OMAN UPDATE

BUDGET 2009

The Sultanate of Oman achieved high economic growth and record budget surpluses from 2005 onwards largely due to high oil prices, strong domestic demand, good investment climate and improved non-oil exports. However, the global economic turmoil and recession, coupled with the sharp fall in oil prices has forced Oman to unveil a tough budget for the fiscal year 2009. The 2009 budget forecasts estimated revenues of about OMR 5.61 billion against an estimated expenditure of OMR 6.42 billion, leaving a high deficit of OMR 810 million.

The estimated total revenues at OMR 5.61 billion are 4% higher than the estimated revenue for 2008. Oil and gas revenues constitute about 75% of the total revenues, and the balance 25% is from other sources. The oil revenues are estimated based on average oil price of US$ 45 per barrel and daily oil production of 805,000 barrels per day during 2009. Revenue from gas are expected to generate around OMR 620 million, or about 12% of the total revenues.

The budgeted total expenditure of OMR 6.42 billion for the year 2009 represents a substantial increase of 11% over the previous year. The expenditures allocated for basic government services, education and health services and civil ministries constitute 34% of the total budget expenditure, and are estimated at OMR 2.17 billion, an increase of about 13% over the previous year. The government's continued focus on the education and health sectors is underlined by the substantial allocation (49%) of the total current expenditures to these sectors. In spite of the difficult economic conditions, the appropriation to the education and health sectors has been increased by 11% and 19% respectively over the previous year.

On a positive note, the estimated allocation for development activities of OMR 800 million, represents an increase of 10% over the previous year. These allocations cover investments on continuing as well as on new development projects, covering major road works, investments in air and seaports and in projects executed by Oman Waste Water Company, Salalah Sanitary Drainage Company, Oman Oil Company, Oman Tourism Development Company, Oman Dry Dock Company, etc.

The budget deficit for the year 2009 is estimated at OMR 810 million which is about 14% of the total revenues and about 5% of the Gross Domestic Product (GDP). Though the budget deficit is considered high in absolute terms, as a percentage of the GDP, economically it is considered to be reasonable, against the backdrop of the difficult global conditions. The budget deficit would be financed by withdrawals from the government contingency reserves, in case actual revenue realization is not in excess of that budgeted. Interestingly, in view of the global volatile economic conditions, the budget for the year 2009 would be flexible and reviewed periodically, so as to respond to the rapidly changing economic developments in the international arena.

The Sultanate of Oman cannot remain immune from the current global recession, as on the one hand it will be difficult to get foreign investment while on the other hand fewer tourists are expected to come to Oman. Most importantly, since all the sectors of the economy are heavily dependent, directly or indirectly on government expenditure, there will be some adverse impact on the economy and the private sector due to falling oil prices and lower oil revenues. Whilst the ongoing government and infrastructure projects would continue to progress on account of government commitment to provide state funding, new projects may get delayed or may not take off.

On a positive note, the economic diversification policy implement-ted by Oman has started bearing fruit with additional revenues coming in from the manufacturing and tourism sectors. The high level of inflation is also expected to come down drastically due to the steep fall in global commodity prices. The government is focusing all its energies and efforts to ensure that the plummeting oil prices do not affect the stable economic growth witnessed by the country during the last few years.

(This commentary has been contributed by the Oman member firm of PKF International)