Oman: Low oil prices end five years of economic growth
Contraction in the nominal GDP in Oman in 2015 was mainly due to the sharp fall in crude oil prices in the global markets and fiscal policies pursued by the government. (Times of Oman)
Oman’s economy contracted in 2015 after five years of robust growth, primarily on account of the marked drop in crude oil prices in the international market and partly due to the global slowdown, according to Central Bank of Oman’s (CBO’s) annual report.
Despite increased oil production, net exports suffered a setback last year due to low oil prices. Prudent fiscal consolidation measures reduced government expenditure significantly in order to contain deterioration in the budget balance, said the report.
Consequently, nominal Gross Domestic Product (GDP) contracted 14.1 per cent in 2015, reflecting a reduction in two key constituents of aggregate demand—rationalisation in government expenditure and a slowdown in exports as
The CBO report stated that the creation of adequate employment opportunities for Omanis has been one of the major macro-economic objectives of the government in the recent years.
In 2015, employment of Omanis in the private sector increased by 6.1 per cent.
Inflationary pressures in Oman abated significantly in 2015, mainly due to a decline in international commodity prices, reduced public spending in Oman and a notable appreciation in the US dollar in real effective terms since mid-2014.
Annual inflation measured by movement in the average Consumer Price Index (CPI) for the Sultanate decelerated to 0.1 per cent in 2015, compared with an average of 2.5 per cent during the previous five years. The recent behaviour of prices in Oman owes its origin to both demand and supply factors emanating from domestic, as well as external sources.
From the demand side, contraction in the nominal GDP in Oman in 2015 was mainly due to the sharp fall in crude oil prices in the global markets and fiscal policies pursued by the government. Among the supply side’s factors, a marked drop in global food and metal prices, coupled with the decline in import prices in 2015 facilitated making goods cheaper in Oman.
The oil and gas sector continued to play a dominant role in the economy of Oman in 2015.
Crude oil production, subdued in 2014, turned around by 4 per cent to 358 million barrels in 2015. The production of natural gas also increased by 5.6 per cent to 39,801 million cubic metres in 2015, compared with 37,682 million cubic metres in 2014.
Crude oil exports in terms of volume rose 5.4 per cent to 308 million barrels in 2015, compared with 292 million barrels in the previous year. However, the average price realisation for Omani crude oil declined by 45.3 per cent to $56.5 per barrel in 2015 from $103.2 per barrel in 2014 due to ample supply, and a lack of aggregate demand in emerging market economies.
As a result, the share of oil and gas in terms of major parameters of the economy witnessed a decline in 2015. Despite a decline in shares, oil and gas together accounted for 33.9 per cent of the GDP, 78.7 per cent of government revenues, and 59.4 per cent of total merchandise exports in 2015.
Overall fiscal balance of Oman came under pressure in 2015, mainly due to a drop in revenues, owing to the decline in average crude oil price and a general slowdown in the economy. After continuous growth in total revenues during the 2009 to 2014 period, Oman recorded a revenue decline of 35.7 per cent to OMR9,067.5 million in 2015.
Fiscal consolidation measures reined in government expenditure (by 9.7 per cent to OMR13,698.9 million) significantly in order to contain the deterioration in the budget balance.
Consequently, the overall fiscal deficit stood at OMR4631.4 million in 2015.
Given the low inflationary environment and moderate non-hydrocarbon growth, CBO continued with its accommodative monetary policy stance. With domestic liquidity conditions still remaining comfortable, monetary aggregates in Oman expanded, with some moderation during 2015.
Despite the challenges facing the economy in the current environment of low oil prices, the banking sector remains robust, supporting economic diversification initiatives and credit needs of the growing young population. The risk-based supervision of banks, implementation of Basel accords, the development of modern payment and settlement systems have led to financial stability. The overall capital adequacy ratio in relation to risk weighted assets of banks remained comfortable at 16.1 per cent at the end of 2015, which was considerably higher than the minimum regulatory requirement.
On account of low oil prices during 2015, the balance of payments position came under some pressure, with the current account turning to sizable deficit against a surplus in the previous years. The merchandise trade surplus posted a fall of 64.5 per cent to OMR3.5 billion in 2015, from OMR9.9 billion during 2014, mainly on account of the decline in the value of exports, notably crude oil.
To a lesser extent though, this decline was mitigated by the reduced level of imports by 4.8 per cent during the year in relation to the previous year’s imports. The combined deficit on services, income and current transfers stood at OMR7.7 billion in 2015, compared with OMR8.3 billion in 2014.
The current account registered a deficit of OMR4.2 billion in 2015, as against a surplus of OMR1.6 billion in 2014. The capital and financial account experienced a net inflow of OMR4,741 million in 2015, as against an outflow of OMR701 million last year, reflecting the gap between domestic savings over investment demand.
The overall balance of payments position registered a surplus of OMR235 million during 2015, giving rise to the accretion of foreign exchange reserves by the same amount. As at the end of 2015, the gross foreign assets of CBO stood at OMR6,745.8 million, providing import cover for around eight months of merchandise goods.
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