Oman plans to introduce value-added tax in 2021, it said in a document, further delaying a fiscal consolidation measure that economists say could be politically sensitive at a time of sluggish growth and high unemployment.
All six Gulf Arab states agreed to introduce 5% VAT in 2018 after a slump in oil prices hit their revenues, but Oman, whose financial position is the weakest of the six, delayed its tax to 2019.
Moody’s, Fitch and S&P Global Ratings have said they expect Oman, rated junk by all three major rating agencies, to introduce VAT in 2020.
In a bond prospectus distributed to investors earlier this month, which was seen by Reuters, Oman said the government would increase its revenue base by introducing VAT, “which is expected to be implemented in 2021”.
The delay is a setback for Oman, which the International Monetary Fund this month said should work harder on fiscal reforms, including expediting VAT and measures to adjust government expenditure.
“The focus of Oman has been very much on supporting growth, but they have been very cautious in implementing fiscal reforms to avoid social discontent – unemployment is still high,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Oman managed to raise $3 billion through the issuance of bonds last week, as investors snapped up the debt amid global low yields.
Despite its access to markets, Oman’s fiscal position remains weak. Standard & Poor’s estimates the fiscal deficit will rise to 10.6% of gross domestic product in 2019 from 8.9% last year.
The agency said earlier this year that delays beyond 2020 in implementing VAT, combined with lower oil prices, posed downside risks to its assumption of smaller deficits compared with 2015-2017.
Introducing VAT would not fundamentally change Oman’s fiscal situation. It would reduce the deficit by about 1 percentage point of GDP, “but it’s an important step to show progress on fiscal consolidation”, Malik said.
The sultanate has introduced some taxes over the past few years. In 2017, it raised corporate tax to 15% from 12% and last month it imposed a new excise tax.
The World Bank said last year that the main social concern for Oman was the lack of jobs and “the adverse effects of subsidy reform on vulnerable households”.
Youth unemployment was 8.3% in 2018, according to estimates by the International Labour Organization.