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Budget 2017


The Ministry of Finance on Sunday issued a statement on the State’s General Budget for the Fiscal Year (FY) 2017.

The statement reads as follows:

“On the occasion of promulgation of the Royal Decree No (1/2017) ratifying the State’s General Budget for Fiscal Year (FY) 2017, the Ministry of Finance is pleased to present, in coordination with the Supreme Council for Planning (SCP), the projected financial results for FY 2016, and main features and estimates of the General Budget for FY 2017.

The State’s General Budget has been affected significantly by the decline of oil prices since mid-2014. Oil prices remain at low levels and, therefore, 2016 budget lost more than 67 per cent of oil revenues, despite high production, compared to oil revenues recorded in 2014.

The year 2016 has witnessed the lowest traded price of Oman oil, where the price dropped to less than $24 in January. However, the Government was able to obtain funds to finance the spending, taking into account the volume of challenges faced. A number of measures and policies have been taken which helped to minimise the impacts of low oil prices on fiscal and economic performance.

The overall framework of 2017 Budget comes in line with the approach adopted in the last two years. Such approach aims at rationalising spending and enhancing its efficiency, as well as keeping public spending within sustainable levels. In addition to, keep reviewing non-oil revenue in order to raise its contributions in aggregate revenues and reduce dependency on oil revenue. Moreover, utilise any resultant increase, in oil revenue, in financing fiscal deficit and enhancing government reserves.

It is worth noting that the budget has been finalised after presenting it to the Financial Affairs and Energy Resources Council, Council of Ministers, and Council of Oman.

In the following, the main initial results for FY 2016 will be reviewed briefly; and the main features of 2017 Budget, including taken measures and policies, shall be presented:

Global and National Economic Developments

1- Global Economy: Global growth prospects continue to be surrounded by substantial uncertainty for businesses arising from several factors including the ongoing realignments and rebalancing, particularly in the emerging market and developing economies. Global growth is projected to rise from 3.1 per cent in 2016 to 3.4 per cent in 2017, with significant variation across countries of the world.

As commodity prices continue to remain weak, global inflation is expected to remain low. All main commodity price indices are expected to decline in 2017, mainly due to abundant supplies and weak demand as for industrial commodities.

2- National Economy: Oman’s economic performance has been affected due to low oil prices. In 2015, Oman’s Gross Domestic Production (GDP) at current prices dropped by 14 per cent compared with 2014 level. GDP has decreased from RO 31.2 billion to RO 26.8 billion. In view of the continued lower oil prices, GDP at current prices was reduced by 11 per cent over first-half of 2016, according to declared figures. However, GDP at constant prices grew by 5.7 per cent in 2015, and it is projected to be positive over 2016. Despite the sharp drop in oil revenues, the growth of GDP at constant prices came as a result of economic and fiscal policies pursued by the Government over these two years. With expected improvements in oil prices over 2017, GDP is projected to experience a growth of 2 per cent while non-oil activities are expected to rise by 4.7 per cent.

Inflation rate in Oman remained at low level in 2016, i.e. 1.85 per cent. It is unlikely that inflation rate exceeds 2.8 per cent in 2017.

In 2016, the national economy has benefited from the decline of non-energy commodity prices. Consumer and producer prices are expected to remain quite low over 2017. Thus, consumers would benefit from lower prices of commodity, and producers will also take advantage of lower production cost.

Initial Projected Results for FY 2016

1- Public Revenues: The (initial) final accounts for FY 2016 featured the following figures:

Actual revenues were less than targeted revenues in 2016 due to:

Decline of oil and gas sales returns by RO 1.1 billion.

Decline of non-oil revenue by RO 140 million.

Therefore, targeted revenues were unachieved mainly due to continued low oil prices, which have fallen to lower levels. The actual average price of oil achieved in 2016 reached about $39/bbl, down by 63 per cent compared with 2014 price i.e. $45/bbl.

2- Public Spending: According to the (initial) final accounts, overall public spending totalled RO 12.65 billion against an amount of RO 11.9 billion estimated in the budget, increasing by 6 per cent. This caused by an increase in spending on development projects and electricity sector subsidy, as well as funding some budget items to meet necessary and urgent needs.

