Fiscal reforms, VAT, subsidy rollbacks to shrink Oman’s fiscal deficit

@conradprabhu –

A combination of key measures adopted by the Omani government in response to budgetary challenges posed by the global economic downturn and exacerbated by the pandemic has begun to pay dividends, according to international ratings agency S&P Global Ratings.

New York-based S&P, regarded as the largest of the Big Three credit rating agencies, said in its latest research update that “Oman’s reform programme will reduce the pace of net government debt accumulation over the next three years”.

The reform programme, it noted, encapsulates a broad slate of measures and initiatives taken by the government to rein in spending, reduce the annual budget deficit and manage its burgeoning public debt. Many of these measures are broadly enshrined in the Medium-Term Fiscal Plan (MTFP), a landmark five-year programme (2020 – 2024) rolled out by the government last year to achieve fiscal balance.

“Under Oman’s MTFP, the government aims to achieve a significant narrowing of deficits over the next four years and a balanced fiscal position by 2025. This plan is underpinned by gradual cuts to electricity, water, and waste management subsidies, rationalisation of capital spending, and a new personal income tax on high wage earners that is likely to be implemented in 2023. This would be a first for the GCC region. As a result, we expect it to be introduced gradually, with a relatively low tax rate,” added S&P.

Significantly, the ratings agency a reduction in Oman’s fiscal deficit to 4.2 per cent of GDP in 2021, from 15.3 per cent in 2020. “A combination of higher oil prices, revised nominal GDP, and accounting changes related to EDO (Energy Development Oman) should lead to an estimated 9 percentage points (pps) reduction in the fiscal deficit to GDP from 2020. Fiscal reforms also make a material contribution by providing estimated gains of about 2 pps of GDP this year,” S&P stated in its latest outlook on Oman.

In particular, Value Added Tax (VAT), introduced for the first time in April at the rate of 5 per cent, will generate revenues projected at “slightly above 1 per cent of GDP” in 2021, according to the ratings agency.

Other measures that will help pare the government’s public sector wage bill, which accounts for a sizable proportion of expenditure, are the mandatory retirement scheme implemented last year, the revised salary scales for new government employees, and lower allowances, it said.

Further savings are set to accrue when longstanding subsidy on electricity and water supply is rolled back, S&P pointed out. That effort, which began this year, was recalibrated recently to help ease the burden on residential segments of the Omani population.

S&P also sees significant fiscal advantage accruing to the government following the establishment last year of Energy Development Oman (PDO), the state-owned holding company representing the government’s oil and gas equity interests in Petroleum Development Oman (PDO), the country’s largest producer of hydrocarbons.

The ratings agency explained: “The key accounting change relates to the treatment of PDO following the transfer of the government’s 60 per cent stake in PDO to EDO. PDO manages Block 6, which accounts for about 70 per cent of Oman’s oil production. Previously, on-budget hydrocarbon revenue, 60 per cent of PDO’s oil-related spending, and 100 per cent of the gas spending were moved to EDO. However, the government expects to receive about 80 per cent (depending on oil prices) of the hydrocarbon revenue from EDO through taxes, royalties, and dividends. This should have a net positive cash impact on the general government balance, as PDO’s investment and operational expense accounted for about 14 per cent of government spending in 2020.”

EDO is expected to raise debt equivalent to 3.3 – 3.5 per cent of GDP every year to secure part of PDO’s capex requirements.

In ratings action announced on October 1, 2021, S&P revised the outlook on Oman to positive from stable. It also affirmed its ‘B+/B’ long- and short-term foreign and local currency sovereign credit ratings.

Figures released by Oman’s Ministry of Finance on Thursday have already underscored a steady improvement in efforts by the government to shrink the annual deficit. State revenues, boosted by an uptick in oil export earnings. climbed 13.9 per cent to RO 6.331 billion during the first eight months of this year, versus revenues of RO 5.554 billion for the corresponding period of 2020. The budget deficit declined 46.3 per cent to RO 1.052 billion this year, down from RO 1.957 billion for Jan – August 2020, the Ministry stated.