Oman’s economy is passing through unprecedented change as it tries to adjust to the oil price environment. Among the positive developments is the successful sale of bonds in the international markets this year, while on the negative, challenges related to the budget deficit, growing indebtedness and declining sovereign rating cannot be overlooked.

Finance ministry officials prepared the budget for fiscal year 2017 with expenditures and revenues of $30.2 billion and $22.4 billion, respectively, for a deficit of $7.8 billion. This would make up about 11 per cent of the state’s gross domestic product and represent an improvement on 2016 when the deficit of $13.7 billion was above 20 per cent of GDP.

The authorities prepared the 2016 budget with expenditures and revenues of about $30.6 billion and $22.1 billion, respectively, thus assuming a deficit of $8.5 billion. But the fiscal year ended with the shortage increasing by some 60 per cent in the ongoing environment of low oil prices.

It is believed that Oman’s oil revenues in 2016 plunged by 67 per cent compared to 2014 when prices began its fall. The petroleum sector accounts for 79 per cent of treasury revenues; this fact confirms that the Omani economy remains at the mercy of developments in global oil markets and raising doubts about the success of efforts to diversify the economy.

Officials made the right move by focusing on international financial markets as a means of funding budgetary shortages, and relying to a lesser extent on domestic financial services marketplace and general reserves.

The plan calls for securing 70 per cent of funds from overseas, 13 per cent from the domestic market and 17 per cent by drawing on general reserves. Undoubtedly, the government ought to limit borrowing from domestic market to avoid the crowding out effect through competition with investors. Likewise, it is right to keeping drawing from the general reserves to the minimum. Latest statistics put Oman’s sovereign wealth fund at $24 billion, the second lowest within the Gulf after Bahrain.

During the first half of 2017, Oman gained the confidence of global financial markets and investors when it successfully sold international bonds worth $5 billion. This came about despite the sultanate staying away from international financial markets for two decades.

The sale took place against the backdrop of offering above market interest rates, in turn reflecting the heightened risk factor. Yet, the market has an appreciation of Oman, for embracing conservative socioeconomic and socio-political tendencies.

There is concern about the rise in public debt, growing to 40 per cent of GDP in 2018, up from 5 per cent in 2014. Oman’s credit rating suffered a setback in May when Standard & Poor’s unexpectedly decided to downgrade the rating from BBB- to BB+. S&P classifies debt instruments of Oman below the investment level together with negative outlook.

The unexpected step reflects the rating agency’s plunge in net external assets, or assets minus liabilities to concerning levels. Moody’s and Fitch maintain positive outlook of Oman’s economy, at least for the time being.

At any rate, the experience of issuing $5 billion bond revealed the confidence of international investors in the Omani economy. Still, the diverse economic challenges including the debt level are matters of concern.

The writer is a Member of Parliament in Bahrain.