Despite the fact that the actual spending is higher than the estimated spending, yet actual spending is less than 2015 spending levels, by RO 1.05 billion i.e. (8 per cent). This came as a result of measures taken, by the Government, to rationalise spending. Compared with 2015 levels, most of budget spending items have been cut, most notably of which subsidies, current expenditures of ministries and government units, and security and defence expenditures.

3- Deficit: According to the (initial) final accounts, actual fiscal deficit for FY 2016 amounted to about RO 5.3 billion, increasing by 60 per cent compared to estimated budget deficit. Such high deficit is driven by many reasons including: the actual oil price achieved was under the estimated price ($45/bbl was the estimated price, while the actual price was $39/bbl). In addition to, an increase in spending compared with budget estimates, and a reduction in some actual non-oil revenues.

4- Deficit Financing: Despite the enormous challenges for the budget, the Government was able to obtain funding by borrowing mainly from external sources. The Government relies on borrowing from external sources to avoid crowding out private sector, and to allow private sector easily meets its financing needs. International bonds have been issued worth $4 billion, and also the Government obtained a syndicated loan of $5 billion. In addition to issuance of Islamic bonds (Sukuk) worth half-billion US-dollars, as well as loans worth $2 billion provided by an export credit agency.

Subsequently, borrowing from domestic and external sources, and issuance of Islamic bonds, development bonds and treasury bills accounted for 72 per cent of total funding. The rest i.e. 28 per cent was covered by drawing on reserves.

5- Public Debt: Higher deficit at recorded levels over 2015-2016 led to rapid growth in debt, increasing by 29 per cent of GDP by year-end of 2016. Consequently, debt service ratio will increase in the coming years.

The Main Features of the State’s General Budget

for FY 2017

The State’s General Budget acts as an annual executive financial programme for the objective of Five-Year Development Plan. Thus, the preparation of revenue and expenditure estimates and deficit projections, in 2017 budget, seeks to achieve the following:

A- Budget Objectives:

1- Ensuring State’s Fiscal Sustainability: Fiscal sustainability and reduction of potential risks are the main objectives that the budget strives to achieve, so that the financial activities do not create pressures on sovereign resources. In this context, the revenues and spending of 2017 budget have been estimated to meet the following:

Reducing budget deficit and contain it within sustainable levels.

To continue rationalising public spending and enhancing its efficiency, as well as ensure its sustainability.

Revitalising non-oil revenues and enhancing their contributions in total government revenues.

Motivating private sector investments so as to achieve targeted growth rates.

Limiting the growth of public debt, and reduce it over the coming years.

Relying only on external borrowing to financing development projects and budget requirements.

2- Stimulating Growth and Sustaining Employment:

Public spending is one of the main sources of economic growth and employment. In this context, 2017 budget included the following:

Achieving economic growth and controlling inflation rate so as to maintain per-capita income level.

Providing allocations required to government units that contribute, directly and indirectly, in achieving targeted economic growth for 2017.

Providing subsidy required to achieve the anticipated results of recommendations, provided by National Programme for Enhancing Economic

Diversification (Tanfeedh), in order to improve investment climate. In addition to enhance the role of private sector and increase investment rates in GDP.

Focusing on investing in promising and productive sectors specified in the Ninth Five-Year Plan. The aim is to enhance economic diversification, increase employment rates, achieve medium-term fiscal and economic stability, and to strengthen social development.

Provide allocations required to establish and activate Investment Services Centre at Ministry of Commerce and Industry. This Centre would facilitate the process of domestic and foreign private investments.

Provide allocations for the Implementation and Follow-up Support Unit, so as to enable this unit to perform its responsibilities perfectly.

Enhancing public-private partnership (PPP) in order to accelerate implementing more investment projects and private sector initiatives.

Giving special attention to allocations for maintenance of assets, facilities, and infrastructure in order to preserve the development achievements.

To continue implementing the decisions made to support Small and Medium Enterprises (SMEs) by allocating some of government projects to SMEs.

In addition to speed up the payments of SMEs and to continue providing loans to the same through Al Rafd Fund and Oman Development Bank.

