04 July 2016
ECONOMY: CBO Annual Report reviews domestic macroeconomic developments and economic growth -

Muscat - After five successive years of robust growth, the Sultanate's economy recorded a contraction last year, mainly on account of low international oil prices and partly due to the global slowdown, the Central Bank of Oman (CBO) said in its 2015 Annual Report.

Despite increased oil production, net exports suffered a setback in 2015 due to low oil prices. Ambitious fiscal consolidation measures reduced government expenditure significantly in order to contain deterioration in the budget balances, the report said.

Consequently, nominal GDP contracted by 14.1 per cent in 2015 reflecting the reduction in two key constituents of aggregate demand, namely, rationalisation in government expenditure and slowdown in exports as against a robust average growth of 11.3 per cent during the five year period from 2010 to 2014, the apex bank stated.

Component wise, nominal petroleum sector GDP declined significantly by 38.2 per cent in 2015, while the non-petroleum sector registered a modest growth of 2.3 per cent during the period. In 2015, non-petroleum industrial activities witnessed a marginal growth of 0.4 per cent, mainly due to reduced government spending and economic downturn, as compared to a modest increase of 3.8 per cent in the previous year.

Within non-petroleum industrial activities, manufacturing accounted for 51.3 per cent, followed by construction (38.9 per cent), electricity and water supply (7.3 per cent), and mining and quarrying (2.5 per cent). While GDP originating from manufacturing contracted by 6.7 per cent, 'mining and quarrying', 'electricity and water supply' and construction sectors recorded positive growth of 13.8 per cent, 11.0 per cent and 8.6 per cent, respectively in 2015.

The manufacturing sector accounted for 10.9 per cent of GDP in 2015 compared to annual average 10.6 per cent in the period 2011-2014.

In 2015, value added in the services sector exceeded that in the hydrocarbon sector after trailing behind during the recent period of oil price boom. As a result, the share of services in the overall GDP improved to 48.9 per cent in 2015 from an average of 36.9 per cent during the previous five years, suggesting resilience of the services sector. The impact of the low oil prices on the services sector was discernible with services sector GDP in 2015 rising modestly by 3.1 per cent to RO 13,215.9 million over the previous year's record of RO 12,814.5 million.

Employment

Creation of adequate employment opportunities for the Omanis has been one of the major macroeconomic objectives of the Government during the recent years, the report said.

During 2014, employment in the public sector registered a marked growth of 10.3 per cent compared to an average increase of 6.6 per cent during the previous five years. While employment of Omanis in the public sector increased by 9.0 per cent in 2014 that of expatriates continued to expand significantly by 18.7 per cent over the previous year.

In the private sector, however, the momentum of employment generation slowed to 3.3 per cent in 2014 following overall slowdown of the economy, as against an average growth of 11.9 per cent during the previous five years. The composition of employment in the private sector has been generally dominated by expatriates and the growth of employment for expatriates in the private sector remained consistently higher in this sector than that in the public sector since 2009. In the private sector, employment of expatriates increased by 2.7 per cent as compared to a rise of 8.6 per cent for Omanis in 2014.

Prices

Inflationary pressures in Oman abated significantly in 2015 mainly due to the decline in international commodity prices, reduced public spending in Oman and notable appreciation of US Dollar in real effective terms since mid-2014.

Annual inflation measured by movement in the average Consumer Price Index (CPI) for the Sultanate decelerated to 0.1 per cent in 2015 compared with an average of 2.5 per cent during the previous five years. The recent behaviour of prices in Oman owes its origin to both demand and supply side factors emanating from domestic as well as external sources.

From the demand side, contraction in the nominal GDP in Oman in 2015 was mainly due to sharp fall in crude oil prices in the global markets and fiscal policies pursued by the government.

While external demand declined sharply following the average price of Omani crude falling by 43.5 per cent in 2015, domestic demand weakened due to significant consolidation in Government expenditure (-9.7 per cent) and subdued expansion in broad money (10.0 per cent) in 2015 over the previous year.
Among the supply side factors, inflation was low in Oman because world food and metal prices declined by 17.1 per cent and 23.1 per cent, respectively in 2015. The change in import price, namely unit value index of imports, which had been rising during the recent year, declined in 2015 by 35.5 per cent, making imported goods cheaper in Oman, the CBO report said.

Oil and Gas

According to the apex bank, the oil and gas sector continued to play a dominant role in the economy of Oman in 2015. Crude oil production, subdued in 2014, turned around by 4.0 per cent to 358 million barrels in 2015. Production of natural gas also increased by 5.6 per cent to 39,801 million cubic meters in 2015 compared to 37,682 million cubic meters in 2014. Crude oil exports in volume terms increased by 5.4 per cent to 308 million barrels in 2015 compared to 292 million barrels in the previous year.

