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Oman Economy Reached 4.1 Percent Growth in 2010

Oman : 24 January 2011

IMF predicts GDP to grow 5 percent this year.

Economic activity in Oman grew by 4.1 percent last year due to improved oil prices and increased public spending. The IMF (or International Monetary Fund) expects that growth to be up to five percent for this year.

Even through the economic slowdown of 2009 Oman’s preparation for handling the worldwide financial crisis of 2008 was solid. The macroeconomic management of the nation’s oil riches was practical with responsible regulations and supervisory policies laid out. Reforms in the economic structure also enhanced the non-oil sector and the IMF concluded the Oman assessment in December.

The IMF made a statement within the assessment preliminaries of the 2010 Article 4 Oman mission which noted that although the economy in Oman felt the effects of the crisis, recovery and growth were seen because of the continuing spending on infrastructure, as well as decisive and prompt actions by the government that were targeted at the preservation of a stable domestic financial environment and the stimulation of credit.

The IMF statement noted that Oman’s economy weathered well through the worldwide crisis. Although it slowed down in 2009 to only 1.1 percent growth, support from public sector investments and the accommodating monetary conditions has created a rebound and growth should hit 4.1 percent for 2010.

Growth within the oil sector should hit 6.2 percent and in the non-oil based sector growth should reach 3.0 percent. After declining to around 1 percent annually back in December of 2009, inflation rose again and should reach 3.5 percent on a yearly basis at the close of 2010. There is a surplus expected in fiscal accounts of 6.25 percent of GDP and the external accounts should see a surplus of 11.5 percent of GDP for 2010, due mainly to rising oil prices. The IMF stated that the 2011 outlook is positive in light of higher oil prices. Growth within real GDP is expected to hit around 5 percent this year, which reflects a continuing increase in the production of oil and another increase of 5 percent within the non-oil sector.

Over the medium term there is a positive outlook that reflects the external climate improvements and a thriving program of public investment that is under the latest Five Year Plan (the eighth so far). Continuing public investments are expected to boost non-oil GDP growth pushing it to reach medium term levels of 6.5 percent. Expectations for inflation put that figure at about 3 percent. From 2012 both the current and fiscal account surpluses should fall gradually.

The major risk that the IMF saw for that positive outlook is a decline in the price of oil, which will have a negative effect on hydrocarbon revenue resulting in a tentative investment outlook that will affect the growth prospects for Oman.

Other risks for the downside are presented by the rising interest rates across the globe and by the inflow of capital. On the positive side Oman must implement advances in technology that will improve techniques for the recovery of hard to reach oil and gas, increasing levels of production over the longer term.

It was also stated that the IMF supports the stance that expansion within capital spending and more accommodating monetary conditions are appropriate for the path of recovery in the nation. It was noted that 2011’s draft budget foresees more economic and social infrastructure projects being implemented that create growth and concentrate activity within the non-oil industries. Eased monetary conditions and more access to credit in the private sector will also be a help to growth within the non-oil sector, according to the IMF statement.

Collective demand needs to be carefully monitored and inflation pressures kept in check. The IMF statement said that although tighter fiscal standard would be the first reaction to those pressures, because there is excess liquidity with the banking systems it would be the job of the central bank to keep watch and clean up that liquidity fast if the pressure was on.

Oman was urged by the IMF to continue with developments of macro prudential policies due to the fact that the Rial is still pegged to the US dollar.

According to the statement, those policies could be used as tools to limit credit growth beyond a reasonable amount, as well as limiting bubbles within asset prices, providing more healthy balance sheets for Oman households and increasing the strength of the financial systems in case of external crisis.  In the medium term authorities were encouraged to keep on with efforts promoting financial developments that create higher efficiencies and a hardier climate.

Liberalized interest rates and a calibrated lending ceiling removal are vital to the financial market developments. Current interest rate and total credit limits for loans of a personal nature seem to be rationing the retail credit which distorts the conditions of the market and the price of assets based on risks leading to a distortion of the banking sector’s risk management strategies. These interest rate limits alone take away the proper incentive banks have to control the exposure to credit in an adequate fashion, stated the IMF.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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