MUSCAT, DEC 17 – Revelations that the 2018 State Budget will be based on an average oil price assumption of $50 per cent — versus $45 per barrel in 2017 — reflect continued caution in fiscal spending by the Omani government despite an uptick in international oil prices, according to a leading Muscat-based tax expert. Alkesh Joshi, Partner — Business Tax Advisory Services at multinational professional services firm EY, said the draft proposals for the 2018 Budget also reveal a commitment by the Omani government to boost expenditure whenever the opportunity presents itself.
“The 2018 Budget, which is expected to be based on an average oil price of $50 per barrel, is a reflection of improving oil price trends in global markets over the last few months,” Joshi said. “The average oil price is currently at about $62 and is expected to be range-bound below $70 during 2018. The Omani government has always been conservative in its budgetary planning and exercises caution in not estimating too high an oil price for its budgeting purposes. Therefore, the budget at $50 (is an indicator of the government’s intention to) keep the expenditure in check while monitoring revenues, which could possibly be greater than expected revenues,” the tax expert added.
Sharing his perspective on the 2018 budget proposals outlined recently by Darwish bin Ismaeel al Balushi, Minister Responsible for Financial Affairs, to the Majlis Ash’shura, also noted as significant the 8.5 per cent increase in the actual expenditure for 2017 over the budgeted spend.
“The actual realisation of oil revenues to the government during 2017 was based on an average $52 per barrel approximately, as compared to the assumed average oil price of $45 per barrel in the 2017 Budget. This has resulted in an income realisation during 2017 in excess of 15 per cent compared to budget for the year 2017,” said Joshi.
However, expenditure growth was not commensurate with the growth in the oil price realisation during 2017, he pointed out. “The actual expenditure during the year 2017 exceeded the planned expenditure for 2017, which is a sign of the government’s continuing commitment to increasing economic activity in the Sultanate given is role as the single largest spending force in the country. This also reinforces the view that the Government of Oman will continue to boost spending wherever possible.”
This commitment to ramping up expenditure is also reflected in the size of the budget deficit for 2018, anticipated at around RO 3 billion in trend with the projected deficit for 2017. “This is an indication that the increase in revenues due to the rise in the estimated oil price, combined with the increase in non-oil revenues, would be offset by an increase in expenditure, which is a very good sign for improving sentiment in the economy,” he remarked.
Significantly, the Sultanate’s solid fiscal credentials will continue to hold the government in good stead when it approaches international lenders for finance in 2018. The deficit for fiscal 2018, as revealed by the Minister Responsible for Financial Affairs, is proposed to be covered by a withdrawal from reserves of RO 500 million, with internal and external borrowings accounting for the balance RO 2.5 billion. EY’s Joshi observed: “The deficit for the last couple of years has been largely funded by external borrowings. The global debt markets are still easily accessible and the cost of borrowing is not prohibitive. Therefore, it makes commercial sense to borrow externally to the extent possible. However, simultaneously it is extremely important for the economy to transform itself and reduce its dependence on oil to the extent possible.”
Besides, the ratio of public debt to GDP is projected to increase to 49 per cent in 2018, with total debt aggregating to about RO 14.063 billion, according to the budgetary proposals. The ratio was 9 per cent in 2015, at the start of the global economic downtown triggered by slumping oil prices, climbing to 30 per cent of GDP in 2016.
Joshi stated: “The slump in oil prices have significantly affected the budgetary balance. Since there has been a continuous deficit being reported, the Government of Oman’s borrowing as a percentage to the GDP has been on an exponential rise. There are several countries in the world which have a public debt in excess of 49 per cent of the GDP, however the only difference is that most of those economies are more diversified as compared to Oman.”
Commenting on other aspects of the 2018 Budgetary proposals, the tax expert said the increase in General Revenues, estimated at RO 4870 million for 2018 (entailing a 5.5 per cent rise over estimated revenues for 2017), stems from measures introduced by the government to boost fees and the prices of some services.
Additionally, the draft budget also reflects a commitment to boosting non-oil revenues, said Joshi. “Increasing the contribution of the non-oil revenues of the Government of Oman has been a priority for the last many years and will continue to be a key issue over the next few years as well.
The increase in tax revenues reflects the recent changes introduced to the income tax law by way of Royal Decree 9/2017 which increased the tax rate from 12% to 15%, removed the statutory exemption of RO 30,000 and expanded the categories of income of a foreign company which were subject to withholding taxes.”
Non-oil current revenues for 2018 are estimated at RO 2560 million on a par with revenues projected in the approved 2017 State Budget.
The draft budget for 2018 estimates public expenditure at RO 12.5 billion, an increase of 7 per cent over the approved budget of RO 11.7 billion — an uptick that augurs well for enhanced economic activity in the coming year.
“The anticipated increase in spending is an indication of the government’s intention to continue to boost the economy and invest in infrastructure development. This step should bring in more positivity in the business sentiment while also spurring employment opportunities for nationals,” he added.