Budget lays stress on infrastructure for growth

Muscat: The main features and estimates of the General Budget for FY 2019, and the preliminary financial results for FY 2018 presented by the Ministry of Finance are mentioned below:
The performance of 2018 Budget was better, as compared to the last three years (2015-2017), reflecting higher oil prices, an increase in non-hydrocarbon revenue and spending cut. However, the oil market remains uncertain with imbalance between supply and demand, and continued fluctuation in oil prices. This requires further precautionary measures in 2019 Budget, deeper fiscal consolidations, and enhancing non-oil revenue. Strategic infrastructure projects wil improve the growth and promote further economic diversification.
The 2019 Budget framework aims at achieving a set of objectives and priorities, notably fiscal sustainability so as to enable the national economy in achieving economic growth targets, a diversified economy, and targeted rates of domestic and foreign investments. It will enable the private sector to play a greater role in the development process and to create more jobs.

Highlights of the budget

Global Economy
According to the International Monetary Fund (IMF), the global growth rate is projected to rise to 3.7 per cent in 2018 and 2019. However, the global growth continues to be surrounded by a number of challenges, particularly trade tensions between major economies, uncertainty regarding monetary policy in advanced countries, high level of global indebtedness, and mounting geopolitical risks.
Oil prices have experienced great volatility during 2018, reached as high as $89/b in September 2018, but then fell back to nearly $50/b in December 2018. This is due to several factors including market fundamentals (demand and supply) and geopolitical risks. According to international institutions, oil prices are projected to average between $60-65/b in 2019. In spite of the positive outlook for oil prices, precautionary measures are essential to mitigate any potential decline in oil prices.
National Economy

Despite the challenges faced by the national economy during the first three years of the Ninth Five-Year Development Plan, the national economy registered a positive growth rate, which is expected to range between 2 per cent and 3 per cent by the end of the plan. According to the National Centre for Statistics and Information (NCSI), the gross domestic product (GDP) continues to grow at current prices, reaching 15.1 per cent over the first half of 2018 compared to the same period of 2017. The growth was supported by an increase in hydrocarbon activities, notably gas activities which grew by 23.2 per cent. In addition, non-hydrocarbon activities registered an increase by 5.1 per cent over the same period, largely due to improved activities in manufacturing sector and mining industry. The contribution of non-hydrocarbon activities during the first half of 2018 reached 63 per cent. It is expected that the growth of GDP will continue to improve over 2019, to at least 3 per cent in real terms, supported by the growth of oil and non-hydrocarbon activities. The IMF projects the national economy will resume growing during 2018 to 3 per cent at constant prices. It has also expected that Oman will record the fastest growth rate among the GCC countries in 2019.
Furthermore, The World Bank expected that the national economy will continue to improve during 2018 and 2019 due to several factors, notably the recovery of hydrocarbon sector, and the increasing production of Khazzan gas field. It has also projected that the GDP of Oman will continue to be improved.
Domestic inflation rate is expected to average between 2 per cent and 3 per cent in 2018 and 2019.
For the banking sector, the financial statements show a high ratio of solvency in light of good growth rates of GDP and fiscal consolidation measures. This is in tandem with the Central Bank of Oman’s efforts in pursuing sound controlling and supervisory policy and adopting a monetary stimulus policy, which goes in line with the fiscal policy that responds to the developments in US dollar interest rate — the stabilising currency for the Omani rial — efficiently. In light of this favourable economic environment, the monetary and financial stability is maintained, which in turn supports the prospects for economic growth and diversification and enhances domestic and foreign investment.

Public Revenue

Non-hydrocarbon revenue target has not been met, mainly due to the delay in implementing some of the approved measures aimed at energising non-hydrocarbon revenue.

Public Spending

According to the preliminary outcomes, overall public spending totalled RO 13.2 billion in 2018 compared to a budgeted figure of RO 12.5 billion, a 6-per cent increase. This is mainly attributed to the rise in investment spending over development projects, increased expenditures of some government units to meet necessary and urgent needs, and high subsidy costs of electricity sector.

2019 Budget Objectives:

  1. Fiscal Sustainability and Enhancing Spending Efficiency

Fiscal sustainability and balancing of revenue and expenditure are the most important objectives of 2019 Budget. Therefore, the revenue and spending of 2019 Budget have been estimated, taking into account the following:

 Prioritising spending in line with the available financial resources and in a way that ensures the achievement of economic and social goals.

