VAT, higher oil price to help Omans budget deficit narrow in 2021

Oman introduced a 5 per cent VAT on most goods and services from April 16 2021, more than three years later than the UAE and Saudi Arabia and more than two years later than Bahrain, although they are ahead of Qatar and Kuwait which have yet to introduce the tax.

The number of food-related exempt items was raised from 93 to 488. Also exempt are financial services, medical care and equipment, education, and real estate transactions, rents, local and international transport services, and crude oil, its derivatives and natural gas.

The authorities estimate that the VAT will raise RO 400mn ($1bn) per year. This, together with higher oil prices than we expected at the start of the year should see revenue exceed RO 10.4bn in 2021, higher than the budgeted RO 8.6bn.

However, we expect spending to exceed the budget as well, and we have pencilled in RO 12bn in total expenditure. We thus estimate a budget deficit of RO 1.6bn or -5.4 per cent of GDP, a significant improvement on last year’s -17.1% per cent deficit.

Bloomberg data shows a further RO 1.6bn in debt falling due this year, bringing Oman’s total annual financing requirement to RO 3.2bn ($8.3bn). Oman sold $3.25bn in international bonds in January, leaving around $5bn still to be financed. This will likely be through a mix of domestic borrowing and drawdown of reserves.

Oman’s budget balance and GDP growth

Oman’s oil production increased by just under 1 per cent in Q1 2021 compared with average output last year, compared with a sharp contraction in oil output from other GCC exporters. While Oman is not an OPEC member, it voluntarily complies with OPEC+ decisions. However Oman’s oil condensate production is not covered by the OPEC+ agreement and this has seen strong growth over the last year. With OPEC+ signalling a gradual unwinding of production cuts from May, we expect Oman’s oil production to continue to recover from last year’s cuts. We have pencilled in 2 per cent growth in the hydrocarbons sector this year, making Oman the only GCC country where we expect oil production to boost headline GDP.

The IMF estimates Oman’s non-oil sectors contracted -10 per cent in 2020, against our forecast of -7.0 per cent. Rising coronavirus cases in Q1 21 and a slow rollout of vaccines relative to some other GCC countries has led to tighter restrictions on movement and activity being re-imposed through mid-May. We remain comfortable with our 2.5 per cent non-oil sector growth forecast for 2021, bringing our headline GDP estimate for this year to 2.4 per cent.

[Khatija Haque is Head of Research & Chief Economist at Emirates NBD Research]

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