OMAN ECONOMY AND OIL PRICES
OMAN’S ECONOMY BEFORE THE FALL IN OIL PRICE
Oman’s economy is substantially dependent on oil revenues as they constitute 83% of the total revenues of the country. The 2014 Budget had estimated 4.5% increase in total revenues to OMR 11.7 billion, and was based on the oil price of USD 85 per barrel as against the average oil price during 2013 of about USD 106 per barrel. The total Budget expenditure in 2014 was increased by 5% over the previous year to OMR 13.5 billion. The investment expenditure estimated at OMR 3.2 billion accounted for about 24% of the overall Budget expenditure. The investment expenditure was mainly for various development projects and capital expenditures for developing oil and gas fields. Major allocations of OMR 9.2 billion were also made by the Budget for social sectors such as Education, Healthcare, Housing, Training, Subsidy and other social services. The investment projects that the government planned to implement were expected to stimulate private sector activities and generate a lot of local employment opportunities. The ambitious first phase of the Oman Railway project was expected to cost OMR 1 billion. The other important development projects included the refinery and petrochemical project at Duqm economic zone, Sohar refinery expansion project, mega road projects, hospitals, and several tourism projects.
IMPACT OF REDUCED OIL PRICE ON OMAN’S ECONOMY
From September 2014 onwards, oil prices started falling steeply and reduced by about 48% to about USD 45 per barrel in 2015. It was a huge challenge for the Oman government to keep its social commitments to its citizens, as sliding oil prices hindered its ability to increase government services and fund huge infrastructure projects. The major impact on the Oman’s economy due to falling oil prices is briefly summarised below:
- Oman’s budget deficit for 2015 is estimated at USD 6.49 billion, constituting about 21% of government revenues and approximately 8% of the country’s Gross Domestic Product. This deficit may further increase at the end of the year.
- Standard & Poor’s cut its outlook for Oman’s sovereign rating from stable to negative.
- Fitch downgraded ratings of certain Banks in Oman.
- The IMF estimated that the fiscal deficit may reach 14.8% of GDP in 2015 and 11.6% in 2016, from a deficit of 1.5% in 2014.
- Reduced employment opportunities and retrenchment in some oil exploration and drilling companies and on other ancillary service industries providing services to the oil and gas industry.
- No reduction made in budget allocations to Education, Health, Housing and Training sectors to ensure that living standards of Omani citizens are not affected.
PROACTIVE STEPS TAKEN BY OMAN’S GOVERNMENT
The Oman government appointed a high level committee to study the impact of falling oil prices and give its recommendations to boost the economy, maintain government revenues and development expenditures, and preserve the high standard of living of its citizens. Some of the proactive steps taken by the government are given below.
- Issue of government development bonds and Islamic bonds to bridge the budgetary deficit, as Oman has a low debt to GDP ratio.
- The plunge in oil prices put pressure on Oman’s state budget, causing one year USD/OMR forwards to rise raising rumors of possible devaluation in the Omani Rial. However, Oman’s government has asserted strongly its commitment to peg the Omani Rial with the US Dollar.
- No major cuts in infrastructure projects and development expenditure.
- Building of a huge modern port with infrastructure facilities and ancillary industries in Duqm so that Oman becomes a main logistics hub for the region.
- Focus on investment avenues and trade opportunities with Iran, following the nuclear deal between Iran and world powers. Oman has entered into agreement with Iran for purchase of around USD 60 billion worth of natural gas from Iran for 25 years which includes laying a billion dollar gas pipeline to Oman that is expected to encourage gas based industries in Oman.
The Oman government is monitoring the new oil price scenario closely, on an ongoing basis, and expects the situation to steadily improve in future. However, if the oil prices continue to remain low in future then the government would be constrained to take the following additional measures to maintain financial stability without adversely affecting the common citizens and their employment and living standards.
- Levy “fair tax” on liquefied natural gas exports, which is estimated to generate about USD 509 million p.a.
- Levy 2% tax on the remittances that Oman’s 1.9 million expatriates send overseas which would raise about USD161 million p.a.
- Levy tax on telecommunications revenue.
- Seek foreign currency loans in international markets.
- Increase corporate income tax rates.
- Remove/reduce subsidies on fuel, and other utilities.
- Introduce Value Added Tax (VAT).
(This article is compiled by Mr. Bhartesh Poojari, an Executive Director in PKF L.L.C., Muscat, the PKF member firm in the Sultanate of Oman.)