Oman: IMF optimistic on the budget

Khatija Haque - Head of Research & Chief Economist
Published Date: 07 July 2021


Oman’s economy contracted by less than we expected last year, according to preliminary (but unpublished) data cited by the IMF at the conclusion of its annual Article IV consultation.  The IMF indicates that non-oil GDP contracted by -3.9% in 2020 with headline GDP down -2.8%, much better than the -5.3% we had pencilled in.  The figures suggest that the oil sector only contracted by -1% in 2020.

Covid-19 is likely to remain a headwind to the recovery this year, with case numbers still elevated and the vaccination rollout off to a slow start. Only 20 Covid-19 vaccines have been administered per 100 people in Oman as of end-June according to Our World in Data, while the 7-day moving average of new cases was at 1700 on 6 July. Nevertheless, we expect non-oil growth to rebound to 2.5% this year, while oil sector growth is also likely to contribute positively to headline GDP growth of 2.4%.

Covid-19 infections remain elevated

Source: Our World In Data

On the budget, the IMF expects a significant improvement this year as the government has already implemented a number of fiscal reforms which will both reduce expenditure and boost revenue.  Spending on energy infrastructure will be taken off budget to Energy Development Oman, while mandatory public sector retirement will help lower the wage bill.  Electricity and water subsidies are also gradually being reduced and VAT was introduced in April.  Some of these gains have been offset by pandemic-relief including temporary waivers of taxes and fees as well as additional social spending.  Higher than expected oil prices this year will also help to narrow the fiscal deficit, which the IMF expects to reach -2.4% of GDP in 2021 from an estimated -19.3% in 2020.  Over the medium term, the Fund is optimistic that the budget will move into surplus, with a decline in government debt.  

The Fund also noted that the government had requested technical assistance to strengthen the medium-term fiscal framework and develop a medium-term debt strategy “to guide the government’s borrowing program and provide more predictability to the financial system.”  Oman tapped debt markets in June, raising USD 1.75bn in 9y USD denominated sukuk. Together with the USD 3.25bn raised in January, Oman’s financing needs for this year have largely been met. Oman’s implementation of the fiscal reforms outlined above have been well received by the market, with the 5y CDS spread has narrowed from the Covid-peak of 769bp to under 260bp today, although higher oil prices have undoubtedly contributed to this tightening.

5Y CDS spreads (bps)

Source: Bloomberg, Emirates NBD Research