Business | Opinion
Spending cuts on agenda if oil falls below $45
Contrary to the traditional practice, Oman's 2009 budget is not conservative on income.
- By Dr Jasim Ali, Special to Gulf News
- Published: 23:35 January 10, 2009
Contrary to the traditional practice, Oman's 2009 budget is not conservative on income. The authorities calculated revenues based on average oil price of $45 (Dh165.15) per barrel, in turn above going rates in the world.
This rate is the same used in developing the budget for fiscal year 2008 though in different conditions. The oil price was exceptionally high (more than $100 per barrel) when authorities prepared the 2008 budget.
However, prices dropped in the aftermath of the global financial crisis with its adverse consequences of demand for oil reflecting adverse economic conditions. Projected revenues for 2009 amount to $14.6 billion, up by nearly 4 per cent from estimated figures for the fiscal year 2008. The rise in income partly reflects growing oil production. Officials expect oil output to average 810,000 barrels per day in 2009 versus 760,000 barrels per day in 2008.
Details are sketchy regarding uses of funds. Officials projected the petroleum sector contributing a whopping 78 per cent of total revenues in fiscal year 2008 (67 per cent for oil and 11 per cent for gas). Undoubtedly, the petroleum sector will continue dominating the treasury income.
Projected expenditures amount to $16.7 billion, up 12 per cent from budgeted expenses for fiscal year 2008. Clearly, the rise in spending reflects governmental determination to make up for the anticipated drop in private sector investments as a consequence of the global financial crisis.
The authorities deserve commendation for the move, as steady public expenditures should help maintaining growth of gross domestic product (GDP). To be sure, public spending is vital for the country's economic well-being, by virtue of accounting for 41 per cent of GDP.
Nevertheless, the authorities threatened to reduce public expenditures in case of a drop in oil prices. Minister of National Economy and Supervisor of the Finance ministry, Ahmad Bin Abdul Nabi Macki has warned of rearranging spending priorities if the oil price drops below $45 per barrel.
Macki has promised to keep appropriations for infrastructure projects. Officials would also keep allocations of salaries for public sector employees to avoid turning economic challenges into social problems. Still, a drop in oil prices would most likely place a cap on employment in government departments, thereby adding to unemployment headache amongst locals.
Authorities would have no choice but to rearrange investment priorities should oil prices drop substantially below budgeted figure or risk large budgetary deficit. In fact, projected deficit in 2009 is higher by 130 per cent versus budgeted shortfall for fiscal year 2008.
Judged by healthy statistics, the sultanate's projected deficit of $2.1 billion is relatively high. The deficit amounts to 14 per cent of projected revenues for fiscal year 2009 and about 5 per cent of the country's GDP. By comparison, projected deficit for 2008 comprised about 7 per cent of estimated revenues and 3 per cent of the GDP.
In reality, Oman's deficit statistics violate one such condition of a planned monetary union within the Gulf Cooperation Council (GCC) set to be implemented in 2010. Among others, the project requires member states to restrict budget deficit to 3 per cent of the GDP.
The desire to keep an independent fiscal policy partly explains Oman's determination not to join the GCC's monetary union initiative. Clearly, officials desire to have freedom in assuming policy choices to address economic challenges.
Oman can afford increasing expenditures (by 12 per cent) partly due to the near absence of inflationary threats. Inflation was a key economic challenge in 2007 and the first half of 2008. Due to the financial crisis, current primary challenges relate to maintaining economic viability through public spending.
- The writer is a Member of Parliament in Bahrain.
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