Muscat: On the occasion of promulgation of the Royal Decree no. (1/2019) ratifying the State’s General Budget for the Fiscal Year (FY) 2019, the Ministry of Finance (MoF) is pleased to present, in coordination with the Supreme Council For Planning (SCP), the main features and estimates of the General Budget for FY 2019, and the preliminary financial results for FY 2018.
The performance of 2018 Budget was better, as compared to the last three years (2015-2017), reflecting higher oil prices, an increase in non-hydrocarbon revenue and spending cut.
However, the oil market remains uncertain with imbalance between supply and demand, and continued fluctuation in oil prices.
This requires further precautionary measures in 2019 Budget, deeper fiscal consolidations, and enhancing non-oil revenue. In addition to, advancing strategic infrastructure projects in order to improve the growth and promote further economic diversification.
The 2019 Budget framework aims at achieving a set of objectives and priorities, notably fiscal sustainability so as to enable the national economy in achieving economic growth targets, a diversified economy, and targeted rates of domestic and foreign investments. In addition to, enable the private sector to play a greater role in the development process and to create more jobs.
Highlights of the preliminary financial results for FY 2018, and main features of 2019 Budget, are summarised as follows:
First: Economic Developments:
1Global Economy: According to International Monetary Fund (IMF), the global growth rate is projected to rise to 3.7% in 2018 and 2019. However, the global growth continues to be surrounded by a number of challenges, particularly trade tensions between major economies, uncertainty regarding monetary policy in advanced countries, high level of global indebtedness, and mounting geopolitical risks.
Oil prices have experienced great volatility during 2018, reached as high as US$ 89/b in September 2018, but then fell back to nearly US $ 50/b in December 2018.
This is due to several factors including market fundamentals (demand & supply) and geopolitical risks.
According to international institutions, oil prices are projected to average between US$ 60-65/b in 2019. In spite of the positive outlook for oil prices, precautionary measures are essential to mitigate any potential decline in oil prices.
2 National Economy
Despite the challenges faced by the national economy during the first three years of the Ninth Five-Year Plan, the national economy registered positive growth rate which is expected to range between 2-3% by the end of the plan. According to National Centre for Statistics and Information (NCSI),the gross domestic product (GDP) continues to grow at current prices, reaching 15.1% over the first half of 2018 compared to the same period of 2017.
The growth was supported by an increase in hydrocarbon activities, notably gas activities which grew by 23.2%. In Addition, non-hydrocarbon activities which registered an increase by 5.1% over the same period, largely due to improved activities in manufacturing sector and mining industry. The contribution of non-hydrocarbon activities during first half of 2018 reached 63% of GDP at current prices. It is expected that the growth of GDP will continue to improve over 2019, to at least at 3%in real terms, supported by the growth of oil and non-hydrocarbon activities.
The IMF projects the national economy will resume growing during 2018 to 3% at constant prices. It has also expected that Oman will record the fastest growth rate among the GCC countries in 2019.
Furthermore, The World Bank expected that the national economy will continue to improve during 2018 and 2019 due to several factors, notably the recovery of hydrocarbon sector, and the increasing production of Khazzan gas field. It has also projected that the GDP of Oman will continue to be improved.
Domestic inflation rate is expected to average between 2% and 3%in 2018 and 2019, respectively.
For the banking sector, the financial statements show a high ratio of solvency in light of good growth rates of GDP and fiscal consolidation measures. This is in tandem with the Central Bank of Oman’s efforts in pursuing sound controlling and supervisory policy and adopting a monetary stimulus policy, which goes in line with the fiscal policy that responds to the developments in US dollar interest rate - the stabilizing currency for the Omani Rial – efficiently. In light of this favourable economic environment, the monetary and financial stability is maintained, which in turn support the prospects for economic growth and diversification and enhance domestic and foreign investment.
Second: Preliminary results of 2018 Budget:
1 Public Revenue:
The preliminary financial outcomes for FY 2018 are as follow:
Non-hydrocarbon revenue target has not been met, mainly due to the delay in implementing some of the approved measures aimed at energizing non-hydrocarbon revenue.
2 Public Spending:
According to the preliminary outcomes, overall public spending totalled OMR 13.2 billion in 2018 compared to a budgeted figure of OMR 12.5 billion, a 6% increase. This is mainly attributed to the rise in investment spending over development projects, increased expenditures of some government units to meet necessary and urgent needs, high subsidy costs of electricity sector. In addition, high cost of public debt servicing.
