Oman’s 2015 Budget

07 Jan 2015
POSTED BY Y Magazine

Amid a climate of falling oil prices and grand Government projects, Oman’s 2015 budget has been revealed. Adam Hurrell and Matt Blackwell look at what it means for The Sultanate 

Oman’s Ministry of Finance has announced its fiscal plan for 2015 and it looks set to be an expensive year.

Public spending has increased 4.5 per cent compared with 2014, up from RO13.9 billion to RO14.1 billion, as the Government intends to plough on with ambitious infrastructure projects. If some were expecting Oman to tighten the financial belt, they were wrong. Reports point out that the Sultanate is due to spend more per head of population than its flashy neighbour across the border Dubai, which while smaller has a reputation for being a far bigger spender.

About RO9.6 billion of the Sultanate’s new budget has been allocated to social sectors such as education, health and housing – the same level as last year, while subsidies and exemptions on things such as electricity, water and petrol stand at an estimated RO1.8 billion.

Oman’s budget is primarily based on revenues from the sale of crude oil –  79 per cent to be exact – and the amount the Government can spend each year is based on how much it can sell the oil for. But the problem is that the price of crude oil has plummeted over the past seven months – from a high of just over US$100 per barrel to a current low of just under $50 per barrel (January 6).

“High oil prices and increased crude oil production supported economic recovery after the global crisis,” says Simon Williams, HSBC’s chief economist for Central and Eastern Europe, the Middle East and Africa.

“While Oman’s growth story still has substance, a falling oil price indicates that story has passed its peak. Public spending has trebled since 2005, but revenue remains dominated by oil, which delivers 90 per cent of total receipts.

“With oil prices hovering around $55 [January 5] a barrel, a five-and-a-half year low, Oman’s budget, in line with that of other major oil producers in the region, looks set to be tipped into the red next year for the first time since 2009.”

Oman is predicted to close 2014 with a defecit of RO600 million thanks to the drop in oil prices and a 7 per cent increase beyond the public expenditure approved in the previous year’s budget. According to local reports Oman’s 2014 budget was based on an annual average oil price of $85 per barrel. For 2015, the Government estimates it will spend RO14.1 billion, but is forecasting that the country’s income will be RO11.6 billion. The drop in oil prices leaves Oman is facing a budget shortfall of RO2.5 billion.

Speaking to local media, Abdurrahman al Faisal, a financial consultant at the Kuwait-based Urban Planning and Infrastructural Projects, believes a deficit could easily become crippling.

“In 2015, Oman must freeze big projects like the railway, the airports expansion plans, stop awarding road projects, reduce spending on defence and the construction of expensive government buildings.

“Anything short of that will simply leave a big hole in the budget and widen the deficit to unsustainable levels,” he says.

Elsewhere in the world, budget deficits in European economies have historically been met with public spending cuts. However, Oman’s recent budget shows no sign of a let up in spending, which means that money will have to be raised in other areas.

Tax and remittance schemes previously explored in Oman have been rejected and instead of cutting subsidies, the Government is determined to focus on other revenue streams, such as investment in tourism. With the announcement of the budget, the Ministry of Finance also released a statement in which it said that the non-oil sector was expected to grow by 5.5 per cent this year. “National economy is expected to continue growth at an acceptable rate, driven by the growth of non-oil activities and effective strength of domestic demand and high oil production,” the Ministry said in the statement.

This fits with Simon Williams’ assessment of the deficit. He believes it “is unlikely to trigger direct cuts in the large public investment programme given the years of plenty across the region”. However, he added: “It does bring questions of future spending restraint and accelerating non-oil revenue growth firmly into view.”

Maggie Jeans, coordinator of the British Business Forum in Oman, agrees that the spending outlined in the budget is necessary. “I personally think that Oman is at a stage in its development where it cannot afford to cancel major infrastructure projects, even if this does involve borrowing large sums of money from various sources,” she says.

“One cannot really question spending on education, health, housing and social insurance but maybe the recipients of this funding have to be made more accountable. I am not an economist, but I am an optimist and believe that the price of oil will eventually rise again. The big question is when.”

While Oman’s GCC neighbours have stockpiled huge fiscal reserves from years of oil production, the Sultanate’s reserves are comparatively low, which brings the need to diversify the economy beyond oil into even sharper focus.

“Any cutbacks now will be counter-productive. As an ex-oilman, I would hope that the government is analysing its economic policy along both a low [$55] crude line and a high [$100+] crude line and doing the ‘what-ifs’ so that they can test their strategies against both eventualities,” one businessman told Y.

The drop in oil prices has been caused by a variety of factors. The two major economies that have experienced explosive growth in the past decade, China and India, are currently experiencing a slowdown and reducing their consumption of oil.

In 2010, China’s economy grew by 10 per cent, but come 2014, growth had slowed by 3 per cent. Coupled with the fact that petroleum-exporting countries – Saudi Arabia, in particular – are refusing to cut their production, there is now too much supply and not enough demand for oil. With the US ramping up its own oil production through fracking, decreasing its reliance on Middle Eastern and Russian oil in the process, the Gulf may not see an increase in prices in the near future.

While assurances have been made that the living standards and employment of the public will not be affected by the short-term measures taken by the Government to maintain the integrity and stability of the economic situation in the light of oil prices, Maggie Jeans believes there may be a knock-on effect for businesses.

“Doing business in Oman is a challenge with increased bureaucracy and decreased efficiency, particularly delays in decision-making and payment, which may be further exacerbated by the falling oil price.”

This financial year for Oman is looking uncertain and the Government’s plan relies on several factors falling into place. Whatever happens in 2015, the nation’s economy is likely to be a topic of hot debate over the next 12 months.

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