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Oman’s budget deficit estimated higher at OMR3.6 billion
June 21, 2015 | 3:54 PM
by Times News Service
 
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MUSCAT: Oman’s budget deficit for 2015 is estimated to be approximately OMR3.6 billion by the International Monetary Fund (IMF), which is 13.2 per cent of the country’s gross domestic product (GDP), the Central Bank of Oman said in its Financial Stability Report. This is against the government’s deficit projection of OMR2.5 billion.

Due to fall in oil prices during the second half of 2014, there were pressures on the fiscal space, and the government deficit to GDP ratio increased in the GCC region, including in Oman, the Central Bank of Oman said in its Financial Stability Report here on Sunday.

The relatively small size of the debt-GDP ratio at five per cent in 2014 would allow some maneuverability in sustaining the quantum of its public debt given timely fiscal adjustments being put in place.

This need to be expedited keeping in view the IMF projected oil prices of $58 per barrel in 2015, which will rise gradually to $74 per barrel by year 2020 thus considerably weakening the fiscal position vis-à-vis the same as hither to at $100 plus.



Fiscal break-even

The debt to GDP ratio is set to rise to around 8 per cent in 2015, as per IMF estimates, it is likely to increase further.



Oman’s fiscal break-even oil price reached $108.2 in 2014, which is an increase of 10.07 per cent from the previous year break-even price of $98.3. On an average, the breakeven price increased by 12.3 per cent since 2010.

The fall in oil prices below the fiscal break-even price of oil would prolong (and worsen) the position of budget deficits and the recently indicated policy responses to cover them by mobilising external resources through borrowing — both domestically and internationally — using reserves, and some of its own savings as also trying to reduce expenditures on price subsidies look timely, the CBO report noted.

Credit rating

CBO report also said that the country’s excellent credit rating augurs well for the prospects to increase its borrowing both locally and internationally. But the implications will not be hassle-free. If the government were to borrow from the domestic market, it has to issue bonds, hence reducing the money supply. Reduction of the money supply adversely affects GDP in the short run.

Borrowing abroad will increase the long run interest rate. Both these operations carry the potentials to put upward pressure on the Omani rial exchange rate leading to a tight monetary policy, which could also affect growth in GDP adversely.

Further, borrowing abroad will cloud external space which does not augur well for Oman, which is under a fixed exchange rate regime.

Inflation

Oman’s Consumer Price Index (CPI) inflation continued to remain benign as the rate remained below the global rates since 2010 and has since declined to reach 1.01 per cent in 2014 from 1.25 in 2013 quite comparable with its GCC peers.

This trend continued despite the ‘peg’ restricting its’ ability to adjust to interest rates abroad and the high growth rates of various components of money supply during December 2013 and December 2014.

Lower imported inflation as also the backing of government subsidies to defend prices of goods and services could largely explain this.

Oman’s current account balance in 2014 was positive but small as a per cent of GDP.

The IMF, however, forecasts a negative current account deficit in 2015. Even though, exports earnings from the non-oil sector increased by 7.3 per cent, a decline in the same from oil sector by 5.3 per cent (which still accounts for 66 per cent of total exports) suppressed the overall growth in exports which saw a decline by 4.8 per cent. The external sector risks accordingly, look higher than last year, and may continue to rise in 2016 if not remedied appropriately.

External debt has been low and falling. As of 2014, the foreign exchange reserves were adequate enough; sufficient to pay for the cost of imports for about five months as against the thumb rule of at least three prospective months of imports of goods and services, and could meet gross current account payments liabilities up to 3.5 months, the same as in end-2013 and end-2012.

The seemingly gradual approach to address the issue of price subsidy – aimed at improving social and political economy – looks worthwhile considering the fact that it bears profound impact on the price of energy/petroleum products, which could turn Oman into a high cost economy adversely affecting the economic growth.

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