Third: Budget Objectives:
The State’s General Budget seeks to achieve a set of economic and social development objectives, prominent among which are the following:
1 Fiscal Sustainability and Enhancing Spending Efficiency:
Fiscal sustainability and balancing of revenue and expenditure are the most important objectives of 2019 Budget. Therefore, the revenue and spending of 2019 Budget have been estimated, taking into account the following:
Prioritising spending in line with the available financial resources and in a way that ensures the achievement of economic and social goals.
Keeping the deficit within a sustainable level, and reducing public debt.
Improving government revenues and enhancing the contribution of non-oil revenue to overall government revenue in a way that leads to reduce dependency on oil sector.
Bringing down breakeven point/oil price over the coming years.
2 Continue to Stimulate the National Economy
The budget is the main driver of the national economy. This is reflected by the importance of the budget for the implementation of five-year plans and for inclusive and sustainable development, by means of the following:
Completion of infrastructure projects that will help incentivise economic growth.
Continue the policies on economic diversification by enhancing the participation of private sector.
Maintain adequate level of public investment in productive sectors that help to increase employment rates, and strengthen social development.
Achieve economic growth of 2 to 3 percent, on average, at constant prices over the Ninth Five-Year Plan.
Control inflation rate so as to maintain per-capita income level.
Outsource some government services and enhance public-private partnership (PPP).
Support Small and Medium Enterprises (SMEs) by allocating some of the government projects to SMEs. In addition to continue providing loans to the SMEs through Al Raffd Fund and Oman Development Bank.
Modernisation of legislation and laws related to business environment, and domestic and foreign investments.
Give special attention to allocations for the maintenance of assets, facilities, and infrastructure in order to ensure the effectiveness and sustainability of the development projects already accomplished.
3 Maintaining the level of Basic Services: The government gives special emphasis on providing basic social services for the citizens. Therefore, the budget seeks to maintain the achievements already accomplished, through the following:
Maintain the level of high-priority social services for citizens
The spending estimated in 2019 budget for basic services, such as education, health care, housing and social welfare accounted for 39% of public spending, which represents the largest portion of the budget. The following table shows the public spending on the aforesaid services during (2015-2019):
Recruitment: The government pays greater attention to investment spending so as to enhance investment climate and enable private sector to play greater role in investment projects and create more jobs. The investment spending estimated at OMR3.7 billion in 2019, including OMR1.2 billion allocated for infrastructure projects which are overseen by various government units; and an amount of OMR2.5 billion to be utilised by some state-owned-enterprises (SOEs) for the implementation of projects in industrial and services sectors. This will help to boost economic growth and create more jobs. On the other hand, the government continues to implement the initiatives recommended by National Program for Enhancing Economic Diversification (Tanfeedh).
As for public sector recruitment during 2019, the Budget includes allocations for 5000 job opportunities. The recruitment in the public sector continues to be based on the needs, particularly in the education and health sectors. However, the private sector is hoped to play a greater role in creating more job opportunities as it is involved in all economic activities in the country.
Training linked with Employment: As part of the government’s policy to enhance the skills of Omani job-seekers, the National Training Fund shall continue in 2019 its plan to train 6170 trainees along with more groups of trainees,in an effort to continue to build human capacity in Oman, and bridge the skills gap between education and job market needs. In addition, cooperation between and among high-priority sectors shall be enhanced to identify job opportunities, along with current and future requirements.
Housing Aid, Social Housing Scheme, and Housing loans: The government continues to implement the Social Housing Scheme and Housing Aid Programme for eligible citizens. An amount of OMR90 million has been allocated for this purpose, which includes an amount of OMR60 million assigned for housing loans provided by Oman Housing Bank, while the remaining OMR30 million is allocated for housing and development loans.
Fuel subsidy: As part of government’s endeavours to mitigate the implications arising from the elimination of fuel subsidy, the National Subsidy System (NSS) has been provided with the required allocations. The number of citizens registered in this system reached around 325,000.
Fourth: Estimates of 2019 Budget: Public revenue, spending and estimated deficit of 2019 Budget, are illustrated as follow:
1- Public Revenue: Aggregate revenue is estimated at OMR10.1 billion, increasing by 6% as compared to estimated revenue for 2018. Such revenue consists of oil and gas revenue of OMR7.4 billion, representing 74% of total revenue. Non-oil revenue is estimated at OMR2.7 billion i.e. 26% of total revenue. Revenue estimates are based on the following considerations:
Oman’s commitment to cut oil production in line with OPEC’s decision to reduce production volumes.
