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

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 detailing it on Monday. It originally had been designed to go into effect in 2018.

Even before the virus 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 an especially heavy toll on the region. The sultanate also followed the footsteps of neighbors 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 Plc. The bank forecasts the countrys fiscal shortfall to widen to 17% of gross domestic product before recovering next year.

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The sultanates 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 surrounding the U.S. November election and fiscal stimulus package boosted demand for riskier assets.

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

Read: Omans First-Half Revenue Down 12.4% on Lower Oil Prices

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Back in 2018, the United Arab Emirates and Saudi Arabia, also clobbered by the drop in oil prices by imposing a 5% VAT. Saudi Arabia tripled its tax this year.

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

— With assistance by Netty Idayu Ismail

(Updates with chart, Standard Chartered quotes.)