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Oman Urged To Develop Non-Oil Revenue Streams

by Lorys Charalambous,, Cyprus

28 December 2011

The International Monetary Fund in its recent report on Oman has warned against the government's dependence on oil revenues to sustain its high spending, despite positive fiscal performance presently.

Although there was a 17% increase in government expenditure to boost economic growth, the fiscal surplus will reach 8.2% of GDP in 2011. Further, the economy has been markedly sheltered from the recent turmoil in international financial markets, the IMF reported.

On the country's financial sector, the Fund reported that the country's domestic banking system appears sound. The Fund reported that the system is well capitalised, with a capital adequacy ratio above the regulatory limit of 12%, at 14.3% and the non-performing loan ratio, at 2.6%, is well below the GCC average.

The economic outlook for Oman is positive for 2012, with real Gross Domestic Product growth expected to amount to 5%. The fiscal surplus is projected to remain high, at 8% of GDP in the coming year.

The Fund however has highlighted in its report that, despite Oman's strong economic fundamentals, the country is not engaging in the same long-term planning as for instance Qatar is undertaking (with its development of its financial services sector), despite ploughing significant government funding into the non-hydrocarbon sector's development.

The IMF projects that the Omani budget could suffer if oil prices fall in the absence of back-up revenues from its non-hydrocarbon sector. The IMF mission projects a breakeven price of USD81 per barrel in 2012, rising to USD105 by 2016. “A drop in oil prices from the prevailing historically high levels could quickly lead to large fiscal deficits,” the IMF warned, adding that: “If sustained, lower oil prices could force a pull back in spending and lead to sharply reduced growth in the non-oil economy.”

“The longer-term outlook hinges on economic diversification. Oman’s hydrocarbon reserves are relatively modest and cannot continue to support economic growth in the long-run. There has been progress towards diversification, with non-hydrocarbon exports - mainly petrochemicals, fertilizers, and metals - now accounting for over 20% of total exports. The non-hydrocarbon export industries, however, are highly energy-intensive, have not generated many jobs, nor contributed much to government revenue.”

“Committing to a gradual improvement of the non-oil fiscal balance would help ensure fiscal sustainability,” the IMF advocates.

“Implementing a fiscal rule targeting long-term fiscal sustainability would help anchor fiscal policy. Based on a standard model of intergenerational equity, and assuming that new discoveries will be able to provide 60 years of the current level of oil production, the projected non-oil fiscal deficit for 2011 is about 9% of GDP above the level consistent with constant real per capita consumption out of the country’s petroleum wealth. To eliminate the gap, the mission recommends a fiscal adjustment of at least 1% of GDP a year over the medium term.”

The IMF reported that: “Non-hydrocarbon revenue has been declining and currently amounts less than 11% of total revenue and only about 5% of GDP. A value-added tax and other steps to widen the tax base would help raise revenue as well as enhance the efficiency of the tax system. Implicit fuel subsidies could also be reduced. These subsidies, estimated at about 12% of GDP in 2011, have been increasing along with rapidly growing domestic consumption and higher opportunity costs,” the IMF concluded.

TAGS: tax | business | value added tax (VAT) | fiscal policy | energy | accounting | banking | budget | Qatar | oil and gas | Oman | services

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