Let’s Have a Think

Budget Uncertainty

Bearing in mind that hydrocarbons make up a significant portion of Oman’s yearly income, the dip and subsequent instability of the oil price means that Oman’s revenues have been somewhat […]

Bearing in mind that hydrocarbons make up a significant portion of Oman’s yearly income, the dip and subsequent instability of the oil price means that Oman’s revenues have been somewhat depleted—according to the Minister of Oil and Gas, His Excellency Mohammed Al Rumhi, the lower price of oil is costing Oman up to $55 million every day. In January 2015, however, it was announced that Oman would actually increase government spending. Although government spending was set at $33.63 billion, a 4.5% increase from 2015, Oman’s revenues were projected to be $30.13 billion, a 1% drop from 2014. According to government figures, the projected deficit was to be $6.49 billion, the largest for Oman since 1990. According to an IMF report in June, however, the deficit had risen to a staggering $9.35 billion. Totaling approximately 13.2% of the Sultanate’s GDP, this presents a concern for the financial leaders of the country. It will face an uphill task to fulfill promises to continue funding and ensure that national projects are not delayed.

A number of high profile projects are currently taking place in Oman. The Minister responsible for Financial Affairs, HE Darwish Al Balushi, was adamant that this sort of infrastructure spending would not be cut, but was vague regarding any concrete programs to reduce the fiscal deficit, saying “When needed, steps will be taken to maintain the economy’s performance.“ Fuel subsidies have already been reduced to $1.5 billion in 2015 from $2.2 billion, and many will be questioning what further steps will be taken to reduce the budget deficit, and what their impact will be. The Minister’s current stance creates two sets of problems. For investors, a sizable budget deficit such as this one creates uncertainty, especially considering the vagueness of his assertions. The future of high budget projects may be threatened from a long-term perspective, and Oman may see investors looking elsewhere if the specifics are not outlined shortly. A second concern comes from within. Gas subsidies have been reduced, which has already had an impact on Oman’s industry sector. In December 2014, Omani cement firms Oman Cement and Raysut Cement announced that they would each be charged more for their gas usage in 2015. Additionally, transportation costs are likely to increase, with plans announced in June to increase the price of fuel for local consumers. In the meantime, food subsidies have also been reduced on items such as rice, flour, and sugar. This is likely to have an effect on low-income families, especially if wages are not increased. Adapting to changes in global markets is a must for Oman and the government has yet to prove that it can do so efficiently. While major projects may not be affected, a decrease in national revenues has already had a knock-on effect on various government subsidies, and this could continue, especially if the oil price remains at its current sub-$50 benchmark level. As the government tackles the oil price slump and the increasing budget deficit, challenges will be faced and belts will almost certainly have to be tightened. Investors, businesses, and citizens alike will be affected, and so it is up to the government to set out a clear plan of action for the Sultanate’s economy.

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