IMF offers Oman recommendations to handle falling oil prices

IMF offers Oman recommendations to handle falling oil prices
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Published December 9th, 2015 - 21:45 GMT via SyndiGate.info

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Oman oil prices dropped to $36.44 on Tuesday. (Al Bawaba/File)
Oman oil prices dropped to $36.44 on Tuesday. (Al Bawaba/File)

New taxes, cutting fuel and energy subsidies, and halting the government’s rising wage bill are three strategies the Sultanate should consider to cope with the global oil crisis, according to the International Monetary Fund’s (IMF’s) Oman chief.

Ananthakrishnan Prasad, the IMF’s Oman mission chief, told the Times of Oman, “Oman should undertake reforms that limit current spending and increase non-hydrocarbon revenues. On the expenditure side, gradually phasing out subsidies, complemented by a safety net and a well-designed communication strategy and curtailing an increase in the government wage bill would generate savings.

“Undertaking these reforms in a phased manner and preserving room for capital expenditures would limit the downward drag on growth,” he said.

“There is a large potential for raising non-hydrocarbon revenues by expanding tax categories, and reconsidering tax rates and exemptions for corporate income tax,” the IMF official added.

On Tuesday, Brent crude prices sank under $40 for the first time in almost seven years, rocked by Organisation of the Petroleum Exporting Countries’ (Opec’s) recent decision to maintain oil output levels, despite a chronic supply glut.

Oman oil prices slipped to $36.44 on Tuesday from $38.13, on Monday.

Gulf Cooperation Council (GCC)-based economist Nasser Saidi said introducing taxation, such as the Value Added Tax (VAT) system will strengthen

the economy.

As oil prices remain low and most GCC nations are unable to follow an independent monetary policy (given the peg to the dollar), the only adjustments that can be made are on the fiscal side, Saidi stated.

“However, in the absence of taxation systems and automatic stabilisers, the fiscal policy is limited to varying government spending. This needs to change and one of the means is to diversify revenue by introducing taxation. Being discussed at the GCC level, VAT is the most notable,” the economist added.

According to Saidi, a multi-year fiscal plan is necessary to diversify GCC government revenue: this would include introducing VAT (to generate a stable, growing revenue source, with least detrimental effects on investment) and corporate income taxes (applying to all companies operating domestically), in addition to setting up property taxes and selective taxation in the form of excise duties (imposed on commodities, such as cigarettes/tobacco, alcoholic and non-alcoholic drinks, to petroleum products,

cars, and mobile telephony).

“Once tax collection capacity is built, the GCC can envisage the gradual introduction of personal income taxes. All this should be done under a multi-year plan to allow the build-up of tax capacity and administration, as well as allow for the private sector to adjust to the new tax system,”Saidi added.

Manjot Sing Chug, a business tax advisory, also said that given the current oil prices, the implementation of VAT is likely to be accepted as a positive measure for diversifying and strengthening governments’ revenue base.

“However, businesses need to plan ahead for incremental costs and compliance requirements associated with VAT, to offset any financial burden,” Chug said.

Oman’s income has fallen by more than 60 per cent since June 2014 when it sold oil at a price of $115 per barrel.

Budget deficit

According to data released by the National Centre for Statistics and Information (NCSI), Oman’s budget deficit for the first eight months of 2015 rose to OMR2.68 billion as plunging crude oil export revenues started affecting the fiscal balance.

This is against a surplus of OMR205.7 million for the same period last year and against a projected deficit of OMR2.5 billion for the entire year by the

government.

Meanwhile, commenting on the base oil price, which will be set in the 2016 budget, economic experts said there is no

magic number.

“There is no magic number at which Oman can base the oil price during next year’s budget. The exercise should be based on a medium-term budgeting framework that is integrated, with a medium-term economic framework. In 2015, the deficit would be around OMR4 billion, according to our projections,” IMF’s Prasad pointed out.

The 2015 fiscal budget was based on the $75 per barrel oil price.

“In 2016, a budget based on a $52 per barrel (oil price) would result in a projected fiscal deficit of OMR4.7 billion in 2016, based on current policies.

“The situation calls for measures to contain spending growth and enhancing non-hydrocarbon revenues,” he added.

Meanwhile, a Muscat-based economic expert said the government will be forced to rethink on investing more on infrastructure development and will have to control welfare scheme expenditures as the country will have to adjust with half of the oil revenue, compared with the previous year, while preparing the 2016 budget.

“A major part of Oman’s revenue, around 75 per cent, comes from oil. When oil prices are in free fall, around 50 per cent down, compared with the previous year, the country will be compelled to adjust,” N. Gurumurthy, the Muscat-based economic

expert explained.

He also said that actual oil price realisation is almost 25 per cent less than projected and with the exception of geo-political shocks, which can sway the oil price to the higher side, it would be safe to project the price in the around $55 to $60 per barrel band.

“In the backdrop of the recent decision of Opec, which allows everyone to pump as much as they wish, along with the expected addition of Iranian oil in the market, it would be safer to be pessimistic. It pays to err on the lower side,” Gurumurthy said.

He added that Oman should keep all options open, which may include rationalisation of subsidies, especially for water, electricity and petrol, enhancement of taxes, cost reduction, and postponement of long-term infrastructure projects etc.

© Muscat Press and Publishing House SAOC 2015

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