Oman faces up to new economic reality in 2016

Business Saturday 02/January/2016 22:00 PM
By: Times News Service
Oman faces up to new economic reality in 2016

Muscat: 2016 is set to be a year of necessary austerity for Oman with experts saying the decline in government spending will ripple through the economy as officials work to keep the Sultanate’s economy on track.
“We should never forget the fact that the government is a major spender in any economy which produces a multiplier effect. Obviously, the decline in expenditure may mean reduction in investment expenditure which constituted roughly 1/3rd of the total budgeted public expenditure in 2015,” a financial expert told Times of Oman.
“This results in lesser government projects in which private companies can participate. All these may lead to lower revenues, lesser profits and lesser employment especially for companies which depend on government projects. It may even trigger a contraction in the economy consequent to overall fall in demand,” the expert added.
On Friday, Darwish bin Ismail Ali Al Balushi, Minister Responsible for Financial Affairs, said government expenditures and revenues for 2016 are estimated at OMR11.9 billion and OMR8.6 billion, respectively, leading to an anticipated deficit of OMR3.3 billion.
The minister also said that the actual deficit for 2015 is expected to reach OMR4.5 billion.
This year’s expenditures are 15.6 per cent less than in 2015, which was OMR14.1 billion, while revenue estimates declined by 25.86 per cent, compared to the previous year’s OMR11.6 billion budget revenue estimates.
“Since the government finds it difficult to reduce its social sector expenditures, which constitutes the bulk of public expenditures, the axe may effectively fall on investment in some of the forward-looking programmes which were part of Vision- 2020,” the expert said, adding that the government may fill its revenue gap through a number of options, such as borrowing, drawing from reserves, and others.
“But, certainly this year will turn out to be a year of extreme challenge, not only for Oman, but for many of the oil exporting nations. As we all know, oil and gas revenues constitute close to 75 per cent of the gross revenue and, hence, drastic declines in oil prices translate into drastic falls in revenues,” the expert added.
Further, the expert noted that the government cannot quickly reduce this revenue gap, because increasing the contribution to the non-oil sector is not easy.
“What we are likely to witness is that at one end there will be an increase in retail oil prices and increased taxes for corporations, which translates into increases in the cost of operations and, at the other end, there will be a fall in revenues due to the contraction of business,” the expert added.
Nasser Saidi, GCC’s prominent economist, said that Oman’s current budget plans to deregulate fuel prices are commendable, but the country’s need for fiscal adjustment should also involve the re-orientation of spending (ie. expenditure switching away from subsidies) towards productivity enhancing spending, public-private partnership and privatisation measures to provide incentives for the private sector to invest in complementing government investments.
“Furthermore, to finance the deficit, the country could pave the way (for the private sector) by creating a domestic bond market by regular (with various tenors) government debt issuances resulting in a yield curve,” Dr Saidi added.
Meanwhile, a Shura member said that he is doubtful this plan can be converted into reality.
“In the current situation we have only limited options. Targeting to cut 15 per cent of ministry expenditures sounds good on paper. I don’t know whether it is achievable or not? If the plans don’t work properly, the deficit could double. We need more solutions on how we can minimise the impact,” said Tawfiq Al Lawati, a Shura member.
A Muscat-based Omani businessman said that proposed control plans are a bit late; however, it is better to introduce controls now, rather than not having them at all.
“The control measures should be implemented strictly and government should keep a tab on its progress. Wherever we have unnecessary expenditures, we should cut them down. Leakage of funds is happening in many places,” Anvwar Al Balushi, chairman of Anvwar Asian Investment Group, said.
“Moreover, the government should work more on creating an investment-friendly atmosphere in Oman. Currently, there are many hurdles that turn away foreign investors. A lack of coordination is affecting this a lot,” Anvwar said, while adding that Oman is one of the safest country to do business in, so the government should realise its potential and become more flexible.
Last week, the Omani government said that prices of petroleum products, mainly petrol and diesel, will be raised as part of deregulation beginning in mid-January this year.
Further, there will be a rise in corporate income taxes, while measures will be taken to increase fees charged by the government for various services.
Market access for goods
Meanwhile, an Indian businessman said that serious reforms to improve the rule of law and market access for goods and capital are needed to return Oman to higher levels of economic freedom.
“Oman has to develop specific strategies to attract investors, and this has to be specific to sectors. The current call is to shift focus to alternate income sectors, which are independent and can be driven and can be fast, such as opening up the tourism sector, mining sector and manufacturing sector. More focused approaches are needed to develop the service industry, such as ports, ICT, healthcare, education and logistics,” Dr Anchan C K, managing director at World Wide Business House, told Times of Oman.
“In addition, there should also be a concentrated effort in developing country-specific strategies with other countries, enhancing co-operation and trade and, in particular, easing investment, regulations and offering incentives on par with other GCC countries,” Anchan added.
In its economic outlook for the Middle East, North Africa and Central Asia, the International Monetary Fund forecast that the six-member Gulf Co-operation Council will see gross domestic product growth slow from 3.25 per cent this year to 2.75 per cent in 2016.
The report added that the GCC countries average fiscal deficits are expected to reach 13 per cent of GDP this year, with the region’s largest economy, Saudi Arabia, facing a deficit of 21.6 per cent in 2015 and 19.4 per cent in 2016.