Gas revenue from Khazzan-Makarem gas field.
Excise tax revenue.
Revenue generated from Privatization Scheme.
Improve efficiency of tax and fees collection. Expanding in the provision of preferential services.
Standardised fees of municipal services.
Revised fees of services provided by Ministry of Agriculture and Fisheries, and Ministry of Health.
2 Public Spending:
Total public spending is budgeted at about OMR12.9 billion, increasing by OMR400 million i.e. 3% compared with the budgeted figures of 2018 Budget, as follow: Current Expenditures of Ministries and Government Units:
These expenditures are estimated at OMR4.5 billion. The current expenditures include salaries, annual allowance, entitlements of the employees, and cost of promoting the 2010 batch of Omani government employees of OMR3.5 billion; and also include operating expenses of OMR0.6 billion. The salaries, annual allowance and entitlements account for 76% of total current expenditures of ministries and government units.
Investment spending, needed for the implementation of development projects, is estimated at OMR1.2 billion in 2019 Budget, representing the estimated amount to be paid during the year as per the actual work in progress for the projects. Spending on development projects will not be cut to ensure the completion of all ongoing projects without delay, and also to ensure that the relevant payments will be made on time.
As for investment expenditures, the focus is on the implementation and completion of a number of strategic projects,including the following:
Construction of hospitals in Salalah, Khasab, and Suwaiq. In addition to completion of implementing a number of health centres in some provinces (wilayat).
Water networks projects in a number of provinces (wilayat).
Construction of catering facilities, air cargo terminals and aircraft maintenance hangars at Muscat International Airport and Salalah Airport.
Implementation of Al Sharqiyah Expressway project
Paving of internal roads in various provinces (wilayat).
Implementation of Adam-Thumrait Road Dualization project.
Implementation of infrastructure projects for Liwa City Housing Complex.
Compensation scheme set for the people whose houses were affected by Batinah Coastal Road project.
Construction of alternative housing units for the people whose houses were affected by Batinah Coastal Road project.
Construction of 400 housing units in Khor Souly (Salalah).
Construction of a number of new schools, and implementation of additional facilities at some existing schools.
Oil and Gas Production Expenditures: These expenditures are estimated at OMR2.2 billion in 2019 Budget, up by 6% compared with 2018 budget estimates. This includes the operational and capital costs of oil and gas production, and expenses required to maintain future oil and gas production, as well as enhance oil and gas reserves.
Subsidies: The appropriations allocated for subsidies are estimated at OMR745 million, higher than the 2018 approved budget by OMR20 million i.e. 3%. This is due to the increases in electricity subsidy to meet the growth in consumption. This includes subsidies for oil products, housing and development loans, and operational support to SOEs.
Other Expenditures: These expenditures include: public debt service, development expenses of SOEs, and government cash contributions to the capitals of local and international companies and institutions. Allocations for such expenditures are estimated at OMR785 million, OMR100 million higher than 2018 Budget estimates. This is due to the increasing cost of public debt service by OMR150 million; and reduction of development expenditures of SOEs, cash contributions of the government to the capitals of local and international companies and institutions, by OMR50 million.
3 Deficit: According to the preliminary outcomes,the actual fiscal deficit for FY 2018 is projected to be around OMR2.9 billion; while the budget deficit for FY 2019 is estimated at OMR2.8 billion i.e. 9% of GDP. In comparing the deficit during the three years (2016, 2017 and 2018), it is clear that the deficit is declining. The estimated deficit for FY 2019 is lower than the deficit of 2017 by OMR1 billion i.e. 26%.
4 Deficit financing: Despite the uncertainty over debt market caused by unfavourable set of global economic conditions, the government was able to cover the approved deficit of 2018 Budget by borrowing mainly from external sources, at the prevailing interest rates in the market. The external borrowing accounted for 69% of total funding, while domestic loans represented 17% to avoid crowding out the private sector in meeting its financing needs, as well as to enhance foreign currency cash flows and reserves. The reminder of the deficit, i.e. 14%,was financed by drawing on reserves.
As for 2019 Budget deficit, it will be financed by external and domestic borrowing by 86% i.e. OMR2.4 billion. The rest of the deficit, estimated to nearly OMR400 million, will be covered by drawing on reserves. This comes in line with the guidelines set out by the government to maintain sovereign reserve funds, and to rely upon borrowing, notably external borrowing, to finance the deficit.
