Oman's 2017 budget tackles cheap oil with austerity measures, privatization

Published January 2nd, 2017 - 06:01 GMT
2016 has witnessed the lowest traded price of Oman oil, where the price dropped to less than $24 in January.  (Shutterstock)
2016 has witnessed the lowest traded price of Oman oil, where the price dropped to less than $24 in January. (Shutterstock)

Oman’s Budget 2017 is tackling falling oil prices head on with a plan to put the country on the right path.

With more austerity, cuts and the targeting of funds only to those projects and schemes that will make the country future-proof, the government hopes the annual budget – revealing a OMR3 billion deficit – will turn the Sultanate’s fortunes around. 

In one of the hardest hitting budget statements in recent years, Budget 2017 pulls no punches: public sector recruitment will be low, austerity measures will continue, subsidies will be reviewed, government assets will be sold off or privatised and funding will only be channelled into projects essential for Oman’s non-oil future.

Royal Oman Police has been tasked with amending fees for civil services, there will be an amendment to income tax laws, there will be selective taxes on items such as alcohol and tobacco and a limit on tax exemptions for some companies.

The statement also reveals that government subsidies will gradually be cut.

It also spells out in detail the Tanfeedh proposals and the need to fund these essential programmes while cutting back on projects

that will not aid the new Oman as it shakes off its dependency on oil.

“ The State’s General Budget has been affected significantly by the decline of oil prices since mid-2014. Oil prices remain at low levels and, therefore, 2016 budget lost more than 67% of oil revenues, despite high production, compared to oil revenues recorded in 2014.

“The year 2016 has witnessed the lowest traded price of Oman oil, where the price dropped to less than $24 in January. However, the Government was able to obtain funds to finance the spending, taking into account the volume of challenges faced. A number of measures and policies have been taken which helped to minimize the impacts of low oil prices on fiscal and economic performance.

“The overall framework of 2017 Budget comes in line with the approach adopted in the last two years. Such approach aims at rationalising spending and enhancing its efficiency, as well as keeping public spending within sustainable levels. In addition to keep reviewing non-oil revenue in order to raise its contributions in aggregate revenues and reduce dependency on oil revenue. Moreover, utilize any resultant increase, in oil revenue, in financing fiscal deficit and enhancing government reserves,” the report states.

The report adds: “Oman’s economic performance has been affected due to low oil prices. In 2015, Oman’s Gross Domestic Production (GDP) at current prices dropped by 14 per cent compared with 2014 level. GDP has decreased from OMR31.2 billion to OMR26.8 billion. In view of the continued lower oil prices, GDP at current prices was reduced by 11 per cent over first-half of 2016, according to declared figures. However, GDP at constant prices grew by 5.7 per cent in 2015, and it is projected to be positive over 2016. Despite the sharp drop in oil revenues, the growth of GDP at constant prices came as a result of economic and fiscal policies pursued by the Government over these two years. With expected improvements in oil prices over 2017, GDP is projected to experience a growth of 2 per cent while non-oil activities are expected to rise by 4.7 per cent.”

The statement revealed that OMR1.1 billion was wiped off oil and gas sales in 2016, thanks to falling oil prices, adding, “The actual average price of oil achieved in 2016 reached about $39/bbl, down by 63% compared with 2014 price i.e. $45/bbl.

Subsidies were also targeted. “Compared with 2015 levels, most of budget spending items have been cut, most notably of which subsidies, current expenditures of ministries and government units, and security and defence expenditures.”

It adds: “According to the (initial) final accounts, actual fiscal deficit for FY 2016 amounted to about OMR5.3 billion, increasing by (60%) compared to estimated budget deficit. Such high deficit is driven by many reasons including: the actual oil price achieved was under the estimated price ($45/bbl was the estimated price, while the actual price was $39/bbl). In addition to, an increase in spending compared with budget estimates, and a reduction in some actual non-oil revenues.”

“International bonds have been issued worth $4 billion, and also the Government obtained a syndicated loan of $5 billion. In addition to issuance of Islamic bonds (Sukuk) worth half-billion US-dollars, as well as loans worth $2 billion provided by an export credit agency,” the statement added.

There was a “rapid growth in debt, increasing by 29% of GDP by year-end of 2016,” according the statement. To ensure the state’s fiscal sustainability, the Sultanate will, in 2017, “continue rationalizing public spending and enhancing its efficiency, as well as ensure its sustainability,” as well as “revitalizing non-oil revenues and enhancing their contributions in total government revenues.

The Tanfeedh proposals for the latest five year plan are also given a resounding thumbs-up in Budget 2017. The statement adds that the country is committed to “providing subsidy required to achieve the anticipated results of recommendations, provided by National Programme for Enhancing Economic Diversification (Tanfeedh), in order to improve investment climate. In addition to enhance the role of private sector and increase investment rates in GDP.

“The aim is to enhance economic diversification, increase employment rates, achieve medium-term fiscal and economic stability, and to strengthen social development.

