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An improvement in oil prices and heavy public spending boosted Oman’s economy by around 4.1 per cent in 2010 and growth is expected to pick up to five per cent in 2011, the International Monetary Fund (IMF) has said.
Despite a sharp slowdown in 2009, Oman was well prepared to confront the 2008 global fiscal crisis because of prudent macroeconomic management of oil wealth, appropriate regulatory and supervisory policies, and implementation of structural reforms to enhance non-oil growth, the Washington-based IMF said in a statement after the conclusion of its mission to Oman in December.This statement, which represents the preliminary assessment of the 2010 Article IV mission to the Gulf country, said that while Oman’s economy was affected by the crisis, ongoing infrastructure spending and the swift and decisive government actions aimed at preserving domestic financial stability and stimulating credit contributed to a recovery in 2010.
“The economy weathered the global financial crisis well. After slowing to 1.1 per cent in 2009, growth supported by public sector investment and accommodative monetary conditions has begun to rebound and is projected to reach 4.1 percent in 2010,” the statement said.
It said oil and non-hydrocarbon GDP growth is projected to reach 6.2 per cent and 3.0 per cent respectively. Inflation after falling to about one per cent year-on-year in December 2009 picked up and is projected to increase to about 3.5 per cent year-on-year at end-2010. Both the fiscal and external accounts are projected to return to surplus in 2010 of 6.25 per cent and 11.5 per cent of GDP respectively, due to higher oil prices.
“The outlook for 2011 is positive, supported by favorable oil prices. Real GDP growth is projected to reach about five per cent this year, reflecting both a continued ramping up of oil production and a further increase in non-hydrocarbon growth to five per cent,” the IMF said.
“The medium-term outlook is broadly positive, reflecting improvements in the external environment and a strong public investment program under the eighth Five Year Plan…. continued public investment should help non-hydrocarbon GDP growth move toward a medium-term level of 6.5 per cent. Inflation is projected to remain at around three per cent. Fiscal and current account surpluses will decline gradually from 2012.”
The IMF said the main risk to the outlook arises from a fall in oil prices as this will have adverse implications for hydrocarbon revenues, which could result in an uncertain outlook for investment, and thereby affect Oman’s growth prospects.
Other downside risks include those posed by higher global interest rates and by capital inflows. An upside risk is Oman’s ability to utilize technological advances in enhanced recovery techniques to extract difficult oil and gas and, thus, production levels might be maintained over a longer period of time.”
The statement said the IMF believes that an expansionary fiscal stance that places emphasis on capital spending and accommodative monetary conditions remains appropriate in support of the recovery in Oman.
It noted that the draft 2011 budget envisages the implementation of growth-enhancing social and economic infrastructure projects and should crowd in activity in the non-oil sector. Easy monetary conditions and a pickup in private sector credit will support non-hydrocarbon growth, it said.
“Aggregate demand should be monitored carefully, however, to avoid the reemergence of inflationary pressures. While a fiscal tightening would be the first line of defense under the peg, in light of ample liquidity in the banking system, the central bank will need to be vigilant and mop up liquidity rapidly should pressures emerge,” the IMF said.
The IMF urged Oman to further develop macro-prudential policies since monetary policy is constrained by the rial’s peg to the US dollar.
It said macro-prudential tools could help to contain excessive credit growth, limit asset price bubbles, maintain healthy household balance sheets, and improve the resilience of the financial system to external shocks.“Over the medium term, the authorities should continue their efforts to promote the development of the financial system to improve its efficiency and further increase its resilience. Interest rate liberalisation and a calibrated removal of ceilings on lending are important prerequisites for the development of financial markets. The existing limits on interest rates, as well as on the quantity of credit available for personal loans, imply a rationing of credit to retail customers, with consequent distortions of market conditions, as well as on the risk-based pricing of assets and thus on proper risk management by the banks,” it said.
“The existing measures that set limits on interest rates do not give banks proper incentives to select, price and monitor their credit exposure adequately.”
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