The Omani government recently announced the budget plan for 2017, that factored in a deficit of OMR3 billion. The shortfall has not quite reached earlier expectations, and we still need to find ways to reduce it. These include supplementing traditional methods – such as austerity measures, removal of subsidies, and caution while approving government spending – with innovative solutions.
However, we first need to ask ourselves if we can achieve our goal without affecting development projects and programmes that require generous budgets. Is it possible to reduce the deficit without negative impact on reform plans in key sectors – such as industry, agriculture, and tourism – that are expected to drive development efforts in the coming years, as outlined in the Tanfeedh programme?
While we may not have definitive solutions to this issue, we do have some insights and ideas that can spearhead a cultural movement and initiate a dialogue - leading to important conclusions on how to reduce our national deficit.
First, we must thoroughly re-evaluate our tax laws that have undergone several stages of development. The first law on income tax was issued in 1971, followed by the law on corporate income tax in 1981, and the corporate profit tax law in 1989. Finally, 2009 saw the enactment of the new income tax law in line with the financial advancements the country witnessed following the signing of several regional and international agreements and joining the World Trade Organisation. In 2016, the Omani parliament voted for significant tax increases in petrochemicals, non-oil natural resources, and natural gas sectors.
The need to enhance the tax law is much more pressing today, amid the decline of oil prices and the sluggish global economy. In this context, countries in the GCC region are seriously considering passing a selective commodities tax law, following discussions in Council meetings.
The law aims to impose higher taxes on select non-essential consumer goods, such as tobacco, soft drinks, and energy drinks. This category could include large-engine private cars, or second or third cars owned by a single family. Imported commodities that have national alternatives can also be subject to higher taxation. A growing range of products that are harmful to consumers, the environment, or the national economy may feature on the list as well.
Selective commodities taxes result in more prudent spending habits among consumers in addition to ensuring investments directed towards sectors at the forefront of the country’s economic progress.
Since the newly-introduced tax will reduce indiscriminate consumption, it is only natural that people’s savings will increase. The best way to invest these savings is through purchasing sukuk. In order to ensure that the proceeds from the sales of sukuk to individuals is allocated towards reducing the deficit and minimizing external debt, the institution issuing the sukuk must be a wholly national entity. Through their investments in sukuk, Oman’s citizens and residents will become bona fide partners in the country’s development projects.
The UAE-based National Bonds Corporation is an excellent role model in this regard. The company has raised over AED6 billion selling sukuk to individuals and is now one of the most prominent sukuk-issuing organisations in the region.
In my opinion, we must also review our financial policies with a focus on controlling inflation, funding productive investments, and limiting individual consumption through imposing more stringent conditions on consumption loans. These suggestions might come as a surprise from a member of the banking sector. However, they are the only rational way forward when the future of our country is our utmost priority.
Financial policies that seek profits through partnerships in the production process rather than through accumulating interests are integral to our growth. Banks must assume a more active role in the development process without affecting their own profits or sustainability. I believe that introducing legal restrictions and regulations could give banks a much-needed push in this direction.
Furthermore, we must direct foreign investments towards productive sectors outlined in the Tanfeedh programme. To achieve this objective, we need to encourage companies to invest funds and expertise in projects aligned with the latest development trends. Another option is to levy higher taxes on entities in non-productive sectors, such as luxury goods.
In the near future, I hope to witness a widespread cultural dialogue that will stimulate out-of-the-box thinking to find solutions to reducing Oman’s budget deficit. In our efforts, we must make the best use of global case studies, adapt their methods to suit our context, and learn from the mistakes of others. Only a strategic approach tailored to our market will set us on the right path towards reaching our goal. - Exclusive to Times of Oman
The author is the Chairman of National Bank of Oman, Executive Chairman of Investcorp and an International Advisor to the Brookings Instituition. All the views and opinions expressed in the article are solely those of the author and do not reflect those of Times of Oman.