Oman’s Fiscal Reform: How a Gulf Nation is strengthening its public finances

What happens when an oil-rich country suddenly sees oil prices cut in half? This is what many Gulf Cooperation Council (GCC) countries faced in 2014, when crude oil prices tumbled from over $100 a barrel to just around $50. In Oman, a country that has long relied on hydrocarbon exports and revenue, the oil price drop was a painful shock to its public finances. Government revenues dropped from 40 percent to 26 percent of GDP in two years, while spending levels were not adjusted. To support macroeconomic stability, the government partially financed the gap through withdrawals from its sovereign wealth fund. This is a shock similar to an individual waking up one day to find their salary slashed but their rent and food bill unchanged. The result? Large deficits started accumulating and public debt reached 68 percent of GDP by 2020, up from only 5 percent of GDP before the shock. These developments were a wake-up call.

Note: Graphs taken from Gulf Economic Update, June 2025 edition

A Turning Point: The Medium-Term Fiscal Plan (MTFP)

In 2020, a Medium-Term Fiscal Plan (MTFP) was introduced. The five-year roadmap aimed at redressing public finances and putting the economy on a sustainable fiscal path. The main ideas? Spend smarter not higher; earn broader, not heavier.

To contain spending, government hiring was frozen (except for critical jobs), triggering a drop in the public wage bill from 12 percent of GDP to 9 percent. Fuel and electricity subsidies were gradually replaced by targeted support, enabled by the creation of the National Subsidy System which redirected savings from subsidies reform to cater for those in need. As a result, public spending was trimmed by 16 percent. To diversify its revenue sources, a 5 percent value added tax (VAT) on goods and services was introduced in 2021, with exemptions for essentials such as health and education services and basic foodstuff. This complemented the existent excise taxes on harmful products, and the corporate income tax rate, as established at 15 percent for most companies and maintained through subsequent amendments. A reduced rate of 3 percent applies to SMEs, offering targeted support to this segment, and a higher rate of 55 percent is imposed on companies engaged in oil and gas exploration or production.

In that sense, spending was contained not by cutting essential services but by tightening belts where it made sense. Revenue was set to increase by expanding the tax base rather than increasing the burden on existing taxpayers. But most importantly, when oil prices increased, Oman allocated the additional revenue towards debt repayment rather than increasing public spending. By 2024, Oman’s public debt had dropped from 68 percent to 35 percent of GDP. 

 Note: Graphs taken from Gulf Economic Update, June 2025 edition

 Note: Graph taken from Gulf Economic Update, June 2025 edition
 

MTFP: Momentum Towards Future Prosperity

MTFP delivered strong results by overachieving its fiscal balance and debt targets (Figure 4). The country not only balanced its books but has managed to run fiscal surpluses since 2022. In 2024, Oman regained its investment-grade rating, attributed by credit rating agencies to improved public debt indicators, fiscal management, and the implementation of economic reforms.

However, Oman fell short of its non-hydrocarbon revenue targets, which grew by only 1.6 percent over the fiscal plan horizon. Strengthening non-oil revenues is essential for oil-dependent economies. In the short term, tax revenues can function as automatic macroeconomic stabilizers, and in the long term, they ensure fiscal sustainability and reduce exposure to oil price volatility. The way forward lies in broadening the tax base to create a more stable and predictable revenue system.

Oman has already begun moving in this direction. To advance its revenue diversification agenda and reduce dependence on oil, the government has taken important steps to broaden its tax base. In 2024, Oman issued a Royal Decree promulgating a law for Top-Up Tax on Constituent Entities of Multinational Groups, thereby aligning with the rules issued by the OECD to avoid Base Erosion and Profit Shifting (BEPS). With its adoption, multinationals are taxed at a minimum effective tax rate of 15 percent, putting a break on tax incentives and tax breaks. Complementing this effort, Oman plans to introduce the Gulf’s first-ever personal income tax by 2028, starting with a 5 percent rate on high earners. Other resource-rich countries should consider following Oman’s example. 

Oman’s experience illustrates the importance of fiscal sustainability as an ongoing process. For oil-rich economies, this includes managing spending during periods of high revenue and planning for long-term stability. Oman’s recent reforms and targeted support measures have contributed to a rapid improvement in fiscal indicators. As fiscal reforms remain an unfinished agenda, the next challenge for Oman will be maintaining momentum, requiring a steady commitment to build on the progress achieved.  With fiscal reform complementing efforts to expand growth in new non-oil sectors under Oman Vision 2040, the future could be bright for fiscal stability and broad-based economic growth.