 Keeping the deficit within a sustainable level and reducing public debt.

 Improving government revenues and enhancing the contribution of non-oil revenue to overall government revenue in a way that leads to reduce dependency on oil sector.

 Bringing down breakeven point/oil price over the coming years.

  1. Continue to Stimulate the National Economy

The budget is the main driver of the national economy. This is reflected by the importance of the budget for the implementation of five-year plans and for inclusive and sustainable development, by means of the following:

 Complete the infrastructure projects that will help incentivise economic growth.

 Continue the policies on economic diversification by enhancing the participation of private sector.

 Maintain adequate level of public investment in productive sectors that help to increase employment rates and strengthen social development.

 Achieve economic growth of 2 to 3 per cent, on average, at constant prices over the Ninth Five-Year Development Plan.

 Control inflation rate so as to maintain per-capita income level.

 Outsource some government services and enhance public-private partnership (PPP).

 Support Small and Medium Enterprises (SMEs) by allocating some of the government projects to SMEs. In addition to continue providing loans to the SMEs through Al Raffd Fund and Oman Development Bank.

 Modernise legislation and laws related to business environment, and domestic and foreign investments.

 Give special attention to allocations for the maintenance of assets, facilities and infrastructure in order to ensure the effectiveness and sustainability of the development projects already accomplished.

  1. Maintaining the Level of Basic Services:
    The government gives special emphasis on providing basic social services for the citizens. Therefore, the budget seeks to maintain the achievements already accomplished, through the following:
  2. Maintain the level of high-priority social services for citizens
    The spending estimated in 2019 Budget for basic services, such as education, healthcare, housing and social welfare accounted for 39 per cent of public spending, which represents the largest portion of the budget.
  3. Recruitment

The government pays greater attention to investment spending so as to enhance investment climate and enable private sector to play a greater role in investment projects and create more jobs. The investment spending is estimated at RO 3.7 billion in 2019, including RO 1.2 billion allocated for infrastructure projects which are overseen by various government units, and an amount of RO 2.5 billion to be utilised by some state-owned-enterprises (SOEs) for the implementation of projects in industrial and services sectors. This will help to boost economic growth and create more jobs. On the other hand, the government continues to implement the initiatives recommended by the National Programme for Enhancing Economic Diversification (Tanfeedh).
As for public sector recruitment during 2019, the budget includes allocations for 5,000 job opportunities. The recruitment in the public sector continues to be based on the needs, particularly in the education and health sectors. However, the private sector is hoped to play a greater role in creating more job opportunities as it is involved in all economic activities in the country.

Training linked with Employment

As part of the government’s policy to enhance the skills of Omani job-seekers, the National Training Fund shall continue in 2019 its plan to train 6,170 trainees along with more groups of trainees, in an effort to continue to build human capacity in Oman and bridge the skills gap between education and job market needs. In addition, cooperation between and among high-priority sectors shall be enhanced to identify job opportunities, along with current and future requirements.

Housing Aid, Social Housing Scheme and Housing loans

The government continues to implement the Social Housing Scheme and Housing Aid Programme for citizens. An amount of RO 90 million has been allocated for this purpose, which includes an amount of RO 60 million assigned for housing loans provided by Oman Housing Bank, while the remaining RO 30 million is allocated for housing and development loans.

Fuel subsidy

As part of government’s endeavours to mitigate the implications arising from the elimination of fuel subsidy, the National Subsidy System (NSS) has been provided with the required allocations. The number of citizens registered in this system reached around 325,000.

Estimates of 2019 Budget

  1. Public Revenue

Aggregate revenue is estimated at RO 10.1 billion, increasing by 6 per cent as compared to estimated revenue for 2018. Such revenue consists of oil and gas revenue of RO 7.4 billion, representing 74 per cent of the total revenue. Non-oil revenue is estimated at RO 2.7 billion, representing 26 per cent of the total revenue.
Revenue estimates are based on the following considerations:

 Oman’s commitment to cut oil production in line with OPEC’s decision to reduce production volumes.
 Gas revenue from Khazzan-Makarem gas field.
 Excise tax revenue.
 Revenue generated from Privatisation Scheme.
 Improve efficiency of tax and fees collection. Expanding in the provision of preferential services.
 Standardised fees of municipal services.
 Revised fees of services provided by Ministry of Agriculture and Fisheries, and Ministry of Health.

