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A view of the old souq in Muscat. The economic shocks from COVID-19 took a heavy toll on the economy in 2020, despite rapid government response, according to a recent staff report from the International Monetary Fund (IMF). Image Credit: Supplied

Dubai: The economic shocks from COVID-19 took a heavy toll on the economy in 2020, despite rapid government response, according to a recent staff report from the International Monetary Fund (IMF).

Overall GDP contracted by 6.4 per cent (revised up from the previous IMF forecast of a contraction of 10 per cent), with non-hydrocarbon GDP estimated to have contracted by 10 per cent and a shallower decline in hydrocarbon GDP.

Construction, hospitality, and wholesale and retail trade sectors were particularly hard-hit. Inflation turned slightly negative owing to subdued demand. Employment conditions due to the economic slowdown were mostly relieved by a 15.7 per cent reduction in expatriates and the flexibility to negotiate temporary wage cuts.

Swift response

The IMF mission, led by Daniel Kanda noted that The swift and well-coordinated response effectively limited the spread of the coronavirus in the latter part of 2020, but the social distancing and other restrictions weighed heavily on economic activity, particularly those requiring close human contact.

The IMF report said substantial fiscal measures to support the economy included interest-free emergency loans, waiving or reducing selected taxes and fees, flexibility to pay taxes in installments, and establishing the Job Security Fund to support citizens who lost their jobs.

In addition, the Central Bank of Oman (CBO) eased financial conditions through lower interest rates and liquidity injections, deferred loan installment payments, and relaxed macro prudential requirements on capital buffers and liquidity ratios.

Weakened external and fiscal positions

According to the IMF, the current account deficit is estimated to have widened from 5.4 per cent of GDP in 2019 to 10 per cent in 2020, mostly owing to lower hydrocarbon exports. International reserves declined slightly to around $15 billion (6.5 months of imports), reflecting stable FDI inflows and a Eurobond issuance.

Government hydrocarbon revenues fell by 3.4 per cent of GDP, reflecting the oil sector shocks. Non-hydrocarbon revenues fell by 0.2 per cent of GDP reflecting declining economic activity and measures such as suspension of penalties on late tax filings and some government fees.

Despite significant attempts to constrain expenditure, the sharp decline in nominal GDP implied a rise in the expenditure-GDP ratio. Overall, the fiscal deficit rose by 10.6 percentage points to 17.3 per cent of GDP and was financed by external bond issuance, drawdown of deposits and sovereign funds, and privatization proceeds. As a result, central government debt rose to 81 per cent of GDP, from 60 per cent in 2019.

Fiscal adjustment plan

The fiscal adjustment plan (Tawazun) targets the elimination of the fiscal deficit over 2021-25 by boosting non-oil revenues while keeping nominal fiscal expenditures broadly constant. To improve public asset management, the government established the Oman Investment Authority (OIA) with a mandate to strengthen the governance and efficiency of public enterprises. Also, a new holding company—Energy Development of Oman (EDO)—was created to manage and finance government investments in oil, gas, and renewables.

Financial soundness

As of December 2020, banks’ capital adequacy ratios averaged 19.1 per cent and the liquidity coverage ratio was around 200 percent, comfortably above regulatory minima. Nonperforming loan ratios increased slightly to 4.2 per cent, with specific provisioning coverage of 63 per cent and total coverage of 98 per cent. Nonetheless, profitability indicators declined reflecting the impact of COVID-19 on economic activity, loan repayment deferment, and risk provision charges.

Modest recovery in 2021

While the roll-out of vaccination and the easing of social distancing restrictions would support increased activity globally as well as in Oman, substantial medium-term fiscal consolidation would weigh on growth. Overall, a mild recovery of 1.5 per cent in non-oil GDP growth is projected for 2021, rising thereafter to 4 per cent by 2026 as the drag from fiscal adjustment subsides.