In the long run, we are all dead,” John Maynard Keynes says, the founder of modern macroeconomics.
The Sultanate has been able to manage its public finances effectively despite the prolonged decline in oil prices that has led to a cumulative deficit of RO 10 billion since 2015. But what if it adopts a countercyclical policy against the economic cycle (slow growth) and replace current cash-based accounting with the accrual method?
The crucial million-dollar question asked back in 2015 was: How can we find our way out of the fiscal consequences of the persistently low oil prices and overcome the challenge of having to spend more money while getting less revenue? It was true that in 2016 alone, the actual deficit stood at RO 5.3 billion — the largest in the history of the state budget, according to the financial statement published earlier this year, although in that year there was a partial improvement in oil prices. So today’s logical question is: Have we managed to do that and at what cost?
Included in the measures applied to address the fiscal imbalance are spending cuts, lifting of subsidies, and increasing taxes and fees. The government has also resorted to domestic and external borrowing to plug the gap in the budget.
Reductions in public spending stood at 10 per cent in 2016, compared to the previous year. Security and defence expenditure was RO 3.86 billion in 2015, as against RO 4.2 billion allocated for both segments a year before, a decline of RO 348 million.
The civil sector managed to save just RO 94 million, given the allocation of RO 5.301 billion in 2015 compared to a sum of 5.395 billion in the previous year.
However, while total government expenditure was projected to reach RO 11.9 billion in fiscal 2016, the amount actually spent was RO 12.65 billion. One of the many reasons could well be a rise in electricity subsidies and that was due, in part, to a doubling in gas prices, as stated by Public Authority for Electricity and Water in its Annual Report.
So what are the impacts of the measures taken so far?
Official statistics indicate a drop in the value of non-oil exports by 27 per cent and 19 per cent in 2015 and 2016 respectively, adversely affecting the inflow of foreign exchange and reflecting a slowdown in the national economy. New businesses with capitals exceeding one million Omani rials constituted just 0.1 per cent of the total number of companies registered in 2015. Revenues collected in the form of corporate income tax fell by 14 per cent in 2016, in comparison with figures for the previous year.
Economic growth, as estimated by the World Bank, was less than 1 per cent of the GDP for the current year.
A RO 4.2 billion deficit in the current account was registered in 2016 and that was due to external transfers. It is not possible to determine the size of the deficit in the current deficit for 2016 due to lack of concrete data. But, judging by CBO reports, it was likely to have risen further.
The way out
While working to deal with a fiscal crisis, we have to pay attention to figures that reflect the health and strength of the economy and the efficacy of the aforementioned remedial measures in terms of their impact on the national economy. To avoid getting stuck with liquidity problems in the economy (the issue of financing the state budget deficit) and forget about reviving the economy, here are some suggestions, based on the practices in crisis management.
A Harvard study suggests that countries that resort to pro-cyclical (that goes with the current mood of the economic cycle) measures, in times of crises, risk falling into economic recession by imposing more taxes and reducing investment expenditure, instead of creating growth by increasing consumption which is countercyclical. Right now, we are doing the opposite and applying pro-cyclical measures with less expenditure and more taxes.
I therefore recommend the creation within the Supreme Council for Planning, which is the strategic planning body of the Sultanate, a special department to undertake the task of formulating economic policies for the country. This step, of course, requires a mindset shift, meaning the proposed department would need to be staffed with professional and well-trained economists.
With respect to the fiscal aspect, I guess the time has come to update the accounting regime by replacing the current cash-based accounting with the accrual method. The latter records all revenues and expenses as and when they occur. Appropriate accounting is likely to reflect the Sultanate’s actual fiscal stance and conserve its favourable credit rating.
I hope this will settle, for good, a longstanding debate over the alternatives to traditional accounting.
In a more optimistic scenario, the bet is on a rise in oil prices to $60 a barrel in the 4th quarter this year. But that price level would not meet the break even price for 2017 (where sales revenue equals expenses). The IMF estimates the price at $76 per barrel.
Meanwhile, public debt stood at 29 per cent of GDP in 2016 and the Ministry of Finance expects that figure to increase further.
To manage this debt, there would be an immediate requirement for the Ministry to seek support from qualified debt managers.
Similarly, it is crucial to improve tax collection instead of increasing rates. Because of the nature of the work of (the Implementation Support and Follow-Up Unit) its impact would inevitably be felt in the medium and long-term.
Meanwhile, the effects of the prolonged decline in oil prices and the challenge of finding work for estimated 44,000 young entrants to the labour market annually makes one wonder: If crises are not the strongest drivers of change, then what else can they be?