Muscat: The Omani economy is on track for strong growth in the short run sustained by buoyant oil prices along with positive momentum in the growth non-oil activities, the Central Bank of Oman (CBO) announced here yesterday.
This upbeat assessment comes on the back of a healthy 8.7 per cent nominal growth in GDP during 2017, the apex bank said in its 2017 Annual Report published here yesterday.
However, the positive outlook is somewhat tempered by concerns linked to developments in global oil markets, political tensions and other issues that may have an adverse impact over the medium-term, it warned.
Commenting on the outlook for the Sultanate, the CBO report stated: “The Omani economy recovered from the contractionary run and posted a positive nominal growth of 8.7 per cent during 2017, which was attributed to a rapid surge in oil prices and pick up in non-oil activities resulting from focused diversification efforts. As the excess global supply of crude oil has been tackled to a large extent, the global oil market has rebalanced and a strong global demand is keeping an upward pressure on the international oil prices.”
The agreement to cut oil production between OPEC and non-OPEC oil producers, the CBO Report noted, has been extended up to the end of 2018, while some supply shock is anticipated on account of expected drop in oil production from Venezuela (due to political instability and lack of investment) and uncertainty with regard to oil supply from Iran after withdrawal from the nuclear agreement by the USA.
At the same time, it said, shale production from the USA has displayed inability to compensate for a drop in oil production by OPEC and non-OPEC oil producing countries. Even OPEC countries would find it difficult to jack up oil production within a short-time as the investment in exploration remained subdued because of protracted low oil prices. Global demand for oil, on the other hand, is expected to remain robust over the foreseeable future as the world economy has gained further momentum with fairly broad-based recovery.
“Oman also continues to invest in exploration of oil and gas to enhance the production level and the Khazzan gas project once developed fully (phase I has already come in full steam and the work on phase II has already commenced), would add considerably to the natural gas production,” the report said.
The apex bank also stressed the government’s continuing efforts to bolster non-oil economic activities to diversify the economy away from hydrocarbon sector. “The policy efforts are producing positive results and the non-hydrocarbon sector recorded an accelerated nominal growth of 3.9 per cent during 2017 as against 2.6 per cent in 2016. Non-oil exports have also witnessed a steady growth over the last few years on the back of strong external demand and diversification efforts producing positive results.”
Also of beneficial significance to the economy, the CBO said, is the ‘Tanfeedh’ programme which continues to concentrate on five sectors for implementing specific projects and initiatives with a potential for diversification.
“Various other policy efforts, such as public-private partnership (PPP), enactment of Foreign Investment Law and Bankruptcy Law, privatization of government companies etc, are underway to propel non-oil economic activities and private sector-led growth,” it said.
Furthermore, going beyond 2020, the Vision 2040 also focuses on economic diversification to develop a more diversified, dynamic, globally integrated and competitive economy for ensuring sustainable growth over the long-run.
The financial sector, the report said, has also been actively participating in nurturing the non-oil sector in the economy by providing requisite funding and other services, including promoting Small and Medium Enterprises (SMEs).
For its part, the CBO has also implemented certain policy measures recently, enabling banks to support higher economic activities in the Sultanate through meeting the requirements for credit and other banking services.
“In the above backdrop, the growth outlook for the Omani economy appears to be robust over the short-term. Nonetheless, some downside risks to the outlook over the medium-term may emanate from tightening of global financial conditions and uncertainty about oil prices, especially on account of progress with regard to the alternative fuels and increase in supply by the countries outside the cartel of OPEC and non-OPEC oil producers,” the Central Bank noted.
According to the report, Omani crude oil price averaged at $51.3 per barrel in 2017, while the 2017 budget had assumed average oil prices at $50 per barrel. Consequently, oil & gas revenues grew by 19.6 per cent, increasing their share in total revenues to 55.6 per cent in 2017. On the other hand, non-oil & gas revenues dropped by 4.6 per cent in 2017 mainly due to a significant decline in capital repayments.
On the other hand, the expenditure declined for the third year in a row during 2017, reflecting the government’s commitment towards fiscal consolidation. The decline in government expenditure by 4.9 percent during 2017 was contributed by moderation in both current and investment expenditure. The spending norms have been restructured aiming at a reduction in deficit and eventually restoring the fiscal balance, the report said.
The current expenditure declined by 4.3 per cent in 2017 compared to an increase of 1.7 per cent in 2016, while the investment expenditure contracted by 9.3 per cent in 2017 in comparison with 11.7 percent drop in 2016. Total expenditure as a percentage of GDP reduced to 43.9 per cent as compared to 50.2 per cent in 2016.
The higher support to electricity sector and government organizations, increase in investment expenditure for government companies and reintroduction of targeted fuel subsidy led to increase in the participation and other expenses by 6.2 per cent in 2017 compared to a decline of 45.9 per cent in 2016. Overall, the fiscal deficit declined by 29.1 per cent to RO 3,760 million in 2017 from RO 5,300 million during 2016.
The fiscal balance as a percentage of GDP improved to -13.5 per cent in 2017 as compared to -20.6 percent in 2016. “The fiscal consolidation plan intends to streamline the spending bill and ensure a sustainable fiscal balance through reducing spending deadweight loss and generating revenue from other sources away from oil. At the same time, the growth stimulating government expenditure is desirable to boost diversification in the economy. The government investment expenditure is required to sustain and expand the hydrocarbon production in the economy acting as a catalyst to stimulate private sector-led growth, as the government is the main stakeholder in the oil and gas sector,” the apex bank pointed out.
The 2018 budget also continued with reforms agenda and emphasized on diversification, promoting private sector-led growth, and removal of bottlenecks and improving business environment.
The budget stressed upon reducing the breakeven price of oil to ensure a sustainable economy.
The government revenues are budgeted to grow by 11.6 per cent in 2018 over the actual in 2017. The hydrocarbon revenues and non-hydrocarbon revenues are estimated to contribute about 58 per cent and 42 per cent, respectively, to the budgeted increase in government revenue in 2018.
Overview and Outlook
Total expenditure is estimated to go up at a muted rate of 1.8 per cent in 2018 over the actual in 2017, with a growth in investment spending budgeted at 3.4 per cent over the actual in 2017, the report said. Overall, the fiscal deficit is budgeted at RO 3,000 million in 2018, which will be largely financed through debt.
“Furthermore, 2018 budget intends to expedite the privatization of government-owned entities
or semi-government companies (manufacturing, petrochemical, and electricity industries) to elevate participation of the private sector in the economy and also contribute to government revenues. Other policy reforms that the government undertook include the deregulation of fuel prices, reduction of electricity subsidy, restructuring the capital increasing private sector partnership, and changing the composition between current and capital expenditures,” it added.