ECONOMY: Oil boost aids the quest for diversity

14 November 1997

OMAN has been planning to change the structure of its economy for several years. The future which the sultanate envisages is one with a diverse industrial base largely in the hands of the private sector. Development Minister Mohammed bin Moosa al-Yousef points to the current five-year plan as an example of this new emphasis. 'In the fifth five-year plan, the private sector share in investment is 53 per cent,' he says.

But it is not only in planning documents that the government's intentions can be seen - the plans to diversify are rapidly becoming realities. The liquefied natural gas project will come on stream in 2000. '[LNG] will increase oil and gas revenue by 18 per cent,' says Tony Hanna, chief executive of Oman LNG. Gas currently accounts for less than 1 per cent of gross domestic product (GDP), but by 2002 it should be making a 15 per cent contribution to the economy.

Oil remains the predominant feature in all aspects of the economy, accounting for about 41 per cent of total GDP. And for the past couple of years, vulnerability to changes in the oil price has worked distinctly to Oman's advantage. A high price has seen the oil sector boost economic growth and widen the trade surplus to record levels for the decade.

Figures recently released by the Central Bank of Oman (CBO) show that the average price of Omani crude in 1996 was $19.41 a barrel. The benefits of a strong price have been all the more keenly felt because of increases in production. Average production for 1996 was up by nearly 4 per cent to 884,000 barrels a day (b/d). The net effect was to increase the value of the oil sector by nearly a quarter.

The performance of the sector has fuelled growth in the economy as a whole. GDP growth in 1996 was nearly 11 per cent at current prices. '1997 will show similar growth to 1996,' says Hamood Sangour Al-Zadjali, executive president of the CBO. 'The fundamentals have not changed - the oil price is still high and production is up.' Analysts say that the rate of growth in 1997 may have been moderated a little by a slightly weaker oil price - about $18.90 a barrel - and a less significant increase in production, expected to average 895,000 b/d.

The trade balance has fared well recently, with more than 90 per cent of Oman's oil exported. The trade surplus rose to RO 1,004 million in 1996. However, services and private transfers more than offset this and Oman continues to have a current account deficit of about RO 40 million.

Improved oil revenues have also increased confidence in the government's ability to eliminate the budget deficit. But the added scope for manoeuvre appears to have eroded the importance previously attached to fiscal targets and the government has given in to the temptation to spend a bit more than planned. 'The problem with a good oil price,' says one expatriate banker, 'is that every minister thinks it's Christmas.' And the purse strings, held by the Finance & National Economy Ministry, have indeed been loosened since 1996.

Increased expenditure has been apparent at the electricity & water and communications ministries. An additional RO 145 million was made available at the former during 1997. The money will be spent on a number of power generation and transmission projects, raising questions about the commitment of the government to a private sector infrastructure policy. The Communications Ministry has been given the opportunity to get the new port at Salalah underway using public finance. The ministry is putting in $130 million to pay for initial construction and dredging costs.

'There have been some over-runs in 1996 and 1997,' concedes Al-Yousef. The target deficit for 1996 of RO 218 million was missed by about RO 45 million. As a result the budget for 1997 anticipates a deficit of RO 263 million - much larger than the RO 147 million laid out in the five-year plan.

The government has not abandoned its commitment to eliminate the budget deficit by 2000. 'The most important thing is the trend,' continues Al Yousef. 'And the trend is towards achieving a balanced budget.' Most observers agree that extra spending is not a cause for concern. In the longer term, the government still has its sights trained on cutting expenditure by providing opportunities for the private sector. Power, water, education, health and telecoms are all viewed as areas where private investment can alleviate pressure on future government budgets.

Despite giving in to the temptation to spend more, the government says it is sticking to its policy of rebuilding the State General Reserve Fund (SGRF). Budget deficits have in recent years been funded largely from the SGRF. The government's policy is to budget for an oil price of $15 a barrel, put anything received over $15 and up to $17 into reserves, and use anything over $17 for extra capital expenditure. Although the system is in operation in principle, missing the budget targets means that at least some of the oil revenues going in to reserves come back out again to fund higher than anticipated deficits.

The fundamentals of Oman's economy are looking good. And the outlook is confident. 'New projects and more activities in the non-oil sector will mean strong growth,' says Al-Zadjali.

The strength of the economy and the potential for the coming years has not escaped the notice of international investors. Due to strong demand, the government increased the size of its debut Eurobond, issued earlier this year, to $225 million. The bond achieved its declared aim of putting Oman and its economy on the map and project finance and corporate bonds are all expected to follow. 'The stage is set for projects to tap the international capital markets' Al-Zadjali says. Against the background of a sound economy, the prospects for such issues seem promising.

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