3- Stability of Citizens’ Standards of Living: Oman has made remarkable achievements in areas, such as health, education, basic services and infrastructure, which uplifted the citizens’ standards of living to higher levels. Such achievements have been attained through wise sectoral policies of all government units, and through optimal use of appropriations. Hence, the budget seeks to maintain the achievements, through the following:

Education, Health and Social Welfare Sectors:

The allocations approved for these sectors amount to about RO 2,686 million i.e. 23 per cent of overall spending, of which nearly RO 1,586 million for education sector, RO 613 million for health sector, and RO 487 million for social welfare. These allocations include salaries and entitlements of employees, operating expenses, expenses for healthcare and education services, and appropriations of social security and welfare. In addition to, appropriations devoted to development projects of the aforementioned sectors, such as schools, health facilities and others.

Recruitment: Recruitment, in public sector during 2017, will be very limited due to the challenges facing the budget resulting from the sharp fall of oil prices, and higher spending on salaries and wages. Private sector is expected to create job opportunities for Omani youths, through the establishment of investment projects that have economic returns. Statistics, issued by National Centre of Statistics and Information (NCSI), show the number of Omani workforce, working in private sector, has increased to 222,000 labours in 2016, increasing by 13000 labours. This means that private sector has been able to recruit such number of citizens, and thus may create further 12,000 – 13,000 jobs over 2017.

Government Services: Maintaining the quality of basic government services such as healthcare, education and training, electricity and water services, security services, communications, and social security benefits.

National Training Fund: Providing allocations required for activating the role of National Training Fund in order to advance recruitment efforts in private sector. In addition to financing training programmes while ensuring the efficiency of such programmes.

Housing Aid and Social Housing Scheme: To continue implementing the Social Housing Scheme and Housing Aid Programme.

B- Estimates of General Budget for FY 2017:

1- Public Revenues: Aggregate revenues are estimated at RO 8.7 billion, increasing by 18 per cent as compared to projected actual revenues for 2016. These revenues consist of oil and gas revenues of RO 6.11 billion, representing 70 per cent of total revenues. Non-oil revenues are estimated around RO 2.59 billion i.e. (30 per cent) of total revenues.

The preparation, of revenue estimates, has taken into consideration the following:

Oman’s commitment to cut oil production in line with OPEC’s decision to reduce production volumes.

Commencement of production of Khazzan-Makarem gas field by fourth quarter of 2017.

Improve mechanisms and rates of collection.

2- Public Spending: Total public spending is estimated at about RO 11.7 billion, decreasing by RO 200 million i.e. (2 per cent) compared with 2016 estimated spending. The outcomes of measures, taken to cut spending, have taken into account the following:

Current Expenditures of Ministries and Government Units: The expenditures of this budget item are estimated around RO 4.4 billion, decreasing by 5 per cent as compared to budget estimates for 2016. The current expenditures of such budget item include salaries and entitlements of the employees with an amount of RO 3.3 billion, and also contain annual allowance and operating expenses of RO 0.6 billion. It is worth mentioning that the budget item of salaries and entitlements represents 75 per cent of total current expenditures.

Development Expenditures: Spending, on the implementation of development projects, is estimated at RO 1.2 billion, representing the estimated amount to be paid during the year as per the actual work progress of the projects. Spending on development projects has been considered not to be cut. The purpose is to ensure the completion of all on-going projects without delay, and make timely payments.

Security and Defence Expenditures: Total allocations of security and defence projected at RO 3.34 billion, falling by 5 per cent compared with 2016 allocations. The expenditures of this budget item comprise salaries and entitlements of the employees, operating expenses, health and education services’ expenditures, and construction expenses.

Oil and Gas Production Expenditures: These expenditures are estimated at RO 1.82 billion, increasing by 2 per cent compared with 2016 budget estimates.

Subsidies: The appropriations allocated for subsidies are estimated at RO 395 million, almost the same level as 2016 budget. This budget item includes subsidies for electricity, cooking gas, housing and development loans, and state-owned enterprises.

