Oman’s most recent spending plan calls for considerable belt tightening

Economy

On January 1, 2016 His Majesty Sultan Qaboos bin Said issued a royal decree approving the Sultanate’s 2016 state budget and the country’s ninth five-year development plan, the latter of which covers the period 2016-20. After almost two years of declining oil prices and months of economic volatility in East Asia and elsewhere, it perhaps comes as no surprise that in 2016 the government plans to curb spending and boost revenues, whilst simultaneously working to maintain financing for various long-term capital projects, integral to Oman’s ongoing economic diversification strategy.

Spending cuts are expected across most ministries and government departments in the coming year, with the country’s leadership effectively issuing belt-tightening directives to public sector employees and contractors. While expenditure on a handful of key infrastructure, industrial and tourism projects is expected to continue apace for the foreseeable future, the state has said that it plans to reduce or even cancel outright existing price subsidies on petrol, natural gas and electricity, for example.

Additionally, Oman will likely seek new sources of financing in the coming year, in an effort to shore up government revenues, which have fallen off dramatically as a result of the declining price of oil in recent years. “The government is working hard to reduce expenditure and increase revenues through various means,” Hamood Sangour Al Zadjali, the executive president of the Central Bank of Oman (CBO), told local media in late 2015. “They have directed the ministries to cap their expenditure at a certain level, or to cut the expenditures by a certain percentage…In the milieu of lower oil prices, the key goal before the government and the CBO is to strengthen the growth process and give a fillip to the diversification process.”

Well underway

The 2016 budget is not the first time Oman has put forward plans to rationalise the country’s finances. Indeed, economic diversification with the goal of reducing the sultanate’s reliance on hydrocarbons-related income has been a key feature of the state’s development plans for more than two decades. The country has been making targeted investments in a handful of key areas – chiefly transport infrastructure, manufacturing, industry and tourism – since His Majesty set out to modernise Oman’s economy in the 1970s. Beginning in the early 2000s, the government was aided in this effort by high oil prices, which fueled a push for increased diversification efforts throughout the Gulf region. During 2013, the price of Brent crude – the international oil benchmark – fluctuated between $103 and $116 dollars per barrel, and Oman ran a budget surplus of RO401mn on annual budgeted expenditure of RO12.9bn.Since the price of oil began to fall in June 2014, however, the sultanate, like many of its GCC neighbours, has posted steadily expanding budget deficits as a result of declining revenues. In 2014, when oil declined from a per-barrel price of $112 to around $60, Oman’s year-end deficit reached RO360.8mn. In 2015, meanwhile, as oil plunged further, ending the year at nearly $30 per barrel, the nation’s deficit hit RO4.5bn, some 80 per cent higher than the RO2.5bn deficit the state had planned for in its 2015 budget, released a year ago.

In the details

According to the 2016 budget, the government expects to end the year around RO3.3bn down, which would be an improvement on 2015. The document includes estimated annual revenues of RO8.6bn for the year, and RO11.9bn in expenditures. These figures represent declines on the 2015 budget of 4 per cent and 11 per cent, respectively. Revenues from oil and gas are expected to total RO6.15bn in 2016, which is equal to around 72 per cent of total expected revenues. This figure is down from 79 per cent of budgeted revenues in the 2015 budget, though oil fell well short of this forecast in 2015 due to the decline in price. Non-oil revenues, meanwhile, are budgeted at RO2.45bn, up from RO1.9bn in 2015, an increase of nearly 29 per cent.

With the objective of pulling in considerably more non-oil revenue than in previous years, Oman’s 2016 budget included a series of policy proposals and additional measures aimed at shoring up the country’s accounts, effectively instituting a government-wide rationalisation of accounts and practices. Among other planned changes, the budget announcement included proposals to streamline the sultanate’s tax code by limiting tax exemptions; improve and expand tax collection procedures; raise tariffs on electricity and water, particularly for state, commercial and industrial usage; and amend legislation related to customs duties to improve customs accounting at border posts and reduce exemptions. Additional changes included in the budget would see a wide variety of government entities raise their fees for various public services, including the allocation of agricultural, commercial and industrial land; and the registration of driving licenses and the registration and renewal of automobiles and other vehicles.