Fifth: Economic Diversification Efforts in Oman: As part of the government’s efforts to achieve economic diversification, 2019 Budget includes allocations approved for the five targeted sectors identified by Tanfeedh, namely manufacturing, logistics, tourism, fisheries and mining sectors.
Nevertheless, the projects and initiatives recommended by Tanfeedh rely largely upon private sector in providing finance and investments required for these projects and initiatives. Besides financing some essential projects, the government is also taking further steps focusing on facilitating procedures, improving the business environment and providing support to the respective sectors.
Over the past period, a number of projects and initiatives have been implemented either by the government, private sector or SOEs. In this context, tourism sector witnessed some additional touristic facilities. Implementation of Irfan City project and Mina Sultan Qaboos Waterfront project has commenced. As for manufacturing sector, implementation of a number of projects has started, including Liwa Plastics Industries Complex,Steel Factory project, and a pharmaceutical plant.
Also, logistics sector has witnessed the implementation of some projects, including Khazaen Economic City project and Salalah Port Expansion project. Furthermore, a number of projects have commenced in the fishery sector, which included fish farming projects, and construction of centres/hubs for fishery products. As for mining sector, implementation of some projects has begun, including copper mining project and a plant for ceramic tile production.
Sixth: Fiscal consolidation and steps to address deficit
The government has taken a set of fiscal adjustment measures aiming at fiscal sustainability; and a gradual fiscal adjustment policy is being pursued to avoid any negative consequences over economic and social aspects. The most important of these measures are as follows:
1 Revitalising non-oil revenue:
Enhancing tax collections efficiency, and activating monitoring and follow-up measures.
Introducing selective tax on certain commodities.
Amending rules and regulations pertaining to exemptions of tax and customs duties.
Amending the regulations of lands allocation (land of commercial, tourism, industrial and agricultural use)
Application of revised fees of municipal services.
2 Rationalising public spending:
Giving priority to the implementation of necessary projects that serve economic and social objectives. Postpone the implementation of low-priority projects.
Controlling capital expenditures.
Halting expansion of organisational structures of the ministries.
Accelerating e-government transformation.
Reviewing and rationalizing government subsidy in order to direct such subsidy to needy/eligible citizens.
Promoting the efficiency of state-owned enterprises in order to enhance their contributions to the economy. Stressing the importance of implementing sound corporate governance.
Raising the efficiency of spending on oil and gas production, by using the latest methods and equipment.
Rationalizing energy consumption in government premises and street lighting.
Engaging private sector in implementing and managing some projects, facilities, and activities. The purpose is to ease the burden on the budget, and maintain good levels of investment.
Adhering to the approved budget allocations for the ministries and government units, and no additional allocations shall be approved. In case of any increase in oil revenue, the priority shall be given to reduce the accumulated deficit.
Seventh: Fiscal Planning and Discipline: In view of the exceptional growth in public spending over the last few years, and in order to achieve fiscal discipline and contain public spending within sustainable levels, the government is carrying out the following:
1 Developing a Multi-Year Budget Framework (2019-2022). This is to include a medium-term estimate of revenue, expenditures, deficit/surplus, and financing.
2 Capacity-building for tax and customs systems.
3 Complete the activation of a single account for the treasury in order to help ensure effective management of liquidity and cash flow.
4 Completing the application of Program and Performance Budget (PPB) in FY 2019 and identifying key performance indicators (KPIs) for 13 government units.
5 Preparing financing plan to cover the budget deficit
6 Preparing a charter on corporate governance of SOEs.
In conclusion: In spite of improvements in oil markets over 2018, the State’s General Budget is still facing challenges posed by oil price fluctuations. This is due to the fact that oil revenues remain the main source of revenue for Oman. Therefore, any decline in oil prices will have an impact on 2019 Budget performance, and the national economy. 2019 Budget seeks to achieve fiscal sustainability by containing the deficit within sustainable level, reducing public debt, enhancing the contribution of non-oil revenue to GDP.
Furthermore, 2019 Budget continues to stimulate national economy through maintaining the level of investment expenditures, and supporting economic diversification by expanding private sector participation.
Although the challenges facing 2019 Budget are significant, it has been taken into consideration to maintain the level of basic social services.
Lastly, the Ministry of Finance is honoured to extend its best wishes to His Majesty the Sultan Qaboos bin Said on the occasion of New Year 2019, supplicating to Almighty Allah to bestow upon His Majesty with good health and long life. The Ministry also would like to congratulate the people of Oman on the New Year 2019.