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publication May 1, 2019

Oman: Economic Update - April 2019

Growth is estimated to have recovered to 2.1% in 2018, supported by rising non-hydrocarbon activity and higher oil output. However, the December 2018 OPEC+ agreement to cut oil production will dampen this recovery in 2019, as growth is projected to slow to 1.2%. While narrowing, fiscal and current account deficits remain high, and debt ratios continue to worsen. The main risks to the economic outlook arise from a delay in fiscal adjustment, which will impede debt reduction and negatively affect business confidence and external financing costs in an adverse global environment.

Growth is projected to slow to 1.2% in 2019 as Oman’s commitment to the December 2018 OPEC+ output cut constrains oil production. There will be a once-off spike in growth to 6% in 2020 as the government plans to significantly increase investment in the Khazzan gas field. The potential boost from the diversification investment spending would continue supporting growth in 2021 and the medium term. Inflation is expected to pick up to 1.5% in 2019 reflecting higher consumer spending, and to further accelerate to an average of about 3% in the period 2020-2021 reflecting the possible introduction of indirect taxes beyond 2019. The budget deficit is projected to rise to 12% of GDP in 2019 due to high public spending amid lower oil prices. The 2019 budget assumes a 3% increase in total expenditure compared to 2018. The introduction of excise and VAT taxes has been delayed to 2020 or beyond.

A key risk facing Oman is that the pace of fiscal and structural reforms may slow, hurting investor confidence and prospects for debt sustainability. To mitigate this risk, the government needs to press ahead with planned reforms on revenue mobilization (namely the introduction of VAT), deeper fiscal adjustment through wage bill and subsidy reform, and more efficient public sector delivery. Fiscal slippages and lower oil prices would result in higher fiscal and current account deficits, a deterioration in government and external debt trajectories and increase the cost of external financing. A larger drain on external buffers could also reduce investor confidence and result in further sovereign rating downgrades and higher financing costs. Job creation is an important challenge, given the 49% youth unemployment rate.