Budget 2017 also wants to:

Enhance public-private partnership (PPP) in order to accelerate implementing more investment projects and private sector initiatives.

Give special attention to allocations for maintenance of assets, facilities, and infrastructure in order to preserve the development achievements.

Continue implementing the decisions made to support Small and Medium Enterprises (SMEs) by allocating some of government projects to SMEs.

Speed up the payments of SMEs and to continue providing loans to the same through Al Raffd Fund and Oman Development Bank.

The statement adds: “Oman has made remarkable achievements in areas such as health, education, basic services and infrastructure, which uplifted the citizens’ standards of living to higher levels. Such achievements have been attained through wise sectoral policies of all government units.”

Education, health and social welfare allocations make up 23 per cent of this year’s budget, according to the statement.

OMR1,586 million has been allocated to the education sector, OMR613 million for the health sector, and OMR487 million for social welfare.

Government jobs will be few and far between in 2017, according to the statement. “Recruitment in public sector during 2017, will be very limited due to the challenges facing the budget resulting from the sharp fall of oil prices, and higher spending on salaries and wages.

“Private sector is expected to create job opportunities for Omani youths, through the establishment of investment projects that have economic returns.

“Statistics, issued by National Centre of Statistics and Information (NCSI), show the number of Omani workforce, working in private sector, has increased to 222,000 labours in 2016, increasing by 13,000. This means that private sector has been able to recruit such number of citizens, and thus may create further 12,000 – 13,000 jobs over 2017.

A National Training Fund will also be established in Oman, “providing allocations required for activating the role of National Training Fund in order to advance recruitment efforts in private sector, in addition to financing training programs while ensuring the efficiency of such programs.”

Aggregate revenues are estimated at OMR(8.7) billion, increasing by (18%) as compared to projected actual revenues for 2016. These revenues consist of oil and gas revenues of OMR(6.11) billion, representing (70%) of total revenues. Non-oil revenues are estimated around OMR(2.59) billion i.e. (30%) of total revenues.

There is also a cut of OMR200 million in public spending. The statement adds: “Total public spending is estimated at about OMR11.7 billion, decreasing by OMR200 million i.e. (2%) compared with 2016 estimated spending. “

Security and Defence spending is expected to be around OMR3.34 billion, a drop of 5 per cent compared to last year.

On the budget deficit the report states: “Budget Deficit is estimated at about OMR(3) billion i.e. (35%) of total revenues, and (12%) of GDP. Despite the fact that deficit-to-GDP ratio is considered low, according to international indicators, and can be financed by global debt markets; reducing deficit is one of the priorities specified by the budget due to deficit accumulation.”

84-per cent, OMR2.5 billion, of 2017 projected deficit will be financed by external and domestic borrowing, according to Budget 2017. External US-dollar borrowing includes issuance of international bonds, Islamic bonds (Sukuk), and syndicated loans. The rest of the deficit, estimated nearly OMR(0.5) billion, will be covered by drawing on reserves.

The Sultanate is also planning to sell off or privatise its holdings.

“In 2016, the government has embarked on implementing a privatisation scheme in accordance to a framework set for the period of (2016-2020). The first phase of the scheme is completed after setting up a holding company for each sector, and transferring government shares to the relevant holding company.

“Furthermore, ownerships of some government companies have been transferred to sovereign funds, in preparation of privatization. Moreover, financial and legal advisory studies, of privatizing Muscat Electricity Distribution Company (MEDC), have been completed. MEDC is a subsidiary of Electricity Holding Company (EHC) and owned fully by the state. It’s expected that the mechanisms and procedures of privatizing MEDC would be completed during first-half of 2017.

“The privatisation scheme will continue over the coming years. Such scheme is considered as one basic tool leading to expanding the ownership base of private sector, and deepening the securities market.”

Main Objectives of 2017 Budget

Fiscal sustainability and reduction of potential risks are the main objectives that the budget strives to achieve, so that the financial activities do not create pressures on sovereign resources

Revitalising non-oil revenues and enhancing their contributions in total government revenues

Achieving economic growth and controlling inflation rate so as to maintain per-capita income

Diversification (Tanfeedh), to improve investment climate. In addition to enhance the role of private sector and increase investment rates in GDP

Amending the fees of licenses of bringing foreign workers

Introducing selective tax, concurrently with GCC countries, on certain commodities such as tobacco, alcohol and others

Amending Income Tax Law that is expected to be issued this year. The implications of such amendment are, therefore, not incorporatedin the budget

Amending the fees of licences for bringing foreign workers

Limiting tax exemptions granted for companies and establishments

Amending rules and regulations pertaining to exemptions of customs duties

Postpone purchase and replacement of government vehicles and equipment, and cut capital expenditure

Reviewing and rationalising government subsidy in order to direct such subsidy to needy citizens. However, the subsidy will be cut gradually

Selling government assets, within privatisation scheme, notably those that entail higher operating expenses or maintenance costs

Implementing the revised tariffs of large power consumers for commercial, industrial and government use.

 


© Muscat Media Group

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