The Sultanate of Oman recently selected five banks to arrange an international bond issue that is worth $2.5 billion.
This step aims to preserve the budget, continue to fund government projects, and maintain an active Omani market. Many observers consider funding by bond issuance a signal of a weak national economy and a decline in income. However, does this really send signals of weakness or strength in the way future challenges are handled?
To answer this question correctly, we need to analyze two factors. Firstly, we have to consider the level of confidence in Oman’s economy which was represented by high subscription volumes from international investors, totalling close to $6 billion. A strong interest from investors represents their belief in the Sultanate’s promising opportunities and its ability to continue the development process in various economic sectors.
Next, we must study similar past occurrences in other economies that had faced a decline in national income and subsequently had to reconsider their policies and their effectiveness.
The American experience after the Great Depression in the first half of the 20th century is a useful case study which shows us how bold financial policies taken by consecutive governments can result in positive outcomes. What did they do to handle the Great Depression? How was the American economy saved from its fluctuating state between falling into a crisis and a total collapse? How did the United States manage to revert the enormous impacts of the Great Depression to become an international economic superpower? Can we consider the IMF’s recommendations to remove subsidies on basic materials and reduce spending on infrastructure and government development projects to be viable? Or could we find better recommendations?
The Great Depression caused an unprecedented increase in unemployment, insolvent banks, and frozen projects. To deal with this crisis, President Franklin Roosevelt instituted an economic stimulating policy called The New Deal. He ordered the Central Bank to print more money, gave unemployment aid to those who were unemployed, and started a systematic approach to reform the economic structure.
President Roosevelt then moved towards constructing giant projects, such as building bridges, roads, dams, desalination plants, and even new cities. These projects that were financed by additional, development-stimulating cash poured large amounts of money in economic sectors, leading to a receding unemployment, increasing wages, and a growing demand for products. Frozen projects and plants went back to work again, while banks were revived after people began using them to deposit money.
Only 18 months following the implementation of The New Deal, the United States was no longer bankrupt. The same plan continued after World War II, with more cash invested to increase demand on products.
During President Kennedy’s era, the US started its space invasion projects, channeling more cash towards enhancing space research and NASA’s activities. A wide range of scientific research projects in medicine, agriculture, and production tools came about as a result of these activities. The same policy was applied during the reign of other American presidents, leading to a surge in the ICT sector’s contribution to the GDP.
I believe that highlighting the American experience up until this point is enough for our purpose since those policies were unfortunately followed by a series of setbacks for the public sector’s role, while the private sector expanded its role and become even more influential than the state’s entities. A deviation happened in the development journey of this American experience, causing more crises to appear.
In short, the economic stimulation policy that leads to pouring more cash and increasing government spending has been the most successful policy to deal with crises throughout history, unlike the reduction in spending, privatization, and receding role of the state in preserving our development. Stimulating the economy needs an increase in liquidity, and borrowing from bonds is one path to ensuring this. The incoming cash will result in products, services and financial assets that remain in place after the bond is paid back. This way, we can boost production to meet the growing demand coming from the liquidity, thus eliminating the need to increase prices of products.
Increasing cash can be done in two ways: one by natural economic growth, and the other through economic stimulation, which is a sound economic policy given cash will be utilized for production and development.
Economic stimulation is a sensitive approach and must be executed carefully by our government and its financial bodies. The state can continue to monitor the economy’s status even after some economic activities are outsourced to the private sector. Supervision by the state will ensure that cash is channeled in the right direction and that production outcomes are spent again, contributing to a continuous process of production and spending.
Oman is well-qualified to implement the economic stimulation policy. I strongly believe that the liquidity coming from issuing bonds will ensure the continuity of our country’s progress and its growth. -The author is the Chairman of National Bank of Oman and an International Advisor to the Brookings Institution. All the views and opinions expressed in the article are solely those of the author and do not reflect those of Times of Oman.