Oman has announced it will raise public spending at a slower rate in 2014, in a bid to address looming fiscal challenges.

Government spending under the country’s newly approved budget amounts to about RO13.5bn ($35.1bn), marking an increase of 5 per cent on last year’s spending.

In comparison, the 2013 budget outlined RO12.9bn in public expenditure, an increase of 29 per cent compared with the previous year.

As part of plans to use its oil revenues more efficiently, the Omani government has stepped up spending to diversify the economy. It is planning to invest more than $50bn in megaprojects in the next 10-15 years, mainly in the transport, oil and gas, and manufacturing sectors.

The government also massively increased public expenditure to curb unrest in the wake of the Arab uprisings in 2011. Demands for more jobs and better pay were among the key factors that fuelled the protests. Up to 45,000 new positions need to be created each year to absorb entrants into the labour force and to reduce unemployment, which is particularly high among young people.

The government moved quickly to stem domestic demonstrations, raising the minimum wage by 43 per cent and creating more than 100,000 new jobs in the civil and defence sectors over the past two years.

But analysts say these measures carry long-term risks. In May, the Washington-based IMF warned that Muscat needs to curb spending and boost non-oil revenue in the medium term, or else run the risk of having its economy slide into deficit.

The new budget estimates that revenues will reach RO11.7bn in 2014, up 4.5 per cent from last year’s plan. While the budget projects that the government will post a deficit for this year, it conservatively assumes an average oil price of $85 a barrel.

The oil price needed by Muscat to balance its budget rose to $80 a barrel in 2012, from $62 a barrel in 2008. It is expected to climb further to $120 a barrel by 2018, exceeding currently projected prices. A sustained drop in prices would greatly expose the sultanate.

In a statement announcing the new budget, Finance Minister Darwish al-Balushi acknowledged that Oman needs to boost non-oil revenues, diversify its economy and encourage more foreign and domestic investment by private firms in order to shore up its finances in the coming years.