Oman's budget cuts overshadowed by rising deficit

Opinion Saturday 02/January/2016 20:50 PM
By: Times News Service
Oman's budget cuts overshadowed by rising deficit

Government may still face a formidable budget challenge in 2016,as lower than expected spending cuts and the forecast of a much higher deficit could expose serious fiscal cracks in the coming months.
Reductions in expenditures of 15.6 per cent to OMR11.9 billion are being offset by a record 2016 budget deficit of OMR3.3 billion, which is 32 per cent higher than planned for last year, at OMR2.5 billion. Obviously, the expenditure cuts have been eclipsed by the growing deficit, which might prove difficult to deal with the shortfalls.
The government has also based its budget on an oil price of $75 per barrel in 2016, just $10 less than last year. Currently, oil is being traded below $40 per barrel. A schoolboy mathematical analysis reveals that there is a discrepancy of at least 80 per cent between the traded prices of crude oil and what the government has based its budget upon. The figure of $75 per barrel only helps to justify accounting methodology, but not practicality on the international market, where the oil glut is continuing to be inspired by growing US production and high capacities of global inventories. It is yet another reminder that oil prices will take a long time to recover.
The superficial cuts might be enough to generate a good headline, but not enough to inspire confidence and long-term growth, at a time when Oman needs to dig deep to maintain the stability of its economy. Increasing petrol prices in filling stations and corporate taxes will help, but not significantly. Obviously, the objective of these changes is to make energy-use more efficient and conserve natural resources, while minimizing the negative effects on lower and middle-income Omanis, but not to provide a big boost to the economy.
With revenues predicted at OMR8.6 billion in 2016, down from OMR12.5 billion last year, the government would need to step up its efforts to issue the anticipated $250 million local bonds and planned $1 billion syndicated loan. Oman may also need to issue its first international bonds since 1997 to overcome its revenue fallout. Though there are many limitations in raising revenues, deeper cuts are the only way to balance the accounting sheets. Economic planners can still pull it off in 2016 by putting the brakes on expenditures for the civil service and by slowing down work on existingprojects.
With little prospect of oil prices reaching the $75 target, the government will be faced with a larger deficit this year. In 2015, the actual budget deficit of OMR4.5 billion was 27 per cent more than the estimated figure. The real challenge will be to wipe out the aggregate of deficits in the last two budgets, while working withvery unreliable oil prices. The government may also have to resort to painful cuts to freeze employment in the government sector, stop bonuses and various perks, such as allocations of cars to senior officials. One area that drained the coffers in the past was travels by officials to attend overseas meetings and seminars.
In the past, the government relied heavily on financial reserves to pay for its deficits. With the gripping economic crisis the Sultanate is currently going through, there will not be much left of reserves. Though the answer is not obvious, and there is no quick fix, it will be prudent to take the bull by its horns and steer it from harm’s way. There is no shame in cancelling some contracts or to stop awarding new ones in 2016, as a temporary measure until the economy recovers.
Downsizing the government’s organizations and trimming them to the minimum would also help control future expenditures. One way of doing this is to completely privatise state-owned companies. One of these companies is Omantel, which is 75 per cent owned by the government. Oman National Transport Company (ONTC) is another one. While Oman Airports Management Company (OAMC) is a good candidate, too, to go under the hammer of privatization. And so is Oman Air. The budgets for these companies take away a sizeable chunk of expenditures that can be used to pay off deficits.