STIMULATING GROWTH

Oman’s economy is projected to achieve continued positive growth during 2018, supported by gradually rebounding oil prices and the government’s diversification efforts

Omran

Increased focus on economic diversification seems to be paying off as Oman’s Budget 2018 in hindsight reflects the country’s improving economic sentiments. The Budget broadly aligns with the Ninth Five-Year Development plan. The targets set out are linked with an aim to increase Oman’s growth rates through stimulation of the private sector and creation of more jobs for citizens of the country. The government is currently working towards revamping certain critically important laws, including the public-private partnership (PPP) law and the foreign capital investment law. The aim is to facilitate private sector investment and increase the ease of doing business.

The Budget 2018 has tried to maintain balance by cutting public expenditure without compromising on funding of key development projects. The focus of the government is not only to improve the investment climate and promote public-private partnerships to stimulate economic growth and sustain employment but also ensuring swift implementation of the National Programme for Enhancing Economic Diversification (Tanfeedh) initiatives.

The government has set aside RO1.2 billion to ensure prompt completion of ongoing development projects and also to make timely payments. Investment projects carried out by state-owned enterprises (SOEs) during 2018 are estimated to cost RO3 billion. This will give a further boost to economic activity, accelerate economic growth and create more jobs. Despite the financial and economic challenges affecting investment activities and capital markets in the region, the privatisation scheme is being continued. This is essential to promote and expand participation of private sector in the economic activities. According to the scheme, six SOEs are being planned for privatisation during 2018.

The total projected spending will amount to RO12.5 billion, an increase of 6.8 per cent against the previous year. Revenues are estimated at RO9.5 billion, leaving a budget deficit of RO3 billion, a level of 10 per cent of GDP. GDP is budgeted to grow at a rate of 3 per cent. This year’s budget is based on an oil price of $50/bbl, which is lower than the $55/bbl assumed in the ninth five year plan and suggests prudent financial management. The actual deficit for FY17 (RO3.5 billion) has exceeded the budgeted deficit (RO3 billion) by 17 per cent mainly due to higher than forecast expenditures compared to the actual revenues. This has resulted in higher than estimated borrowings in 2017 and is reflected in an 81 per cent increase in interest payments. The reduction in the deficit permits an increase in allocation to subsidies in the current fiscal year, which includes fuel subsidy for the needy. Value-added tax (VAT) in Oman, which appears to be delayed until 2019, may have a positive impact by further driving down the declining budgeted fiscal deficit. When VAT is enacted in Oman, as per the International Monetary Fund estimates, it could account for 1.5 to 2 per cent of GDP (or 2.5 to 3.5 per cent of non-oil revenues). The oil and gas production expenditures are estimated at RO2.1 billion, up by 15 per cent compared with 2017 budget estimates. This includes the cost of oil and gas production, and expenses required to maintain future oil and gas production, as well as enhance oil reserves.

With increased activities in Duqm, tourism sector and logistics sectors, economic growth should gather pace in 2018. The revenue of RO9.5 billion is 9 per cent higher than what was budgeted in 2017, and 3 per cent higher than 2017 actuals. The rebounding of oil price has helped in bringing down the deficit to 10 per cent of GDP. Despite the continued economic challenges posed by geo-economic factors, the government has projected a GDP growth of 3 per cent for 2018. This indicates that the 2018 budget reflects improving economic sentiment. The government’s continued rationalisation of public spending and focus on increasing non-oil revenues will help contain deficit to an acceptable level.

Oman’s economy is projected to achieve continued positive growth during 2018, supported by gradually rebounding oil prices and rising economic diversification efforts on the part of the government. Improved oil prices and prudent controls exercised by the government on expenditure have resulted in curtailing the deficit. The budgeted deficit for 2018 is estimated to be RO3 billion as compared to 2016 actual deficit of RO5.3 billion, which is a remarkable improvement of 44 per cent over a two-year period. Should oil prices remain close to $70, Oman’s deficit for 2018 could be considerably lower than expected. The budget is balanced and realistic, which includes several measures for stimulating growth and sustaining employment. The focus continues to be on diversification with enhanced contribution from the private sector, in-country value, public-private partnership, national initiative to create 25,000 new jobs, privatisation of certain state-owned entities and to continue spending on the social sectors such as education and healthcare.

