A Quarterly Newsletter from UAE and Oman Offices

VOL 12, Issue 2 April 2010

OMAN UPDATE

Budget 2010

Despite the global economic recession and sharp fall in oil price, the Sultanate of Oman has registered a positive growth of 3.7% at constant prices in 2009, and expects the economy to grow by 6.1% at constant prices in 2010. This demonstrates the economy’s resilience and ability to counter the external economic turmoil and financial crisis. This impressive growth and financial stability was possible due to exemplary fiscal policies adopted by the Government to promote diversification of economy and private investment, and other measures undertaken to ensure the stability of the banking and financial sector. The 2010 budget forecasts estimated revenues of about OMR 6.38 billion against an estimated expenditure of OMR 7.18 billion, leaving a deficit of OMR 800 million.

The estimated total revenues at OMR 6.38 billion are 14% higher than the estimated revenue for 2009. Oil and gas revenues constitute about 76% of the total revenues, and the balance 24% is from other sources. The oil revenues, which account for 63% of total revenues, are estimated based on average oil price of US $ 50 per barrel. The daily production of crude rose to 810,000 barrels in 2009, reflecting an increase of 7% compared to 2008, thereby mitigating the impact of fall in oil prices. Revenues from gas are expected to generate around OMR 800 million, constituting about 13% of the total revenues.

The budgeted total expenditure of OMR 7.18 billion for the year 2010 represents a substantial increase of 12% over the previous year. Health and education sectors represented 47% cent of the total expenditure and accounts for 72% of the total government jobs. Funds allocated for the health and the education sectors amount to about OMR 1,168 million, an increase of OMR 106 million over 2009. The education sector allocation at OMR 874 million represents 35% of the total current expenditures of the civil ministries. The share of the health sector amounts to OMR 294 million, representing 12% of the total current expenditures of the civil ministries. The total allocation for the new projects to be implemented during 2010 amounted to about OMR 937 million. This includes construction of a number of new schools and health centres in various regions. The budget seeks to give a thrust to improvement of existing roads, sea ports and airports, as well as allocating additional funds for new infrastructure projects. The development budget has been increased by 16% with an allocation of OMR 950 million.
The budget deficit for the year 2010 is estimated at OMR 800 million which is about 13% of the total revenues. Though the budget deficit is high in absolute terms, it is in line with the previous year’s deficit, and is considered to be economically safe and acceptable, against the backdrop of the difficult global conditions. The budget deficit would be financed by withdrawals from the state general reserves, in case actual revenue realization is not in excess of that budgeted.

On a positive note, the economic diversification policy implemented by Oman has started bearing fruit with additional revenues coming in from the manufacturing and tourism sectors. The Consumer Price Index (CPI) data indicates a decline in inflation in 2009 to about 3.6% compared to 12.4% in 2008. The budget’s commitment to infrastructure development and major projects is expected to contribute to the economic growth of the country. In turn, this will provide job opportunities for nationals and will also increase private investment. The private sector in Oman is geared to capitalize on the opportunities available from implementation of the infrastructure and other development projects envisaged in the budget, through the unstinted support provided by the government. This will enhance confidence in the investment climate and economic environment of the country, and will enhance local as well as foreign investment in the various sectors of the economy.

Further, as per the recently promulgated new Tax Decree no. 28/2009, relating to income tax on companies in Oman, effective from tax year 2010, the tax rate on foreign branches has been reduced from 30% to 12%. Presently, Oman has signed Double Tax Avoidance Agreements (DTAA) with 27 countries and is negotiating with several other countries, which would result in foreign companies whose home countries have signed DTAA with Oman getting relief by way of set-off of income tax paid by them in Oman. Consequently, Oman is becoming an attractive investment destination for companies across the globe.

(This write-up is contributed by the Oman member firm of PKF International Ltd.)