Cost cutting

The budget includes a range of cuts to government operations. In addition to cancelling or suspending various projects and new project tendering, the state has announced that it will revamp its management of government vehicles, which has the potential to reduce costs considerably. The government will review the overall travel and transport needs of ministers and other state functionaries with an eye towards returning unnecessary vehicles to the Ministry of Finance. Furthermore, the use of publicly owned vehicles outside of working hours will be curtailed or, in some cases, prohibited outright. Automobiles currently in use by lower-level employees, in particular, will be recalled. Instead, the state will pay for travel on a per-trip basis.

In a related move, Oman plans to cut down on mail and correspondence costs by making better use of publicly available mail services, and primarily Oman Post, as opposed to hiring couriers or privately managed deliveries. More broadly, the 2016 budget called for the increased use of electronic communication technologies – namely e-mail – within the government, in an attempt to minimise paperwork in the state offices and, in turn, reduce clerical expenses. Further proposed cost-cutting measures include: limiting overseas training for government employees; contracting some government services out to the private sector; reducing electricity costs by implementing measures to ensure that lights and air conditioners are switched off at night and during off-hours; limiting hospitality and entertainment costs across the government; and, finally, reducing the size of the state’s work force, i.e., cutting government jobs.

Focus on subsidies

The budget also called for considerable reductions in state spending on subsidies for a wide range of products and services, many of which have been subsidised to some degree or another for decades. In 2016 the state planned to spend RO400mn on subsidies, down 64 per cent from budgeted subsidy expenditure of RO1.1bn in 2015. This reduction has been under discussion in government circles since the price of oil started to drop in mid-2014. “I think the time is probable…especially with the decline in oil prices,” HE Darwish Al Balushi, Oman’s minister of finance, told media outlets in October 2014. “I think the people would be more understanding now, more accepting. They realise that this was natural wealth that is being overused, wasted.”

The state has lost no time in implementing these reforms. From January 15, just two weeks after the 2016 budget announcement, the price of petrol at Omani pumps jumped by 23 per cent for regular unleaded fuel and 33 per cent for premium products. This move follows on similar moves by Oman’s neighbours. Most recently, earlier in January Bahrain cut fuel subsidies as well, which resulted in a jump in petrol prices of nearly 60 per cent. In recent months Bahrain has also cut subsidies on meat and poultry, kerosene and diesel fuels. Similar cuts have been made by Saudi Arabia, the UAE and Kuwait.

Ramping up revenues

While cutting costs is key to ensuring Oman’s short-term economic stability, boosting government revenues – particularly those generated by non-oil activities – is widely regarded as a medium- and long-term priority. The sultanate can generate revenues in a variety of ways. Prior to the release of the 2016 budget, corporations in Oman were required to pay a general income tax of 12 per cent on all taxable income above RO30,000. According to data from PwC, however, under the new budget, the state plans to increase the tax rate to 15 per cent and remove the RO30,000 tax exemption, effectively making all corporate income earned in Oman taxable by the state. Firms involved in the oil and gas industry are expected to see a considerably higher income tax increase, from 12 per cent previously to 35 per cent, while companies carrying out work related to the production of liquid natural gas (LNG) could see a jump from 12 per cent to 55 per cent. This latter rate hike would bring the corporate tax rate for the LNG sector to the same level as that applied to firms involved in oil exploration and production.

Oman’s government is also looking at raising revenues by issuing conventional and/or sharia-compliant debt instruments both on the local market and abroad; and by privatising state-owned assets. In October 2015, the government carried out the Sultanate’s first sovereign sukuk (Islamic bond) issuance, raising RO336mn on a RO200mn, five-year listing. The fact that the sukuk was oversubscribed points to considerable demand for sovereign debt issuance in the country, which bodes well for the state’s ability to raise additional funds in the future. Indeed, as of late 2015, Oman was widely expected to carry out another debt issuance in 2016, though further details had yet to be released.

The privatisation of state-owned firms and other publicly held assets has also ramped up in recent years, driven in part by the falling price of oil. In April 2014, Oman raised RO240mn on the sale of 19 per cent of Omantel, the largest telecommunications service provider in the Sultanate, on the Muscat Securities Exchange. More recently, in December 2015, HE Al Balushi told local media that the government planned to privatise three state-owned companies over the course of the following year, including the hydrocarbons giant Oman Oil Refineries and Petroleum Industries Company (ORPIC).


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