Other Expenditures: The appropriations allocated for this item are projected at RO 405 million, increasing by RO 165 million i.e. (69 per cent) as compared to 2016 budget estimates. Such an increase is due to higher interest rates on loans, which totalled RO 265 million. This budget item also contains government cash contributions, in the capitals of local and international companies, with an amount of RO 140 million.

3- Deficit: Budget Deficit is estimated at about RO 3 billion i.e. (35 per cent) of total revenues, and 12 per cent of GDP. Despite the fact that deficit-to-GDP ratio is considered low, according to international indicators, and can be financed by global debt markets; reducing deficit is one of the priorities specified by the budget due to deficit accumulation.

4- Deficit Financing: An 84-per cent, i.e. RO 2.5 billion, of 2017 projected deficit will be financed by external and domestic borrowing. External US-dollar borrowing includes issuance of international bonds, Islamic bonds (Sukuk), and syndicated loans. The rest of the deficit, estimated nearly RO 0.5 billion, will be covered by drawing on reserves.

5- Privatisation Scheme:

In 2016, the government has embarked on implementing a privatisation scheme in accordance to a framework set for the period of (2016-2020). The first phase of the scheme is completed after setting up a holding company for each sector, and transferring government shares to the relevant holding company. Furthermore, ownerships of some government companies have been transferred to sovereign funds, in preparation of privatisation. Moreover, financial and legal advisory studies, of privatising Muscat Electricity Distribution Company (MEDC), have been completed. MEDC is a subsidiary of Electricity Holding Company (EHC) and owned fully by the state. It’s expected that the mechanisms and procedures of privatising MEDC would be completed during first-half of 2017.

It is worth noting that the privatisation scheme will continue over the coming years. Such scheme is considered as one basic tool leading to expanding the ownership base of private sector, and deepening the securities market.

6- National Programme for Enhancing Economic Diversification (Tanfeedh):

The Ninth Five-Year Development Plan focused on five promising sectors and enablers. To ensure implementing the objectives of the plan especially those pertaining to economic diversification, Tanfeedh’s programme was adopted. Tanfeedh aims at improving investment climate, ease of doing business, attracting domestic and foreign investments. This programme targets to achieve its goals by reviewing and modernising laws and legislations, as well as using technologies in government transactions/operations. These, eventually, lead to eliminate all constraints that face private sector. The first stage of the aforesaid programme included three key sectors, such as manufacturing, tourism and logistics. In addition to, supportive sectors namely finance and innovative financing, and employment and labour market.

The first stage resulted in introducing 121 initiatives and projects to be implemented starting in 2017. It’s expected that the first stage outcomes will help in maximising GDP by more than RO 1.7 billion. In addition to, create more job opportunities for Omani nationals, by 30,000 jobs.

An Implementation and Follow-up Support Unit has been established. This unit will help to speed up the implementation of initiatives and projects recommended by Tanfeedh.

Fiscal Consolidation and Fiscal Measures Taken to Address Budget Deficit

Due to the continued lower oil prices, the Government pursued a gradual fiscal adjustment policy to face sharp fall in revenues. The aim of such policy is to minimise its impact on economic and social aspects. Therefore, the Government has taken into consideration the importance of maintaining the services provided to the citizens, and preventing economic contraction. Thus, 2017 budget included a set of measures, the most important of which are as follow:

A- Revitalising Non-Oil Revenues: The measures listed below, as per the decisions issued or to be issued by Government units concerned, are expected to improve and raise the contributions of non-oil revenues. These measures are as follows:

Amending Income Tax Law that is expected to be issued this year. The implications of such amendment are, therefore, not incorporated in the budget.

Introducing selective tax, concurrently with GCC countries, on certain commodities such as tobacco, alcohol and others.

Amending the fees of licences of bringing foreign workers.

Amending some fees of civil services provided by Royal Oman Police (ROP).

Limiting tax exemptions granted for companies and establishments.

Enhancing tax collections efficiency, and activating monitoring and follow-up measures.

Amending rules and regulations pertaining to exemptions of customs duties.

Implementing the revised tariffs of large consumers of electricity for commercial, industrial and governmental use.

