Oman’s 2015 budget will be the largest ever, with public spending raised by 4.5 per cent to RO14.1bn ($36.7bn).

Taking the drop in oil prices to $56 a barrel into account, Oman will run a deficit of RO2.5bn, or 8 per cent of GDP.

Some 79 per cent of Omani government revenues, or RO9.16bn, come from oil revenues. Revenues are projected to decline by 1 per cent in 2014, to RO11.6bn.

Standard & Poor’s (S&P) projected GDP growth of 3.6 per cent a year until 2017, while the new budget is balanced based on an optimistic 5 per cent growth rate.

While Oman is one of the financially weaker Gulf states, due to its comparatively small oil reserves, ratings agencies are not concerned. Oman’s strong net external and government asset positions, at about 76 per cent of GDP, have kept sovereign debt highly rated.

“Oman and Bahrain are in the weaker group of the GCC for sovereign debt,” says Steffen Dyck, Vice-President and Senior Analyst at Moody’s. “But we think that for now they will be able to cope with the challenges posed by lower oil prices, because there seems to be solid demand for sovereign debt in the case of Bahrain and Oman has very low levels of government debt.”

Muscat expects to finance the budget deficit by issuing long-term Islamic bonds and instruments, activating the domestic capital market.

The capital investment budget remains at RO3bn, as Oman focuses on diversifying the economy away from oil and gas. Oman will press ahead with important infrastructure and diversification projects, including the national railway project, the dualisation of Adam-Thamrait road, fishery and port infrastructure works in Duqm and wastewater programmes.

“Capital spending is needed for key infrastructure and diversification projects, which the government views as vital for economic development, and thus will go ahead,” says Dyck. “Muscat is also feeling significant pressure to spend on social programmes.”

Oman’s State Council advised cuts non-essential projects and subsidies, and widening the tax-base to reduce the deficit in late 2014. But after unrest across the Arab world reached Oman in 2011, Muscat is reluctant to cut social spending, and subsidies are still expected to form 13 per cent of spending in 2015 at RO1.8bn.

The education budget has more than doubled to RO3bn, more than 20 per cent of total spending, reflecting a desire to invest in human capital.

“It was necessary to take some temporary precautionary measures… to maintain the integrity and the stability of financial and economic situation,” said a government statement. “These will not affect the aspects related to citizens living [sic], the provision of basic services [and] employment both in the public and the private sectors.”

The privatisation of state-owned companies, some of which are non-performing, will move forward by 2017.

If the oil price remains under $60 a barrel in the long term, significant cuts will be needed in future budgets, threatening the project pipeline. Muscat has not stated the oil price the new budget is calculated on, but Oman’s breakeven price was $101.6 a barrel in 2014 and was predicted to be $107.5 a barrel in 2015 by the Washington-headquartered IMF. Oman exports more than 900,000 barrels a day (b/d) of oil, making up 50 per cent of its GDP.