Recently, conflicting political and economic reports have been emerging about Oman. On a positive note, the Omani capital of Muscat was in the spotlight by hosting a high-profile meeting between the US, the EU and Iran over Tehran’s nuclear programme.
Signalling a major diplomatic success for the sultanate, the meeting was the first of its kind within the Gulf Cooperation Council (GCC) on a topic of such significance to the six-nation grouping.
On the negative side, the meeting coincided with a disturbing piece of news raised by the rating agency Standard & Poor’s about the sultanate’s public finance levels. The cause of the concern is understandable, namely the adverse effect of a steady drop in oil prices on the state of the broader economy.
S&P is qualified to raise such concerns by virtue of having access to data relating to the Omani economy while assigning a rating. On the plus side, Oman maintains a rating of A with a stable outlook, neither the best nor the worst in the GCC.
Yet, the sharp drop in oil prices, by more than 20 per cent in a span of several weeks, leaves an adverse bearing on budgetary revenues and, therefore, expenses. The budget for fiscal year 2014 was prepared with an assumed rate of $85 a barrel, below the prevailing market prices at the moment.
To be sure, the state’s finance were in a difficult position even at this assumed price level, with projected revenues and expenditures of $30.4 billion and $35.1 billion respectively, leading to a deficit of $4.7 billion.
At the stated level of expenditure, a break even point of above $100 a barrel is required in order to avoid a shortfall in public finance.
Looking back, the projected deficit was reversed into a surplus in fiscal year 2013 on the back of relatively strong oil prices, with the average Brent oil standing at $108.7 a barrel. Notably, this marked the third year in a row where oil prices averaged above $100 a barrel. Yet, this is not likely to be repeated in 2014.
Now, however, there can be no cause for celebration with oil prices falling below the rate used in preparing state budget, in essence requiring a revisit of the planned expenditures and revenues alike.
Lowering spending is a tough choice, as governmental expenditure compromises some 44 per cent of the gross domestic product (GDP). A few years ago, public sector spending constituted around 35 per cent of GDP. The increase reflected the stronger oil prices prevailing at the time and which gave the flexibility to raise public spending.
Among the tough choices the authorities are seriously considering include a revisiting of the subsidy programme. The precise details are yet to be released, but the talk is about revising the current subsidy programme next year. Officials hope that the nationals would appreciate such a move in the light of the significant drop in oil prices.
The option of lowering governmental spending could further undermine an already disturbing unemployment situation. At 8.1 per cent, the jobless rate in Oman is the worst in the GCC. Bahrain follows with 7.4 per cent. The two countries experienced unrest in early 2011 partly due to socioeconomic reasons, notably unemployment among youths.
Yet, another option being considered relates to issuing a bond, an Islamic sukuk, to help bridge public finances. Undoubtedly, Oman’s ratings, A and A1 assigned by S&P and Moody’s respectively, allow for a fresh issuance.
In all cases, Oman has to make some tough choices while coping with the free fall in global oil prices.
The writer is a Member of Parliament in Bahrain.