Amending the regulations of lands allocation (lands of commercial, tourism, industrial and agricultural use)

Implementing the standardised fees of municipal services.

Adjusting fees of some services provided by the ministries and government units.

B- Rationalising Public Spending: Fiscal consolidation measures, undertaken by the Government since 2015, were gradual so as to minimise its implications on economic growth and employment. Spending cuts, reflected improvement in efficiency, have been confined to areas which do not affect salaries and allowances of government employees. In addition to government services and main activities carried out by the government units for the society, as follows:

Giving priority to the implementation of necessary projects that serve economic and social objectives.

Postpone the implementation of unnecessary projects.

Postpone purchasing and replacing government vehicles and equipment, as well as control capital expenditures.

To stop expanding in organisational structures of the ministries (such as creating departments and directorates).

Asserting that economic efficiency, in the provision of public services and commodities, must be a key standard. Such standard governs the preparation of annual budgets by ministries and government units.

Raising the efficiency of administrative apparatus by expanding the use of technologies in government transactions/operations.

Promoting the efficiency of state-owned enterprises in order to enhance their contributions to the economy. Stressing the importance of implementing sound corporate governance.

Reviewing and rationalising government subsidy in order to direct such subsidy to needy citizens. However, the subsidy will be cut gradually.

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 that help to spur economic growth.

Selling government assets, within privatisation scheme, notably those entail higher operating expenses or maintenance costs.

Completing the process leading to enact a Public-Private Partnership (PPP) law. Such law is hoping to facilitate the partnership between public and private sectors, as well as activate relevant private-sector initiatives.

Adhere to the approved appropriations of the ministries and government units, and no additional allocations will be approved.

2017 Budget has taken into account the importance of maintaining the levels of investment spending. The reason is to enable the government units meet its financial requirements needed to implement government projects, as well as make timely payments to the contractors and suppliers.

The budget also accorded utmost importance to the implementation of various planned projects such as water supply network, water sewerage, and roads. The Government seeks to finance these projects by borrowing from domestic and international institutions.

Fiscal Planning and Discipline

In view of rapid growth in public spending over the last years, and in order to achieve fiscal discipline and contain public spending within sustainable levels, the Government carried out the followings:

1- Developing the Macro Fiscal Unit, established at Ministry of Finance, to enable it to set up a database for government financial statistics and build-up a fiscal model for public finance. This model will include the preparation of projections on revenues, expenditures, deficit/surplus, and medium-term finance.

2- To continue the modernisation phases of Government Financial Management Information System (GFMIS), and transition from cash-based accounting to accrual accounting. This system develops a method for recording government accounts and links them to national statistics. This will facilitate the monitoring of public spending, and ensure fiscal discipline.

3- Initiating the application of Programme and Performance Budget in FY 2017 to four ministries such as Ministry of Education, Ministry of Health, Ministry of Civil Service, and Ministry of Finance. This budget acts as an advanced method of fiscal planning. It also identifies public spending priorities and links them to a set of objectives and activities that serve the society.

4- Improving the performance of government investments by establishing a holding company in every sector. Furthermore, the holding company would make optimum use of available means and resources, and will avoid duplication of efforts. These measures target to maximise the benefits of government investments.

5- Issuing new edition of Standard Documents for Building and Civil Engineering Works. The preparation of such documents/contracts was based on new standard forms of contract issued by International Federation of Consulting Engineers (FIDIC).

6- Formation of a unit entrusted with the public debt management at the Ministry of Finance. This unit shall plan, organise and manage government debt. In addition to reviewing all means and options related to public debt in light of developments in global markets and financial position.

7- Improving the mechanisms of cash management at Directorate-General of Treasury and Accounts. This includes introducing a single account for this directorate.

8- To continue monitoring fiscal performance of the budget, and take measures needed to strike a balance by 2020. This can be achieved by capping spending and enhancing revenues over the medium-term, in line with the overall framework of Five-Year Plan.

9- Strive to improve Oman’s credit rating, which was reduced from (A) in 2014 to (A-) and (BBB-) in 2015 and 2016, respectively. This downgrade is attributed mainly to the effects, driven by lower oil prices, on public finance.

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