Conrad Prabhu –
MUSCAT, jan. 9 –
A balanced budget by the end of the current 9th Five Year Plan – one of several strategic goals set out by the Omani government in its 2017 State Budget — is achievable provided oil prices remain buoyant over the remainder of this decade, according to a well-known Muscat-based economic expert.
Dr Fabio Scacciavillani (pictured), Chief Economist at Oman Investment Fund, a sovereign wealth fund of the Sultanate, said oil’s pivotal role as a source of roughly 80 per cent of government revenues is key to the realisation of this goal.
“Key parameters revolve around the dynamics of the oil price,” said Dr Scacciavillani. “We are already on the cusp of a recovery, as evidenced by the uptick in oil prices in the dying days of 2016 and the early days of 2017, and if this trend is sustained between now and the end of this decade, then the expectation of a balanced budget by 2020 is definitely reasonable.”
Low oil prices have enlarged a deficit gap that is projected to balloon to just under RO 10 billion by the end of 2017. Nevertheless, assuming oil will remain above the $45 benchmark price on which the 2017 budget is based, earnings over and above this threshold will help narrow this gap.
Barring any regional upheavals or game-changing global developments, oil prices are expected to rebound going forward, according to the economist. That’s partly because conventional oilfields are being depleted at a rate hardly offset by new fields coming on stream. At the same time, new discoveries are few and far between because investments in new exploration projects have been cancelled or postponed indefinitely, he explains. “Investment on exploration was slashed to $40 billion last year from about $100 billion in 2014. In 2015 only 2.7 billion barrels of new supply were found, a record low since 1947. And in the first 7 months of 2016 oil companies discovered just 736 million barrels of conventional crude.”
“Thus, ruling out unforeseeable shocks, the supply of hydrocarbons will not be able to keep up with global demand, which from about 95 million barrels a day in 2016 is projected to reach close to 100 million barrels between now and the end of the decade. This outlook reinforces expectations that oil prices will gradually pick up going forward.”
Besides, there are other factors that will contribute to closing the budget gap, Dr Scacciavillani points out. One is Value Added Tax (VAT), which is part of a Gulf-wide effort by GCC states to shore up national revenues in the face of the slump in oil-based export earnings.
‘Then there is this package of structural reforms proposed as part of the Tanfeedh initiative to spur non-oil economic investment and activities. These measures promise to foster a more business friendly economy and a faster diversification process, which in turn will definitely boost non-oil revenues. Furthermore, improved governance in debt and cash management will greatly improve efficiency in the use of state financial resources.”
The prudent fiscal stance adopted by the 2017 Budget is undoubtedly dictated by current economic circumstances, Dr Scacciavillani points out.
“During 2016 the government finances felt the full brunt of the oil market weakness and for 2017, although the outlook is distinctively more positive, authorities have prepared a prudent plan aiming at withstanding any adverse shock.
Overall the deficit will in all likelihood turn out to be lower thanks to better tax collection and higher oil revenues, while the shortfall will be covered by borrowing on international markets which have been favourably impressed by the operations conducted in 2016,” he explained.
Equally noteworthy is the government’s renewed commitment to capital expenditure to improve Oman’s infrastructure, he remarked. However, prospects for long term growth, employment and diversification will ultimately hinge on the capacity to transform Oman into a modern knowledge-based economy where education is the main competitive advantage and nurturing talent is the primary objective of public policies, he added.