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Oman in economic metamorphosis: VAT introducing, salary slashing, force retiring

Oman is stealing the limelight from its GCC counterparts for its aggressive business strategies aimed at lifting the country from its economic doldrums

The revenue from implementation of the VAT law would amount to OMR400 million (around $1 billion) Oman in April announced plans to cut its expenditure by 10%, equivalent to 500 million Omani Rials ($1.29 bn) The Oman Investment Authority (OIA) will cluster all government companies and take over $17.7 billion worth of assets.

Oman is stealing the limelight from its GCC counterparts for its aggressive business strategies aimed at lifting the country from its economic doldrums.

Ever since Sultan Haitham bin Tarik has taken over the country’s governance, succeeding the late Sultan Qaboos on January 11, 2020, Oman has been re-inventing its economy, in a surprising and effective manner.

2022 VAT talks   

Following extensive discussions and approval of the joint committee report between the State Council and Majlis Al-Shura, the Omani State Council forwarded the draft of the value-added tax (VAT) law referred by the Council of Ministers as a matter of urgency, with the opinion of the two Councils.  

Dr. Ruwaish Al Maharbi, a member of the Economic Committee of the State Council, told Al Shabiba, Times of Oman’s sister Arabic publication, “The community would not be negatively affected by the law as there are parallel programs to mitigate any potential impacts. Earlier studies have shown that the revenue from implementation of the law would amount to OMR400 million (around $1 billion).”

Oman’s legislature is proposing to implement a VAT after January 2022.  Oman would become the fourth of the Gulf Cooperation Council’s six states to collect VAT, after the UAE imposed a 5% VAT in 2018 and Saudi Arabia tripled its levy to 15% earlier this year, while Bahrain imposed a 5% VAT in 2019.  

This proposal needs the approval of Sultan Haitham who vowed to take bold steps to bolster the near $80 billion economy, lower its debt, and review the role of state companies in an economy that has since been hit by the coronavirus pandemic. 

Exclusive: Oman is digitally transforming business events

Salary cuts and forced retirements

In May, Oman slashed salaries for new civil servants with wage cuts ranging from 20% for doctorate holders to 5% for secondary school graduates.

Oman employs about 180,000 civil servants in various government ministries.

The government in April announced plans to cut its expenditure by 10%, equivalent to 500 million Omani Rials ($1.29 bn). 

It said all government employees who have served for 30 years would be retired and that salaries of board members in government organizations would be halved.

In an earlier assessment, the International Monetary Fund (IMF) expected Oman’s budget shortfall to reach 17% of gross domestic product (GDP) this year, a figure that Fitch Ratings’s August report increased to 20% (see below), citing financial challenges.

Oman’s chess moves getting noticed

Omanis interviewed by Al-Monitor praised the retirement of ministers who have been in office for decades, the presence of new faces, and a shift toward technocrats with solid qualifications. 

“The changes brought in by Sultan Haitham have been greeted very positively in the business and wider community,” Mac Thomson, CEO of Oman-based hotel management company MMIS, told Al-Monitor. 

Alexandre Briand, president of the Paris-based Club France Oman, praised the willingness of the new Omani leadership to increase foreign direct investments (FDI) if the pace of business and legislative decision making in the country is quickened.  

On Aug. 18, Sultan Haitham gave up the foreign and financial affairs portfolios, making room for more inclusive decision-making. “This is an important shift in the delegation of authority,” political sociology researcher Mubarak Al-Hamdani commented to Al-Monitor.

In June, a newly formed sovereign wealth fund took over most of Oman’s state-owned entities to reduce bureaucracy, consolidate public assets and trigger a change in those companies. 

The Oman Investment Authority (OIA) will cluster all government companies, with the exception of Petroleum Development Oman, and take over $17.7 billion worth of assets.  

Bloomberg revealed in a June 11 report that the erosion of Oman’s fiscal situation was discussed during high-level political meetings attended by Gulf officials. “Nothing has been decided” but Oman could seek financial assistance from its neighbors, the report stated.

FITCH downgrades

On Aug 17, 2020, Fitch Ratings has downgraded Oman’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘BB-‘ from ‘BB’ with the Outlook ‘Negative’.

The rating agency forecasts Oman’s fiscal deficit at nearly 20% of GDP in 2020 from about 8% of GDP in 2019 expecting a 32% drop in revenue driven by lower oil prices and production.  

Oman’s oil export price is likely to average around $45 per barrel still well below Oman’s estimated fiscal break-even oil price of over $70. 

Fitch expects government debt to increase to over 80% of GDP this year, from 60% of GDP in 2019.