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Fresh perspective to growth
In a bid to strike a balance
between social and economic needs of the country, Budget 2012
represents by far the biggest fiscal spending unveiled by the
government of Oman. Visvas Paul D Karra speaks to a cross
section of industry leaders to get a fair idea of how the
economy will unfold this year
In order to really understand the impact of Budget 2012, we need
to go back to October 2011 and the 7th Term 84-member Majlis
A’Shura. The members of this particular Shura took their office
armed with unprecedented legislative powers previously unheard
of. For instance, while their predecessors could only have a
look at the annual draft State General Budget, the 7th Term
Majlis A’Shura had the authority to not only glance but grant
approval for the 2012 Budget. This allowed the Shura members to
ensure that the government’s budgetary spendings were in line
with the demands of the citizens. Therefore every baiza spent by
the government in 2012 means that it has the implicit nod of the
people.
Commenting on this, Ashok Hariharan, partner and head of Tax for
KPMG in Oman and the UAE, says, “It is important that people
look at the budget as one of the important tools to communicate
its plans for the progress of the country. What is equally
important is the efforts made by the government to bring in
reforms including legislative changes as demanded by today’s
generation wanting progress to take place at a fast pace.”
“During 2011, we have seen amongst others, His Majesty’s
directives to allow Islamic Banking and the promulgation of the
new oil and gas law which addresses issues around concession
agreements, conservation of environment and also regulates the
natural gas sector. Changes introduced in the Labour Law and
legislative powers and authority given to the Council of Oman
mean that the government is now more responsible to its citizens
in all the actions it takes.”
Balancing act
It is good to see that the government has carried out a
comprehensive review of the state of finances expected not only
for 2012 but also for the entire 8th Five Year Plan period.
Taking benefit of the prevailing oil prices, the government
revised upwards the planned development expenditure by 13 per
cent mainly to fund additional projects. Further, in response to
the social needs and financial decisions taken by the government
during 2011, the government has allocated additional funds
during the plan period for employment generation and improving
living standards.
HE Darwish bin Ismail Al Balushi, Minister Responsible for
Financial Affairs, says, that the State General Budget (SGB) for
2012, has been prepared within the framework of the objectives
of the Eighth Five Year Plan and in harmony with the basic
principles stipulated in the financial framework of the plan.
“Stabilisation of the macro-economy and preserving the public
finance balances and the gains achieved through the
comprehensive development by balancing the requirements of the
economic and social development and maintaining a growth rate of
7 per cent and inflation levels achieved in 2011 are the chief
objectives of the 2012 Budget,” HE Al Balushi said.
Populist measures have been implemented while drafting the
budget as can be seen from the minister’s statement that social
dimension will be given special importance in a way that
complies with the development process and the aspirations of the
society through promoting spending on education, training,
employment, health, housing, water and improving the living
standards of nationals. The aim is to continue to implement the
economic diversification strategy and support the nonoil
productive sectors in a way that leads to the expansion of the
production base of the economy and create employment
opportunities for nationals.
The government’s concern for social security and welfare can be
gauged by the fact that expenditure on this account is budgeted
to go up by 74 per cent compared to the original 2011 budget.
Further, the government’s spending on education is planned to go
up by 25 per cent in 2012 budget over the original 2011 budget
(see Chart 3). It is also interesting to note that the
government is reactivating the training for employment programme
which was in force a few years ago. Hopefully, the government
would have learnt from the challenges of the previous programmes
and would make sure that the training results in the direct
uplift of the skills of Omani nationals.
Estimates
The general revenues of the state for 2012 was estimated to be
RO8.8bn against RO7.3bn in the budget of the fiscal 2011, with
an increase of RO1.5bn, i.e. 21 per cent. The oil and gas
revenues constitute 82 per cent of the total revenues, whereas
the current and capital revenues constitute 18 per cent thereof
(See Chart 3).
The oil revenues were calculated on the basis of average price
$75 per barrel and an average daily production of 915,000
barrels per day. The deficit is estimated to amount to RO1.2bn,
i.e. 50 per cent of the GDP and will be covered from funding
approved in the budget including the issuance of development
bonds to the domestic market amounting to RO200mn.
