The dual shock of the Covid-19 pandemic and plunge in oil prices has undermined various assumptions significantly with serious fiscal implications for Oman’s 2020 budget, said the Sultanate’s Central Bank in its 2019 annual report.

The 2020 budget assumed an average oil price at $58 per barrel and projected fiscal deficit at RO2.500 billion ($6.48 billion), lower by 4.7 per cent over actual in 2019, reported Oman Observer.

“Hence, the 2020 fiscal year will have to deal with even more overwhelming challenges. The government debt further burgeoned and stood at RO16.4 billion at the end of 2019. The government debt to GDP ratio also increased to 55.9 per cent in 2019. Furthermore, as government has been raising the major part of the debt through external borrowings to avoid crowding out, the government’s external debt constituted 79.3 per cent of the total government debt in 2019,”the report said.

The Omani economy witnessed a widespread contraction during 2019 on the back of lower oil prices and increased uncertainty due to a slowdown in global economic activities.

Despite Opec+ extending the production cut agreement, oil prices remained under pressure in 2019 and stood lower than those of the preceding year, the Central Bank of Oman noted in its newly published 2019 annual report.

The government, however, continued to pursue reforms to reinstate macroeconomic stability in the Sultanate. Consequently, fiscal and current accounts recorded some improvements during the year. While the Omani economy was already facing some pressure, the outbreak of the Covid-19 pandemic in early 2020 inflicted dual shock of lockdown and a steep fall in oil prices, causing significant economic losses, it said.

Macroeconomic conditions witnessed mixed trends in terms of various indicators during 2019. The economic slowdown in Oman was in line with the weakened momentum in the global economy. While the Omani economy experienced a contraction in nominal terms, the dual shock of the Covid-19 pandemic and a steep plunge in oil prices exacerbated economic vulnerabilities during 2020, the report said.

“The near standstill of economic activities during the lockdown and requirement of social distancing after gradual opening up of the economy led to output loss during 2020,” it noted.

The government continued to engage proactively and implement policy measures to improve the business environment and boost private sector led growth in the Omani economy, the Central Bank said.

The public policy is also striving to reinstate sustainable macroeconomic balance with policies aimed at boosting the participation of foreign investors and private sector in the economy, it stated.

Significantly, the Omani economy contracted by 4.3 per cent in nominal terms during 2019 as compared to a nominal growth of 12.3 per cent in 2018, mainly led by a significant decline of 8.4 per cent in the hydrocarbon sector. The Omani oil price declined by 8.8 per cent to $63.6 per barrel in 2019, while oil production dropped by 0.8 per cent during the year. The non-hydrocarbon sector shrank by a marginal 1.5 per cent in 2019, reflecting an environment of uncertainty, low external demand, and fiscal consolidation.

The manufacturing construction, wholesale and retail trade, and public administration and defence sectors primarily propelled the contraction in the non-hydrocarbon sector. But the agriculture and fisheries and financial intermediation real estate and business activities sectors grew and provided support to the non-hydrocarbon sector, it said.

Oman’s real GDP at constant prices (Base year: 2010) also contracted by 0.8 per cent during 2019 compared to an expansion of 0.9 per cent in 2018, the report said.

The downturn in the services sector was the main driver of contraction in real GDP during 2019, as all other major sectors witnessed a growth.

Several factors including economic and political, conditioned the performance of the international oil market during 2019, the Central Bank noted. “Although the Opec+ agreement helped in reducing sharp fluctuations, Brent price averaged $64 per barrel in 2019, $7/b lower than its 2018 average, reflecting reduced global demand. Oman exported 87.6 per cent of crude oil production in 2019, with China remaining as top destination. Oman’s natural gas production registered a marginal increase of 1.1 per cent in 2019,” it stated.

Gross capital formation

Investment activities remained sluggish in 2019, though the pace of contraction moderated compared to the previous two years. Gross capital formation (GCF) declined by 4.0 per cent during 2019 as against 4.2 per cent during the preceding year. The GFC to GDP ratio at 23.3 per cent in 2019 was marginally higher than 23.2 per cent in 2018.

The gross domestic savings to GDP ratio declined by 3.3 percentage points to 34.8 per cent during 2019, while gross national savings to GDP ratio declined by 4.2 percentage points to 14.5 per cent due to increased outflows of savings from the country. The investment savings gap remained large, indicating a continued requirement of external savings to finance domestic investment.

Despite economic challenges, the government has been actively providing employment opportunities to Omani nationals and expatriates over the years. However, overall employment in Oman declined by 2.6 per cent during 2019 as compared to a decline of 2.2 per cent in 2018.

The employment in the public sector decreased by 0.7 per cent in 2019, while that in the private sector dropped by 3.1 per cent. There has been an increase in the number of Omani nationals being employed in the private sector over the last few years and during 2019 as the employment of Omanis in the private sector increased by 4.0 per cent.

In order to address the unemployment problem, the government has recently set up the National Center for Employment (NCE) by merging a number of government entities and sub-entities with the mandate of providing employment to Omanis.

Currency peg

Due to the Sultanate’s currency peg, open capital account and high dependence on imports of goods and services, imported inflation remains a dominating factor in domestic inflation, according to the CBO. The average consumer inflation in Oman decelerated to 0.1 per cent in 2019 from 0.9 per cent in the preceding year, in line with the trends prevailing in advanced countries.

“A combination of subdued domestic demand and lower pressure from the supply side led to benign inflationary conditions in the Sultanate. Import prices index, encompassing the impact of relative inflation, international commodity prices and changes in the NEER, dropped by 18.2 per cent,” the apex bank stated.

The fiscal position improved marginally during 2019 reflecting a spur in non-hydrocarbon revenues and cut in expenditure, despite hydrocarbon revenues witnessing a decline. Hydrocarbon revenues declined, reflecting lower oil prices as well as lower crude production, while non-hydrocarbon revenues got a boost due to the reform measures.

Fiscal consolidation

The government continued to push expenditure rationalisation, showing strong resolve to achieve fiscal consolidation. During 2019, the government expenditure declined on account of both current and capital spending, although participation and other expenses increased considerably.

“Despite a decline in expenditure, the fiscal deficit declined marginally to RO2,623 million in 2019 from RO2,650 million in 2018. Furthermore, the National Programme for Fiscal Balance (Tawazun) is working out a medium-term fiscal consolidation plan,” the apex bank noted.