Oman's government to accelerate economic reforms and broaden revenue base

Oman’s oil output fell by 3.7% year-on-year (y-o-y) in the first 10 months of 2017, with production averaging 970,000 barrels per day (bpd), down from 1m bpd in the same period of 2016. However, an improvement in average prices saw oil earnings rise by 32%, according to the National Centre for Statistics and Information.

Bolstered by a 10.7% increase in gas revenues to October 2017, the higher hydrocarbons earnings helped narrow the budget deficit to OR3.2bn ($8.3bn) by the end of October 2017, down from OR4.8bn ($12.5bn) in the same period the previous year. The year-end deficit was expected to reach OR3bn ($7.8bn), according to forecasts from the 2017 budget, down from OR5.3bn ($13.8bn) in 2016.

Flat Growth

Despite state revenue rising by 19.2% y-o-y in the first 10 months of the year, real GDP growth was expected to fall by 2.7 percentage points to 0.1%, pushed down by cuts in oil production, according to World Bank figures from October 2017. Non-hydrocarbons growth was also set to ease, from 3.4% to 2.5%, due to lower public spending, and the knock-on effects of falling consumption and a decline in investment. The IMF anticipated a moderate contraction of -0.02% in its “World Economic Outlook”, also released in October 2017. However, it added the economy was set to rebound in 2018 on growth in both the oil and non-oil economy; GDP is forecast to expand by 3.7%, well above the GCC average of 2.9%.

Tax Reforms

The government has taken steps to generate new avenues of income. In February 2017 it introduced an increase in the corporate tax rate from 12% to 15%, and withdrew the OR30,000 ($77,900) tax-free ceiling. A 3% income tax was also implemented for certain small-scale taxpayers, while the 10% withholding tax was extended to encompass dividends, interest and payments for services.

The government hopes the new taxes will generate an additional OR125m-250m ($324.6m-649.2m) per year, although some analysts feel the measures could deter investors. “The introduction of withholding is negative for banking. The sector now pays taxes on interest payments and fees paid to overseas banks, which local banks tap for liquidity from time to time,” Lloyd Maddock, CEO of Ahlibank, told OBG. “However, the increase in the corporate tax rate from 12% to 15% is still internationally competitive, and manageable.”

Impact On Credit Ratings

The downturn in the economy also had an effect on the country’s credit rating. In early November 2017 ratings agency Standard & Poor’s (S&P) lowered Oman’s long-term foreign and local currency sovereign credit rating from “BB+” to “BB”, citing continued dependence on hydrocarbons as a key factor. The move came four months after Moody’s lowered its long-term bond rating from “Baa1” to “Baa2” due to concerns over structural vulnerabilities.

Streamlining Business Activity

While reflecting some of the challenges facing the country, the S&P downgrade could spur the government to improve the investment climate with further reforms, according to Lo’ai Bataineh, CEO of Ubhar Capital. “S&P’s downgrade of Oman’s credit rating could hasten the authority’s efforts to improve the ease of doing business,” he told OBG. “Investors are aware of Oman’s challenges and have already priced them into their decisions. S&P’s downgrade does not change that.”

The government introduced a number of measures over the course of 2017 designed to improve the business environment. Initiatives included enhancing the online single-window system for exports and imports; easing processes related to obtaining construction permits; and speeding up the incorporation of businesses and registration of employees.

The reforms helped the sultanate rank 71st out of 190 countries in the World Bank’s ease of doing business index for 2018. Although the country slipped five places from its 2017 standing, Oman’s overall score of 67.2 was well above the MENA regional average of 56.7.