 

Oil revenue decline

Oil revenue is expected to decline by 11 per cent as compared with the ninth five-year plan, but projected to grow by 11 per cent as compared to the 2017 budget.  The estimated oil price considered for the five-year plan, initially prepared in 2016, was on the higher side. Thereafter, the 2017 and 2018 budgets have aligned revenue projections to current market reality. Oil and gas revenue for 2018 is expected to increase by 9 per cent compared to the 2017 budget. The estimates take into account reduced production pledged by the government in line with the OPEC production agreement, as well as anticipated production from the Khazzan-Makarem gas field. Given the anticipated increase in oil and gas revenue, there should ideally not be any threat to the growth of the Omani economy during 2018, although the need for economic diversification remains.

 

Impact of subsidies and diversification

Overall, the amount of subsidy has been raised to RO725 million compared to RO395mn in 2017. Operational support for government companies and subsidy on the electricity sector form the major chunk of the subsidy segment at 93 per cent. The government should aim to balance economic needs with social welfare. Earlier, subsidies were available to all the people. Now the government seeks to provide subsidies only to those who need them most. For instance, fuel subsidy is now only available to individuals earning below certain income levels.

The government has been pursuing its diversification strategy since the past several years and many avenues have been opened. Public private participation in various projects, Tanfeedh and changes in the investment law are the core areas where the government is focusing. Tanfeedh is a national initiative, which is part of the 9th Five-Year Development Plan (2016-2020). The targeted sectors are manufacturing, tourism, transport and logistics, mining, and fisheries. The programme will focus on raising the contribution of these sectors to the Sultanate’s Gross Domestic Product (GDP), increasing investment in these sectors, and creating more job opportunities.

 

Public private partnership

Oman with the geopolitical stability, state-of-the-art infrastructural facilities and investment-friendly environment, is well placed to attract further investment by facilitating PPP initiatives and foreign capital/bankruptcy laws. Investment is the main driver for economic growth. In developing the economy, public investment is the major investment stream. The government has to maintain this lead, but with a special emphasis on PPP initiatives and strategy to enhance non-oil revenue. All the five sectors identified by Tanfeedh should be pursued aggressively, with defined time-bound targets. The private sector should be engaged in implementing and managing projects, facilities and activities in both oil and non-oil /gas sectors.

The government should consider accelerating the reform process including issuing the new PPP, foreign capital investment and bankruptcy laws to foster private sector participation. The 2018 budget does suggest a critical role for private sector businesses to be more involved in government initiatives. It is critical to improve investment conditions so as to raise investment from the private sector and promote public private partnerships. Easing the way of doing business in Oman would also improve the country’s chances of raising levels of foreign direct investment (FDI).

Vision 2040

The Supreme Council for Planning is looking to make the first draft of Oman Vision 2040 available for the discussion by the end of 2018. Oman Vision 2040 will provide the guidelines for next two decades, under which the government can draft the next five-year plan, which would be the first five-year plan to be implemented under the guidance of Oman Vision 2040. The plan period would commence from 2021.

The foremost objective of the proposed draft is to present Oman as an attractive investment destination for both local and foreign investors in order to diversify the non-hydrocarbon sector. Currently Oman is in the third year of the ninth five-year plan and under this plan most of the planned executions are underway. The Supreme Council is optimistic of achieving all the goals set up for the period.  Since 2014, lots of work has been done in the direction of the economic diversification, most prominent of which is Tanfeedh programme.

The ninth five-year plan identified five promising sectors for economic diversification, whether by increasing government revenues and exports or by offering more and better employment opportunities. The five sectors are: manufacturing, transportation and logistics, tourism, fisheries and mining. The plan was prepared in light of a number of challenges, most notable of which are the fluctuating global oil prices, the geopolitical situation in the region and the young population structure that will pressurize the employment market in the coming years. The vision of the current plan is to rise to the challenge and implement practical solutions to these.

 

Challenges Ahead

Achieving diversification of revenue in a short span of time will be challenging and will require adequate planning and timely execution. By encouraging greater involvement of the private sector and local SMEs, the government is ensuring swift implementation of identified development projects, and thus implementing its diversification strategy. The key challenge would be to revive the non-oil revenue stream and also to bring further down the budget break-even oil price to a sustainable level before 2020.

The Sultanate’s increased thrust on economic diversification and developing the travel and tourism sector has begun to show its positive effects on the economy. A number of private and government projects across various sectors including hospitality is a testament to the growing investor confidence in the Sultanate’s economy. Economic diversification and tourism will be the main growth engines for the country’s economic development as it will help in achieving the target of 3 per cent GDP growth and place the economy back on the growth mode.

 


Leave a Reply