  1. Public Spending

Total public spending is budgeted at about RO 12.9 billion, increasing by RO 400 million compared with the budgeted figures of 2018 Budget, as follow:

 Current Expenditures of Ministries and Government Units:
These expenditures are estimated at RO 4.5 billion. The current expenditures include salaries, annual allowance, entitlements of the employees, and cost of promoting the 2010 batch of Omani government employees of RO 3.5 billion; and also include operating expenses of RO 0.6 billion. The salaries, annual allowance and entitlements account for 76 per cent of total current expenditures of ministries and government units.

 Investment Expenditures:
Investment spending, needed for the implementation of development projects, is estimated at RO 1.2 billion in 2019 Budget, representing the estimated amount to be paid during the year as per the actual work in progress for the projects. Spending on development projects will not be cut to ensure the completion of all ongoing projects without delay, and also to ensure that the relevant payments will be made on time. As for investment expenditures, the focus is on the implementation and completion of a number of strategic projects, including the following:

 Construction of hospitals in Salalah, Khasab, and Suwaiq. In addition to completion of implementing a number of health centres in some wilayats.
 Water networks projects in a number of wilayats.
 Construction of catering facilities, air cargo terminals and aircraft maintenance hangars at Muscat International Airport and Salalah Airport.
 Implementation of Al Sharqiyah Expressway project.
 Paving of internal roads in various wilayats.
 Implementation of Adam-Thamrait road dualisation project.
 Implementation of infrastructure projects for Liwa City Housing Complex.
 Compensation scheme set for the people whose houses were affected by Batinah Coastal Road project.
 Construction of alternative housing units for the people whose houses were affected by Batinah Coastal Road project.
 Construction of 400 housing units in Khor Souly (Salalah).
 Construction of a number of new schools, and implementation of additional facilities at some existing schools.

v Oil and Gas Production Expenditures:
These expenditures are estimated at RO 2.2 billion in 2019 Budget, up by 6 per cent compared with 2018 budget estimates. This includes the operational and capital costs of oil and gas production, and expenses required to maintain future oil and gas production.

v Subsidies:
The appropriations allocated for subsidies are estimated at RO 745 million, higher than the 2018 approved budget by RO 20 million.
This is due to the increases in electricity subsidy to meet the growth in consumption. This includes subsidies for oil products, housing and development loans, and operational support to SOEs.
v Other Expenditures:
These expenditures include: public debt service, development expenses of SOEs, and government cash contributions to the capitals of local and international companies and institutions. Allocations for such expenditures are estimated at RO 785 million, RO 100 million higher than 2018 Budget estimates. This is due to the increasing cost of public debt service by RO 150 million; and reduction of development expenditures of SOEs, cash contributions of the government to the capitals of local and international companies and institutions, by RO 50 million.

  1. Deficit

According to the preliminary outcomes, the actual fiscal deficit for FY 2018 is projected to be around RO 2.9 billion; while the budget deficit for FY 2019 is estimated at RO 2.8 billion. In comparing the deficit during the three years (2016, 2017 and 2018), it is clear that the deficit is declining. The estimated deficit for FY 2019 is lower than the deficit of 2017 by RO 1 billion.

  1. Deficit Financing

Despite the uncertainty over debt market caused by unfavourable set of global economic conditions, the government was able to cover the approved deficit of 2018 Budget by borrowing mainly from external sources, at the prevailing interest rates in the market. The external borrowing accounted for 69 per cent of total funding, while domestic loans represented 17 per cent to avoid crowding out the private sector in meeting its financing needs, as well as to enhance foreign currency cash flows and reserves. The reminder of the deficit, 14 per cent, was financed by drawing on reserves. As for 2019 Budget deficit, 86 per cent (RO 2.4 billion) will be financed by external and domestic borrowing.
The rest of the deficit, estimated to nearly RO 400 million, will be covered by drawing on reserves. This comes in line with the guidelines set out by the government to maintain sovereign reserve funds, and to rely upon borrowing, notably external borrowing, to finance the deficit.

