The International Monetary Fund has urged Oman to introduce VAT as soon as possible as the sultanate’s economic recovery from the 2014 oil price shock remains subdued.
The UAE and Saudi Arabia were the first countries in the GCC to introduce a 5 percent VAT on January 1 2018 while Bahrain made the move a year later but Oman, Kuwait and Qatar have not yet implemented the tax.
While welcoming the Oman’s plans to continue with fiscal consolidation, IMF directors called for an expeditious introduction of VAT and measures to adjust government spending.They also encouraged Omani authorities to implement an ambitious medium-term fiscal adjustment plan, based on reforms to tackle current spending rigidities, streamline public investment, and raise non-hydrocarbon revenue.
The recommendations were made by the executive board of the IMF following the conclusion of a Article IV consultation with Oman.
The IMF said since the 2014 oil price shock, Oman’s policy efforts have aimed at strengthening the fiscal position, enhancing private sector-led growth and employment, and encouraging diversification.
It added that economic activity started to recover last year, and the overall fiscal and current account deficits improved somewhat, reflecting mainly higher oil prices.
However, macroeconomic vulnerabilities continued to rise, with government and external debt increasing further, while some fiscal reforms were delayed. Higher vulnerabilities have led to new sovereign credit rating downgrades and increases in sovereign risk premiums.
The IMF said economic activity is gradually recovering in Oman with estimates that, after reaching a low of 0.5 percent in 2017, real non-hydrocarbon GDP growth has increased to about 1.5 percent last year, reflecting higher confidence driven by the rebound in oil prices.
Furthermore, oil and gas production increases boosted hydrocarbon GDP growth in 2018 to an estimated 3.1 percent, the IMF said, adding that these developments brought overall real GDP growth to 2.2 percent.
Non-hydrocarbon growth is projected to increase gradually over the medium term, reaching about 4 percent, assuming efforts to diversify the economy continue.
Preliminary budget execution data indicates an improvement in the overall fiscal balance last year with a fiscal deficit estimated to have declined to about 9 percent of GDP from 13.9 percent of GDP in 2017.
IMF executive directors welcomed steps taken over the past few years to enhance private sector growth, reduce spending growth, diversify government revenue, and improve the business environment but called for a deeper fiscal adjustment to maintain confidence and ensure fiscal and external sustainability.
Directors concurred that the exchange rate peg to the US dollar had delivered low and stable inflation and remained appropriate.
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