High spending to boost Oman

Oman’s economy is projected to keep expanding in the medium term as a result of a massive investment programme announced by the government within its 2011-2015 development plan, the IMF has said.

The Gulf country’s real GDP swelled by around 5.5 per cent in 2011 and growth could slip slightly to five per cent in 2012, still far higher than the average three per cent targeted by the five-year blueprint.

In a statement containing the preliminary assessment of the 2011 Article IV mission to Oman, the IMF said the slower growth in 2012 would be a result of slackening growth in the country’s oil production.

“A large public investment programme is underway and will help sustain growth over the medium term,” the IMF said.

It said major projects in progress include a rail network and new air and sea ports, adding that government plans also reflect what it described as a strong emphasis on education and social infrastructure.

The report said that with civil investment by the Omani government projected to average about 16 percent of non-hydrocarbon GDP over 2012–2016, annual non-hydrocarbon GDP growth is expected to stay at about 5.5 percent over the medium term.

Oil production is expected to plateau and then slightly decline, leading to small contraction in real hydrocarbon GDP, it said.

“The main risk to the medium term outlook is a prolonged drop in oil prices. Higher government spending is raising the oil price that would be needed to balance the budget,” the Washington-based IMF said.

It projected a breakeven price, the level needed to balance the budget, at around $81 in 2012, rising to $105 by 2016.

It warned that a drop in oil prices from the prevailing historically high levels could quickly lead to large fiscal deficits.

If sustained, lower oil prices could force a pull back in spending and lead to sharply reduced growth in the non-oil economy, it added.

“The longer-term outlook hinges on economic diversification. Oman’s hydrocarbon reserves are relatively modest and cannot continue to support economic growth in the long-run,” the report said.

“There has been progress towards diversification, with non-hydrocarbon exports—mainly petrochemicals, fertilizers, and metals—now accounting for over 20 percent of total exports. The non-hydrocarbon export industries, however, are highly energy intensive, have not generated many jobs, nor contributed much to government revenue.”

According to the report, the overarching policy challenge is to ensure strong and sustainable growth over the long run while addressing the urgent need for jobs. It said achieving this calls for strengthening public finances, addressing the causes of high unemployment, maintaining macroeconomic stability and supporting financial sector development.

Announcing its eighth five-year plan, Oman reported a surge by 113 per cent to RO30 billion ($78 billion) in its budgeted spending during 2011-2015 as it expects high oil prices and it is pursuing plans to raise crude output.

Oman’s Minister of National Economy Ahmed bin Abdulnabi Mekki said the plan aims to create 200,000 to 275,000 jobs for Omanis, who have become a majority in their country after they were a minority two decades ago.

He said development expenditure would be as high as RO12 billion, including around RO5.6 billion for new projects and the rest for development plans and ventures that were approved during the seventh five-year scheme.

Last week, Oman announced a record high budget for 2012 forecasting spending at RO10 billion and revenue at RO8.8 billion. Expenditure is nearly nine per cent above the budgeted spending in the 2011 fiscal year.

Follow Emirates 24|7 on Google News.