However, the average price realisation for Omani crude oil declined by 45.3 per cent to US $ 56.5 per barrel in 2015 from US $ 103.2 per barrel in 2014 due to ample supply, lack of aggregate demand in emerging market economies, etc. As a result, the share of oil and gas in terms of major parameters of the economy witnessed a decline in 2015.

Despite decline in shares, oil and gas together accounted for 33.9 per cent of GDP, 78.7 per cent of government revenues, and 59.4 per cent of total merchandise exports in 2015.

Government Finance

Overall fiscal balance of Oman came under pressure in 2015 mainly due to fall in revenues owing to decline in average crude oil price and general slowdown of the economy. After continuous growth in total revenues during 2009-14, Oman recorded a revenue decline of 35.7 per cent to RO 9,067.5 million in 2015. The decline in the net oil revenues was significant (RO 4,549 million or 44.6 per cent), followed by gas revenues (RO 203 million or 12.0 per cent) and other current revenues (RO 119 million or 6.0 per cent). Fiscal consolidation measures reined in government expenditure (by 9.7 per cent to RO 13,698.9 million) significantly in order to contain deterioration in the budget balances.

Consequent to the decline in government revenue far outstripping the consolidation in government expenditure, the overall fiscal deficit widened to RO 4,631.4 million in 2015, which was about 17.1 per cent of GDP as compared with persistent modest deficits observed in the overall fiscal balance during the recent years.

Approximately, 70 per cent of the overall deficit in 2015 was financed by drawing down of reserves while the remaining 30 per cent was financed through loans, grants, and residual surplus transferred from 2014. As a part of ongoing fiscal consolidation strategy, Government rationalised current expenditure and investment expenditure by 4.6 per cent and 7.5 per cent, respectively in 2015 keeping in view the long-term growth objective of the economy.

The Sultanate's annual State General Budget for the year 2016 has been dovetailed with the objectives stated under the Ninth Five-Year Development Plan (2016-20) and attempts to address the ensuing challenges in fiscal management of the country.

As the first year of the current five-year development plan, the 2016 budget is expected to set the momentum for the country's developmental priorities and economic growth over the next five years which is anticipated to witness substantial reduction in government revenues that would in turn support a path of fiscal consolidation in the medium term.

The 2016 budget, the CBO Report said, endeavours to focus on measures aimed at (i) augmenting nonoil revenue, (ii) rationalising government spending and (iii) initiating reforms in subsidies. Factoring in the sustained drop in oil prices, budget for 2016 assumed average Omani crude oil price at US $ 45 per barrel.

While Government revenues have been projected to decrease by 25.9 per cent to RO 8,600 million in 2016 from the previous year's budgeted revenues of RO 11,600 million, aggregate expenditure is expected to drop by 15.6 per cent to RO 11,900 million from RO 14,100 million during the same period.
On the basis of the assumed price for Omani crude in the budget for 2016, the overall fiscal deficit has been budgeted at RO 3,300 million in 2016. Going by the recent volatility in international prices of crude oil, average price realisation for Omani crude in 2016 may be lower than that assumed in the budget which may point to pressure on the overall fiscal balance.

Balance of Payments

On account of low oil prices during 2015, the balance of payments position came under stress with the current account turning to sizable deficit as against a surplus in the previous years. The merchandise trade surplus posted a fall of 64.5 per cent to RO 3.5 billion in 2015 from RO 9.9 billion during 2014, mainly on account of the decline in the value of exports, notably crude oil.

To a lesser extent though, this decline was mitigated by the reduced level of imports by 4.8 per cent during the year in relation to the previous rear's import. The combined deficit on services, income and current transfers stood at RO 7.7 billion in 2015 as compared to RO 8.3 billion in 2014. The current account registered a deficit of RO 4.2 billion in 2015 (equivalent to 15.4 per cent of nominal GDP) as against a surplus of RO 1.6 billion or 5.1 per cent of nominal GDP in 2014.

With oil prices continuing to remain low in 2016, it is expected that Oman's current account will continue to be in deficit mode in 2016 too. The capital and financial account experienced a net inflow of RO 4,741 million in 2015 as against an outflow of RO 701 million last year, reflecting the gap between domestic savings over investment demand. The overall balance of payments position registered a surplus of RO 235 million during 2015 giving rise to the accretion of foreign exchange reserves by the same amount. Foreign exchange reserves of the Central Bank of Oman (net of valuation adjustment) increased by RO 547 million, while Government reserves decreased by RO 312 million in 2015. As at the end of 2015, the gross foreign assets of the Central Bank of Oman stood at RO 6,745.8 million providing import cover for around 8 months of merchandise goods.

© Oman Daily Observer 2016