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Big changes are coming to Oman in 2021, aimed at fixing economy, employment

Look for Oman to take drastic measures to save its economy and address budget shortfalls

Oman’s fiscal deficit will double to 18% of GDP in 2020 There are assumptions that next April's 5% VAT might increase to 10% temporarily if the oil price doesn’t rebound Electricity and water subsidies costing the government more than 500 million rials could also be steadily phased out

Look for Oman to take drastic measures to save its economy and address budget shortfalls.

Lower crude revenues have left Oman’s finances in a precarious position and while spending cuts and additional taxes will help narrow its soaring budget deficit, the sultanate could require support from its Gulf neighbors unless oil prices rebound.

The coronavirus (COVID-19) pandemic has roiled Oman’s economy, with the real gross domestic product (GDP) poised to shrink 5% this year, according to S&P Global Ratings. 

Gross government debt is expected to soar to 84% of GDP in 2020 from 60% in 2019, S&P estimates.

“Oman needs the Brent price to rebound to above $60 per barrel to reach a comfortable fiscal zone,” said Fabio Scacciavillani, a partner at Dubai investment bank Emintad and former chief strategy officer at Oman Investment Fund.

“Until the oil price exceeds $80, Oman won’t be completely out of the woods.”

Hydrocarbons provide 35% of Oman’s GDP with the country’s oil production in November averaging 720,789 barrels per day (bpd).

Government income was down by one-fifth in the first seven months of 2020. The sultanate has borrowed internationally and spent some of its foreign reserves in order to fund a budget shortfall that has worsened over the past half-decade; Oman’s 2019 fiscal deficit was 20 billion rials ($52 bn) as government debt soared to 17.6 billion rials over the same period.

Oman’s fiscal deficit will double to 18% of GDP in 2020, from 9% in 2019, according to S&P and Fitch Ratings.

Oman aims to increase government revenue to 12 bn rials in 2024 from 8.6 bn rials in 2020.

Muscat also plans to reduce its 1 billion rials annual subsidy bill so that only “vulnerable” and “deserving” people receive such support. 

Read: GCC VAT revenues, VAT dates for Kuwait, Qatar, and Oman, plus COVID-19 VAT impact

VAT in April 2021

To diversify state income, Oman will introduce a 5% value-added tax (VAT) next April 2021 and there are assumptions that VAT might increase to 10% temporarily if the oil price doesn’t rebound substantially.

Oman’s own proposed VAT, which is scheduled to go into effect in April 2021, will apply to all purchases other than food items, medical care, education, and financial services. 

Sectors affected by VAT include supply, logistics, trade, finance, and foreign direct investment. Taxing these will contribute around 1.5 to 2% of the revenue gap.

In early November, Oman’s government also announced plans to institute an income tax on high earners by 2022. The policy will break precedent in the Gulf.

Oman remains dependent on fossil fuels: Oil and gas account for 70% of its government revenue and 60% of exports while most of its natural gas is consumed domestically.

Oman’s oil resources are estimated at 4.8 billion barrels of proven reserves (2007 data). 

Read: Oman’s decision to impose income tax on the wealthy likely to be emulated by the GCC

Dramatic changes in 2021 

A number of measures designed to help Oman grow will come into effect from January 1, 2021.

In 2021, single-use plastic bags will no longer be available in stores, as part of the government’s plans to safeguard the environment. Expats will also be able to move between companies in a freer manner, with the no-objection certificate (NOC) being scrapped.

Shahswar Al Balushi was the head of the Tanfeedh Labour Labs that worked on the processes around the scrapping of the NOC. “There were too many expats in the country, and the need was to prioritize opportunities for Omanis,” he said.

“There are now more opportunities available for locals, and there will be even more when the economy picks up again, so it was decided to encourage free movement of expat workers again,” said Al Balushi. 

Electricity and water subsidies costing the government more than 500 million rials could also be steadily phased out over a 5-year period, and one rial out of every 100 rials earned by Omanis every month will go to the Job Security System.

Starting next year, all Omani employees in the country will need to contribute one rial of every OMR100 earned every month to support the Job Security System (JSS). Launched on November 1 to provide decent standards of living for Omani job seekers, it is jointly run by the Public Authority for Social Insurance (PASI) and the Ministry of Labor.