Omani economy expected to continue slowdown this year, says CBO

Business Sunday 16/July/2017 15:40 PM
By: Times News Service
Omani economy expected to continue slowdown this year, says CBO

Muscat: Oman’s economy is expected to witness a slowdown in 2017, but the country is well placed to deal with the challenges posed by the economic slowdown in the short term, the Central Bank of Oman (CBO) said in its annual report released on Sunday.
The government has been proactive in undertaking various measures to address the macroeconomic challenges over the medium-term.
“Although oil prices are expected to further recover somewhat, Oman oil price would remain much lower than the external breakeven level. At the same time, planned fiscal consolidation is expected to slow down the growth of the non-hydrocarbon sector,” the report noted.
Lower hydrocarbon prices continued to weigh on the overall macroeconomic scenario in Oman, notwithstanding various reform measures undertaken by the authorities to improve fiscal balance, and promote economic diversification to reduce dependence on the oil sector.
Both the current account balance and fiscal balance remained in large deficit for the second consecutive year in 2016. The output in hydrocarbon sector declined significantly, while non-hydrocarbon sector output grew marginally in 2016.
Overall nominal gross domestic product (GDP) (at market prices) contracted by 5.1 per cent, while inflation inched up to 1.1 per cent during 2016. The fiscal deficit further grew and consequently, debt to GDP ratio shot up from 12.8 per cent at the end of 2015 to 31.4 per cent at the end of 2016.
The progress on macroeconomic reforms, such as introduction of excise and value added tax (VAT), approval for legislations on labour and foreign direct investment (FDI) will be paramount for shaping the medium-term outlook of the Omani economy.
Furthermore, the continued emphasis on economic diversification under the Ninth Five Year Development Plan and Tanfeedh would pave the way for sustainable growth in the economy.
Government has already taken various measures to promote tourism and expand the manufacturing sector while the approval of the legislation on FDI would usher in increased participation of foreign investors and accelerate the pace of economic diversification in the economy.
Inflation rate
Notwithstanding the decline in government expenditure, the average inflation based on consumer price index (CPI) for the Sultanate increased to 1.1 per cent during 2016 from 0.1 per cent in 2015 mainly due to the recovery in international commodity prices, increase in energy prices and other user fees and charges.
Inflationary pressure in Oman is largely conditioned by government spending, international prices, and the movement of US dollar due to the pegging of Rial Omani, the CBO said in its annual report.
Nevertheless, the consumer inflation in Oman compares favourably with that of Gulf Cooperation Council (GCC) countries which is projected to rise to 3.5 per cent in 2017 from 2.9 per cent in 2016. Both demand and supply side factors emanating from domestic as well as external sources have impacted the price level in Oman.
The CBO also said that the Omani economy contracted in nominal terms for the second year in a row in 2016, after a sustained robust expansion over five years (2010-2014), mainly due to steep decline in hydrocarbon prices. Despite expansion in output, the revenues from hydrocarbon sector declined reflecting lower level of oil prices caused by slackening of external demand. At the same time, domestic demand also weakened due to decline in government expenditure by 5.8 per cent.
Consequently, Oman’s nominal GDP contracted by 5.1 per cent in 2016, on top of a drop of 13.8 per cent in 2015. Component-wise, nominal oil sector GDP decreased by 23.7 per cent in 2016 while the non-oil sector registered a growth of 0.6 per cent during the period.
Manufacturing sector declined by 17.2 per cent during 2016, mainly reflecting weak external demand. Agriculture and fishing sector, however, registered a solid growth of 16.3 per cent in 2016 as against an average growth of about 6.4 per cent in the previous five years.
The intensive efforts of the government aimed at economic diversification have contributed significantly to the growth of services sector and its share to GDP improved to 53.5 per cent in 2016 from an average of 39.6 per cent during the previous five years. Notwithstanding contraction in nominal GDP, the real GDP growth is expected to be positive in 2016.
The apex bank said that after plunging significantly in January 2016, international oil prices recovered subsequently but continued to be at the lower level and affected the oil exporting countries adversely, including Oman. Nonetheless, the hydrocarbon sector remained the mainstay of the Omani economy with its contribution to nominal GDP at 27.4 per cent in 2016.
The sharp decline in crude oil prices explained the sharp reduction in the contribution of this sector to GDP during 2016 and it certainly did not reflect the ongoing structural change in the Omani economy. The average price for the Omani crude oil dropped to $40.14 per barrel in 2016 from $56.45 per barrel in 2015 and $103.23 per barrel in 2014. Oil and gas revenues accounted for 68.2 per cent of government revenues and about 57.9 per cent of total merchandise exports (including re-exports) during the year.
Economic challenges
Oman continued to face various macroeconomic challenges, including large fiscal deficit. The 2016 budget undertook various reforms and initiatives to boost economic activities in the private sector, contain fiscal deficit, and promote macroeconomic stability.
Notwithstanding these reform measures, total government revenue declined by 16.1 per cent in 2016 due to substantial fall in oil revenues which contracted sharply by 35.4 per cent.
Fiscal measures announced in the budget, however, contained the government expenditure, which declined by 5.8 per cent to OMR12,908.2 million in 2016. As curtailment in expenditure fell short of decline in revenues, the fiscal deficit exacerbated to OMR5,300 million in 2016 from OMR4,361.4 million in 2015.
The 2017 budget has reaffirmed the government’s commitment to undertake fiscal consolidation and accordingly, the fiscal deficit has been budgeted to decline to OMR3,000 million in 2017. Rationalisation of expenditure in favour of development expenditure, proposed in 2017 budget, suggests qualitative improvement.
The recent policy programmes, including the Ninth Five Year Plan and Tanfeedh, aim at economic diversification with expanded participation of the private sector, and generating enough additional employment opportunities in Oman. The employment generation in the public sector remained subdued and grew by 1.6 per cent in 2015 with employment of Omanis increasing by 0.9 per cent. The share of Omanis in the public sector employment, however, continued to remain at around 85 per cent. On the other hand, the employment of Omanis in the private sector grew by 6.4 per cent in 2016.
Money supply
The monetary policy continued with its accommodative stance during 2016 in order to support real economic activities, despite some uptick in inflation. Despite a sharp fall in reserve money, the broad money grew by 1.8 per cent at the end of 2016 due to increase in money multiplier. The outstanding banks credit, however, grew by 10.1 per cent as at the end of December 2016, which was partly driven by greater flexibility provided to banks in their liquidity management by treating investment in government securities as part of eligible reserves up to a maximum of 2 per cent of the deposits. On the other hand, aggregate deposits held with banks increased by 5.2 per cent in December 2016. Lower growth in deposits as compared to credit growth resulted in some tightening of liquidity conditions, and increase in interest rates in the economy.
Notwithstanding incipient delinquency due to economic slowdown, the capital adequacy ratio of banks further improved to 16.8 per cent at the end of 2016 as compared to 16.1 per cent at the end of previous year and continued to be significantly higher than the minimum regulatory requirement.