Important expenditure are in the social fields namely, for
education – RO1.3bn, (i.e. 13 per cent of total); health –
RO500mn (5 per cent); social security and welfare – RO130mn;
development budget – RO120mn for constructing 2500 housing
units; and subsidies – RO1.2bn (see Chart 5 for breakup of
investment expenditure).
Further, the amended approbations of the Eighth Five Year
Development Plan (2011-2015) as at the end of November 2011
amounted to about RO13.7bn compared with the original
approbations amounting to RO12.1bn i.e. 13 per cent increase.
The total approbations allocated for the first and the second
years of the plan (2011 and 2012) and the projects continuing
from the Seventh Plan will amount to RO8.6bn, out of which
RO1.6bn is the cost of the new projects scheduled to be executed
in 2012. (See Chart 4).
Says Hariharan, “The striking feature of Oman’s budget is the
fact that there are hardly any borrowings to finance the
expenditure. Whilst the 2012 budget allocates an amount of
RO300mn to fund the deficit of RO1.2bn, actual results of
previous years show that there is hardly any need to resort to
borrowings given the surplus generated. This is in sharp
contrast to the challenges faced globally and in particular by
the Euro Zone.”
Whilst a deficit of RO1.2bn is budgeted, in reality it may be
far lower given that the budget is based on an oil price of $75
which is at least 25 per cent lower than the prevailing market
price, Hariharan predicts.
Beneficiaries
It is evident that the nationals and the residents of the
country will benefit from the government’s continued focus on
development and promotion of social security and welfare. The
private sector will also no doubt benefit from the significant
increase in the five-year planned development expenditure.
However there are divergent views when it comes to speaking
about the benefits of the budget.
Dr Abdullah Al Salmi, Acting Executive President of Capital
Market Authority, says that although all the projects that have
been announced are good for the economy the government has to
evaluate them, and determine how much value addition is being
created by them. “We are spending on projects to get something
for our long term use. At the same time, the economy has to
benefit from these expenditures on a short term basis as well in
the form of returning some of these amounts into the local
economy. Since we know that some projects cannot be executed by
local companies, the foreign companies can be the general
contractor underneath whom we must have small contractors. These
big companies should transfer technology and knowhow so that in
the future the jobs can be done by the local companies,” opines
Dr Abdullah.
Continuing further, he says, “This way we can start building
capacities among the local companies which will not only grow
but will be able to implement and execute these projects.
Employment will also be generated through the formation of new
local companies. Thus, a part of the revenues will remain in the
country.”
Many industry leaders feel they need a proactive government with
a clear thrust on development which takes timely and appropriate
decisions to help private sector thrive and participate in
national development. While the private sector can bring in new
efficiencies and new technologies to make sure that Oman makes
rapid progress, the government should support certain areas like
the manufacturing sector which is expected to contribute 20 per
cent to the GDP by 2020.
Hussain Salman Al Lawati, Vice Chairman and Managing Director,
Oman Cables Industry, says there are His Majesty’s instructions
and policies to support the local manufacturing industry.
However, just allocating RO100mn in the 2012 Budget for
development of new industrial zones cannot be called as support,
he says. “All countries including the developed one, gives
importance to their national industries while our neighboring
countries gives direct extensive price preference and support
for their national products,” says Hussain while adding, “In our
opinion, they should implement the common GCC agreement which
gives priority and preference to the local industry up to 5 per
cent to the GCC and 10 per cent to the international companies.
Instead of injecting loans into businesses, the government
should inject money into the companies. This way, they can
convert the capacity to productivity.”
“With the amendments in the labour law, the costs have gone up.
Unfortunately, the manufacturing sector has taken the maximum
hit as compared to other sectors like trading, services etc. It
is important that for the officials in the Government to recall
that manufacturing industry employs extensively and can create
more opportunities for the Omanis to join. While presently
manufacturing industry employs more than 15000 Omani employees
and therefore it is important that the Government must provide
the support to local industries to get business,” adds Hussain.
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