Oman Joins Gulf Neighbors by Introducing 5% Value-Added Tax

(Bloomberg) -- Cash-strapped Oman is planning to introduce a delayed 5% value-added tax in April, following the lead of Gulf neighbors.

The levy will exempt essential food items, medical care, education and financial services, according to a royal decree issued on Monday. It had originally been due to start in 2018.

Even before the virus outbreak, Oman was often seen as among the more vulnerable economies in the six-nation Gulf Cooperation Council. As lower crude prices and Covid-19 took an especially heavy toll on the region this year, the sultanate also followed its neighbors 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 Plc. The bank forecasts the country’s fiscal shortfall to widen to 17% of gross domestic product before recovering next year.

Goldman Sachs Group Inc. said the new law suggests improving prospects for fiscal consolidation under Oman’s new sultan, Haitham bin Tariq. In a note Tuesday, economist Farouk Soussa estimated the change would “bring in an additional 300 million rials in non-oil revenues in 2021.” That would reduce Goldman’s deficit forecast from 15.8% of gross domestic product previously, to 14.8%.

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 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 that November’s U.S. election result won’t be contested and a stimulus package would be agreed whatever the outcome boosted demand for riskier assets.

Both Fitch Ratings and Moody’s Investors Service have downgraded the sovereign twice in 2020, saying the government will unlikely be able to offset revenue loss.

Read: Oman’s First-Half Revenue Down 12.4% on Lower Oil Prices

Back in 2018, the United Arab Emirates and Saudi Arabia imposed a 5% VAT, with Saudi authorities tripling the tax this year.

“VAT implementation by April 2021 could help support government revenue as we see economic growth returning to 2.5% in 2021,” Slim said of the Omani move.

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