  1. Economic diversification

As part of the government’s efforts to achieve economic diversification, 2019 Budget includes allocations approved for the five targeted sectors identified by Tanfeedh, namely manufacturing, logistics, tourism, fisheries and mining sectors. Nevertheless, the projects and initiatives recommended by Tanfeedh rely largely upon private sector in providing finance and investments required for these projects and initiatives. Besides financing some essential projects, the government is also taking further steps focusing on facilitating procedures, improving the business environment and providing support to the respective sectors.

Over the past period, a number of projects and initiatives have been implemented either by the government, private sector or SOEs. In this context, tourism sector witnessed some additional touristic facilities. Implementation of Irfan City project and Mina Sultan Qaboos Waterfront project has commenced. As for manufacturing sector, implementation of a number of projects has started, including Liwa Plastics Industries Complex, Steel Factory project and a pharmaceutical plant.
Also, logistics sector has witnessed the implementation of some projects, including Khazaen Economic City project and Salalah Port Expansion project. Furthermore, a number of projects have commenced in the fishery sector, which included fish farming projects, and construction of centres/hubs for fishery products. As for mining sector, implementation of some projects has begun, including copper mining project and a plant for ceramic tile production.

  1. Fiscal Consolidation and Fiscal Measures Taken to Address Budget Deficit

The government has taken a set of fiscal adjustment measures aiming at fiscal sustainability; and a gradual fiscal adjustment policy is being pursued to avoid any negative consequences over economic and social aspects. The most important of these measures are as follow:

  1. Revitalising Non-Oil Revenue:

 Enhancing tax collections efficiency, and activating monitoring and follow-up measures.
 Introducing selective tax on certain commodities.
 Amending rules and regulations pertaining to exemptions of tax and customs duties.
 Amending the regulations of lands allocation (land of commercial, tourism, industrial and agricultural use)
 Increasing fees of municipal services.

  1. Rationalising Public Spending:

 Giving priority to the implementation of necessary projects that serve economic and social objectives, and postponing the implementation of low-priority projects.
 Controlling capital expenditures.
 Halting expansion of organisational structures of the ministries.
 Accelerating e-government transformation.
 Reviewing and rationalising government subsidy in order to direct such subsidy to needy/eligible citizens.
 Promoting the efficiency of state-owned enterprises in order to enhance their contributions to the economy. Stressing the importance of implementing sound corporate governance.
 Raising the efficiency of spending on oil and gas production by using the latest methods and equipment.
 Rationalising energy consumption in government premises and street lighting.
 Engaging private sector in implementing and managing some projects, facilities and activities. The purpose is to ease the burden on the budget and maintain good levels of investment.
 Adhering to the approved budget allocations for the ministries and government units, and no additional allocations shall be approved. In case of any increase in oil revenue, the priority shall be given to reduce the accumulated deficit.

Fiscal Planning and Discipline:

In view of the exceptional growth in public spending over the last few years, and in order to achieve fiscal discipline and contain public spending within sustainable levels, the government is carrying out the following:

  1. Developing a Multi-Year Budget Framework (2019-2022). This is to include a medium-term estimate of revenue, expenditures, deficit/surplus and financing.
  2. Capacity-building for tax and customs systems.
  3. Completing the activation of a single account for the treasury in order to help ensure effective management of liquidity and cash flow.
  4. Completing the application of Programme and Performance Budget (PPB) in FY 2019 and identifying key performance indicators (KPIs) for 13 government units.
  5. Preparing financing plan to cover the budget deficit
  6. Preparing a charter on corporate governance of SOEs.

Conclusion

In spite of improvements in oil markets over 2018, the State’s General Budget is still facing challenges posed by oil price fluctuations. This is due to the fact that oil revenues remain the main source of revenue for Oman. Therefore, any decline in oil prices will have an impact on 2019 Budget performance and the national economy. 2019 Budget seeks to achieve fiscal sustainability by containing the deficit within sustainable level, reducing public debt and enhancing the contribution of non-oil revenue to GDP.
Furthermore, 2019 Budget continues to stimulate national economy through maintaining the level of investment expenditures and supporting economic diversification by expanding private sector participation.
Although the challenges facing 2019 Budget are significant, it has been taken care to maintain the level of basic social services.
Lastly, the Ministry of Finance is honoured to extend its best wishes to His Majesty Sultan Qaboos on the occasion of New Year 2019, praying to Almighty Allah to bestow good health and long life upon His Majesty. The Ministry also would like to congratulate the people of Oman on the New Year 2019.