analysis

Oman ratchets up its spending plans

As long as oil hovers above $50, Gulf state can afford to do so

12:09 January 6, 2018

Oman’s expansionary 2018 budget underlines the government’s determination to address outstanding economic challenges, including generating optimum growth and creating jobs. The authorities are aiming for GDP growth of more than 3 per cent on the back of stronger spending and higher oil prices. And stronger growth levels is essential to enhance job opportunities.

The unemployment rate stands in single digits by official accounts, but in double digits according to international sources. Demographics add to the challenge, as many young Omanis are expected to enter the job market seeking positions matching their expectations.

The 2018 budget assumes a rise in expenditures and revenues while keeping the deficit size intact. Expenditures are set at $32.5 billion, up by 6.8 per cent. The move reverses the trend of trimming public spending following the oil price decline in 2014.

The budget assumes an average oil price of $50 per barrel compared to $45 for fiscal 2017. Oil prices are projected to remain above $50, thanks in part to efforts by Opec members to limit output.

Oman is not a member of Opec by choice, as the country likes to maintain its own independent policies. However, the sultanate has a tendency of following Opec’s guidelines with regards to production levels to lift prices.

Revenues are projected at $24.7 billion, showing a rise of 9.1 per cent. The revenue gains will allow for higher spending and will come about through firmer oil prices plus efforts to generate fresh non-oil revenues. As a consequence, budgetary shortage stands at $7.8 billion, and would be primarily financed via borrowing from local and international sources and partially through withdrawals from reserves.

The deficit is thus about 10 per cent of GDP, something not popular with credit rating agencies. In late 2017, Standard & Poor’s cut Oman’s credit rating from BB+ to BB, the second such downgrade in a six-month period. Moody’s downgraded the sultanate’s long-term bond from Baa 1 to Baa2 and changed the outlook from stable to negative.

The 2017 budget had assumed expenditures and revenues of $30.1 billion and $22.4 billion, and was prepared with lower expenditure versus that for 2016. Public spending is exceptionally vital by virtue of being more than 40 per cent of GDP. This is something quite extraordinary.

The higher spending is partly designed to provide financing for housing projects for nationals, deemed critical to maintaining living standards. Also, the plan calls for providing assistance to lower-income citizens.

To be sure, many enterprises depend on governmental expenditures for their well-being. Broadly speaking, this means the economy depends largely on governmental spending, in turn at the mercy of international oil markets.

Undoubtedly, low oil prices have necessitated the need to diversify. Yet, Oman has decided to delay introduction of the value-added tax to 2019. Of the Gulf countries, only Saudi Arabia and the UAE have started with the tax.

But Oman did implement excise tax on tobacco products, energy and fizzy drinks. Better late than never.

The writer is a Member of Parliament in Bahrain.