Trajectory of debt expansion points south

With current expenditures alone almost entirely accounting for the total revenues projected in the 2018 State Budget, it entails that capital expenditure towards infrastructure development will necessarily have to come from external borrowings – a key element that underscores the principle of fiscal sustainability underpinning this year’s budget, according to a well-known economist.
Dr Fabio Scacciavillani, Chief Strategy Officer at Oman Investment Fund (OIF), (pictured) a sovereign wealth fund of the Sultanate of Oman, said the principle of borrowing to pay for job-creating and GDP-boosting infrastructure development is an important hallmark of the 2018 budget.
He explained: “It must be observed that the total revenues are almost on par with current expenditures, i.e. salaries, social programmes, health, education, subsidies, and so on, while the fiscal deficit is almost entirely due to capital expenditure, i.e. infrastructure, road, buildings, and so on. This means that the Omani government is adopting the golden rule by which borrowing covers infrastructure that boost GDP and hence will yield a substantial return over the years sufficient to pay for the debt service.”
Per the 2018 Budget, aggregate revenues are estimated at RO 9.5 billion, increasing by 3 per cent as compared to expected actual revenues for 2017. These revenues consist of oil and gas revenue of RO 6.78 billion, representing 70 per cent of total revenues, while the balance 30 per cent – estimated at RO 2.72 billion – is made up of non-oil revenues.
In comments to the Observer, Dr Scacciavillani also underlined the significance of the Budget’s goal of “maintaining fiscal and economic stability” during the current year.
“During a cyclical downturn, a government faces the challenge of striking a fine balance between the objective of supporting the economy and the need to maintain a degree of fiscal discipline. In simple terms, expenditures should not drop too drastically, as long as the deficit can be financed through borrowing at low interest rates,” observed.
Thanks to a wise fiscal policy pursued before the oil price drop in 2014, the Omani government had virtually no debt and actually had accumulated substantial reserves to deploy in case of need, as it has happened over the past three years, the economist said.
Also of significance, said Dr Scacciavillani, is the conservative oil price assumption of $50 per barrel that forms the basis for the 2018 budget. “Personally, I forecast a rosier outlook for the crude market that will allow a wider margin of maneuver to support the domestic economy,” he remarked.
Likewise, the 10 per cent deficit to GDP ratio, while high by international standards, is sharply down from the 17.2 per cent recorded in 2015, almost 20 per cent in 2016 and an estimated 12.6 per cent in 2017. “Hence, the trajectory of debt expansion is pointing South,” he noted, adding that the Budget’s objective of reducing expenditures to 40-45 per cent of GDP is “achievable”.

Conrad Prabhu