The State General Budget 2013 is ambitious and has the biggest ever spending directed towards the Omani citizens for education, training social security and housing. And there is a commitment from the government to continue with its mega projects which aim to create jobs for Omanis. Visvas Paul D Karra delves into the budget for this report.
What has Islamic banking got to do with the fiscal budget of Oman? Plenty of good news, would be a fair answer. If you want to run the risk of being labelled a partisan, you could go ahead and add, Islamic banking is a master stroke at the right time by the government. But how does it all add up to the fiscal numbers?
The statement by HE Darwish Al Balushi, Minister Responsible for Financial Affairs, while announcing the State Budget for 2013, that the deficit of this year’s budget will partly be financed through issuing development bonds in the market tells us from where it is all coming. Experts say that this will happen in the form of sukuk.
The minister goes on to say that issuance of development bonds will encourage domestic savings and enhance the efficacy of utilising the domestic savings in the local market. The Government is currently considering the sale of some government shares in wholly or partially government owned companies through MSM, which basically means divesting some stake.
The between-the-lines script is that this two-pronged strategy by the government will open up the cash boxes of shariah-compliant unused funds to lap up the development bonds as well as the government divestment stakes. Lo and behold, your Islamic banking is in full play as according to the Islamic banking regulations, shariah-compliant funds cannot be channeled into non-islamic banking operations. It means they need new investment options to generate returns for the millions of rials which will be raised through domestic finances by the Islamic financing institutions.
The sub-plot in this brilliant story is that the government is killing two birds with one stone. Firstly, it is giving a boost to Islamic banking by partly financing its deficit from the local market and secondly the government divestments will stimulate the capital market into enhanced activity and liquidity and encourage new IPOs.
The sukuk way
In his budget speech, HE Darwish expressed hope that the Muscat Securities Market would witness improvement, during 2013 as a result of the continuing Government spending which will support the issuance of the anticipated Islamic financial instruments to give the market a substantial depth and additional financial instruments and will enhance the confidence of the investors.
Reflecting on the minister’s statement, HE Abdullah Al Salmi, the executive president of the Capital Market Authority (CMA) says, “We hope that the government will come up with new products like sukuk to achieve economic goals like creating a benchmark yield curve for the Omani rial and secondly use the capability of the market to finance the mega projects that are coming up in Sohar, Salalah, Duqm as well as the road and railway infrastructure and other utility projects. That will ease the financing part from the government. Also products like sukuk are definitely required because the Islamic banks as well as regular banks with Islamic banking windows need to utilise their funds somewhere. If sukuk can finance the deficit in the budget, the surpluses that are generated from oil revenues can be invested in the SGRF (sovereign fund) to get more returns.”
The government could divest its stake in some industries and downstream oil and gas projects, and even from Omantel in which the government still holds about 70 per cent, says HE Salmi. This will add liquidity and depth to the market which he thinks will give good sentiment to the market. What will really happen is that the proceedings that come from divesting stake could be used to initiate new projects. This would enhance the economy and create new jobs and as a result it will benefit the capital market’s liquidity and add depth to the market and encourage new projects from the private sector.
Some of the key statistics (see table) of the State General Budget 2013 revealed by HE Darwish include a significant — 29 per cent increase in expenditure to give a fillip to the economy sending a message that the government will not curtail necessary expenditure.
The minister disclosed that the total revenues of the state for the year 2013 were estimated to be about RO11.2bn against RO8.8bn in the budget for the year 2012, with an increase of RO2.4bn, i.e 27 per cent. The oil revenues constitute 84 per cent of total revenues.
The oil revenue has been calculated on the basis of $85 per barrel and a daily production rate of 930,000 barrels, therefore the oil revenues were estimated to be about RO8bn, which represents 72 per cent of the total revenues. The gas revenues, estimated at RO1.3bn, represents 12 per cent of the total revenues.
The non-oil revenues were estimated at about RO1.8bn with an increase of 13 per cent over last year, which represent 16 per cent of the total revenues.
There is a seven per cent growth in economy budgeted (same as in 2012) which is higher by one per cent compared to the eighth Five Year Plan annual average GDP growth.
Humayun Kabir, general manager, wholesale banking, National Bank of Oman, says the growth oriented budget reflects the healthy finances of the treasury and a determined effort to keep turning the wheels of the economy in an otherwise globally challenging economic environment. Deficit at 5 per cent of GDP is a tad on the higher side but that may not be an issue if oil prices remain north of $100.”
Although a deficit of RO1.7bn is budgeted, as in the previous years the borrowings are insignificant. Much of the budgeted deficit will be met out of the last year’s surplus and the rest from development bonds. The deficit, although higher than last year’s budget is within acceptable limits – 5 per cent of GDP. The minister did clarify that in order to avoid any deficit, the breakeven price for oil should be $104 per barrel as compared to the realised 2012 price of $109 per barrel.
The significant growth in budgeted expenditure has been possible because of the high oil prices, $109 per barrel compared to an average of around $60 per barrel used in preparing the eighth Five-Year Plan.
Defence and security expenditure budget of RO3.5bn is more than double the expenditure estimated in the Five Year Plan (approximately RO1.7bn). The increase in budget for defence and security in 2012 was 57 per cent and in 2013 there is another 38 per cent increase.
Ashok Hariharan, partner and head of Tax, Oman & United Arab Emirates, KPMG, says the actual growth in GDP achieved in 2012 is estimated at 8.3 per cent which is higher than the 2012 budgeted growth of 7 per cent. This indicates that despite the global and regional challenges, the Omani government has been able to drive the economy forward. Another encouraging trend is the confinement of inflation in 2012 to three per cent compared to four per cent in 2011. The target inflation rate in the 8th Five-Year Plan is 4 per cent.
According to Hariharan, another indication of growth in the economy is the performance of the MSM listed companies. The Minister Responsible for Financial Affairs mentioned that the performance of companies listed in MSM has increased by 18 per cent although the market index rose only by two per cent suggesting that 2013 could be a strong year for equities. The market will also be buoyed by the proposed sale by government of its shares in government owned companies.
“Whilst indications are good for the future particularly if current level of oil prices is maintained, the minister has rightly cautioned for the need to control expenditure within the budgeted amounts. Further he has stressed on the need to reduce subsidies which are quiet large and amount to RO1.3bn,” Hariharan adds.
Benefits for citizens
While talking about the benefits for citizens from the Budget, Ali Hamdan Al Raisi, the vice president of the Central Bank of Oman said there are several ways in which the State General Budget for 2013 will benefit the citizens of the Sultanate. “It is expected that the expansionary budget envisaged by the government will help the economy in sustaining a high growth rate. As the benefits of high growth rate percolates downward, the trickle-down effect of the high growth rate will lead to increase in income and spending power of the masses. Moreover, the focus of the Government on creating additional employment for the national workforce through the provision of 56,000 jobs in 2013 will benefit the younger generation,” says Raisi(See full interview on page…)
The government is increasingly focussing on its social responsibility by allocating a higher amount of expenditure on education and healthcare. This will benefit the general populace as the educational and healthcare facilities improve in the Sultanate.
The budget is also focussing on attracting local and foreign investment in the private sector, supporting growth of the small and medium enterprise (SME) sector, and setting up new industrial zones. This will lead to further diversification of the economy as envisaged in Long Term Development Strategy Document- Vision 2020.