(MENAFN- Muscat Daily) Oman must cut subsidies and trim a burgeoning public wage bill to avoid draining financial reserves the International Monetary Fund's country head said.
The IMF mission concluded a visit to Oman on Tuesday as part of the country's Article IV consultation a regular economic review. The IMF will press for major fiscal reforms in the sultanate mission chief Ananthakrishnan Prasad said in an interview in Muscat.
'The oil price decline has made undertaking of reforms more urgent for Oman' Prasad said. 'Without any reforms at this stage the country will either have to use its buffers or increase debt and there could be spillovers from the fiscal sector to the rest of the economy.'
Oman the biggest Middle Eastern oil producer that is not a member of OPEC has been hit hard by the rout in oil prices. After years of surpluses the country recorded a budget deficit of RO600mn last year according to the Ministry of Finance. It estimated that the deficit will widen to eight per cent of gross domestic product this year assuming an oil price of US$75 per barrel.
Brent crude on Wednesday was trading at just over US$60. In its survey of what the drop in oil prices means for Middle Eastern nations HSBC Holdings Plc predicted that Oman's shortfall could reach 16 per cent of GDP if it carries on spending at trend levels. Oman's fiscal stance will 'tighten significantly if low oil prices persist drawing down overall growth' HSBC economists said in a report.
Oman realises 'very well that even if the prices go up they are going to run a deficit and the deficit is going to stay' Prasad said. 'So they have to do something.'
The IMF will release forecasts next week for Oman's budget deficit and economic growth he said. Because the country's oil production is near capacity at 980000 barrels a day non-oil growth will be key Prasad said.
The IMF estimates Oman's non-oil growth last year at 6.5 per cent and projects it will narrow to five per cent in 2015 and 2016.
Prasad said Oman needs to limit growth to public sector wages and reform the system of subsidies for fuels electricity and water. The government also needs to further diversify the economy and increase non-oil revenue through direct and indirect taxation he said.
Reforms should be phased to avoid destabilising the economy or causing social discontent Prasad said.
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