Muscat: As the Omani government forges ahead with its strategy to diversify the national economy in line with Vision 2040, it also needs the nurture in parallel the growth of a well-developed, inclusive and stable financial sector, says the International Monetary Fund (IMF) in a new report.
The advisory is articulated in a ‘Selected Issues Paper’ titled Oman — A Financial Sector for the Economy of the Future’, issued by the UN financial agency on Thursday, June 13, 2024.
Authored by IMF staffer Thomas Kroen, the paper underlines the importance of a suitably advanced and complex financial sector that can fund the new Omani economy.
“As the economic transformation gains traction and entrepreneurship and innovation take center stage, Oman’s financial sector will face a more complex environment where it needs to develop innovative financial and risk management solutions to cater for the emerging and expanding financial needs of the different players in the economy,” said the IMF paper.
To this end, the IMF has proposed a number of areas for improvement, as well as outlined policy actions to foster further financial development and inclusion. Topping the list of recommendations is a proposal for measures to support the growth of a “deeper, more liquid, and larger financial sector”.
Such measures can come in the form of structural financial sector reforms and successful coordination with other policy areas, particularly government debt management, the Fund said.
Furthermore, to help improve market liquidity, the Fund moots the development of local currency government bond markets, particularly secondary market trading. “Priorities include deepening the market by developing the NBFI (non-bank financial institutions) sector and facilitating non-resident participation, removing regulatory hurdles, such as the cap on government bond holdings, and introducing a market maker system."
"The repo market should be developed alongside the government bond market as it can create additional demand for government bonds and invigorate secondary market trading,” it explained. Furthermore, with the eventual establishment of a benchmark yield curve, markets can then be opened up for riskier securities, including corporate bond and equity markets, the Fund stated.
It pointed out that public listings by state-owned enterprises (SOEs) can help boost the equity market and attract a broader investor base. Additionally, the banking sector will benefit from relaxing regulatory constraints and achieving cost efficiencies while maintaining healthy competition, it noted.
Finally, the IMF called for improving SMEs access to finance and promoting fintech – measures that can further contribute to deepening the financial sector and diversifying the economy, it stressed.
“New fintech businesses can complement the development of debt capital markets and resulting reallocation of bank funding to support growth of SMEs and the non-hydrocarbon sector. Investors can benefit from a well-designed SME credit guarantee scheme with the objective to provide third-party credit risk mitigation to lenders to stimulate debt financing to SMEs. Throughout, authorities should consider exploiting synergies between different financial market development measures,” the IMF paper added.
According to the paper’s author, Thomas Kroen, Oman has shown some progress on financial development since 2010 but continues to lag GCC peers, notably on the development of financial markets beyond banking.
Oman’s financial development index has marginally risen from 0.36 to 0.38 since the last Financial Sector Assessment Programme (FSAP) in 2010, fueled largely by the strength of the local banking sector.
However, some structural challenges identified in the programme continue to persist, including low capital market liquidity, the absence of a well-established yield curve, and barriers to SME funding.
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