Dubai — Cash-strapped Oman is planning to introduce a delayed 5% VAT in April, following the lead of Gulf neighbours.
The levy will exempt essential food items, medical care, education and financial services, according to a royal decree detailing it on Monday. It originally had been designed to go into effect in 2018.
Even before the coronavirus outbreak, Oman was often seen among the more vulnerable economies in the six-nation Gulf Cooperation Council. The double whammy of lower crude prices and Covid-19 this year took a heavy toll on the region. The sultanate also followed the footsteps of neighbours this year in offering debt to take advantage of low borrowing costs.
“We view the long-awaited VAT announcement as essential fiscal reform for Oman to unlock external funding,” said Carla Slim, a Dubai-based economist at Standard Chartered. The bank forecasts the country’s fiscal shortfall to widen to 17% of GDP before recovering next year.
The sultanate’s fiscal deficit during the first half of the year widened 25% on a yearly basis, according to preliminary figures from the statistics service.
Oman’s bonds strengthened for a ninth day on Monday, with the yield on its security due in 2029 falling 6 basis points to 6.5%. The sultanate’s debt has gained 3.6% this month, outperforming all of its Gulf Arab peers, as optimism surrounding the US November election and fiscal stimulus package boosted demand for riskier assets.
Both Fitch Ratings and Moody’s Investors Service have downgraded the sovereign twice in 2020, saying the government is unlikely to be able to offset revenue loss.
“VAT implementation by April 2021 could help support government revenue as we see economic growth returning to 2.5% in 2021,” said Slim.
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