Analysis Economy How Oman got its budget back into the black By James Gavin August 25, 2022 Oman swung to a budget surplus in the first half of 2022. Oil and gas revenues boost budget surplusReforms include help with VAT, and more in the pipelineDecrease in public debt adds to optimism Oman’s economic outlook looks rosier now than policymakers might have dared to expect just a few months ago – having registered a rare budget surplus in the first half of 2022. Data from the Ministry of Finance revealed a OMR784 million ($2 billion) fiscal surplus, compared to an OMR457m deficit in the same period in 2021. That is a reflection of surging oil and gas revenues, with the budget break-even oil price around double the $50/barrel on which the government based its fiscal plans. Yet this is not just not just a picture of buoyant hydrocarbons receipts; government revenue-raising measures are also having an impact. Official figures show tax and fees revenues rose 71.5 percent to OMR1.12bn in the first six months. That reflects key steps taken by the government under Sultan Haithem Bin Tariq to put the economy on a more solid footing. Oman’s tourism sector on recovery path amid economic diversification UK-GCC trade in numbers: relationship set for new era Prior to the pandemic, Oman had registered successive twin current and fiscal deficits. A budget deficit of 20 percent in 2020 underscored the sultanate’s vulnerability. This year, the tables have turned. But flusher finances may not automatically translate into an uncosted spending boom. “Spending in Oman is increasing year-on-year and it’s going to be above budget. But you could view it as relatively contained given what oil prices are doing,” said Toby Iles, head of Middle East and Africa Sovereigns at Fitch Ratings. “Historically spending might have been expected to increase by much more at such oil-price levels.” Though H1 2022 data shows an 8.6 percent increase in total spending – imbued by higher food and fuel subsidies – expenditure might start contracting in the second half of this year. “Fuel subsidies are linked to a certain oil price and so they’re not structural,” said Iles. “It’s not like giving everyone a 20 percent salary increase.” Before the surge in hydrocarbons prices hit, Oman had implemented a series of fiscal consolidation moves. This included implementing value-added tax at a rate of five percent in April 2021, and cuts in capital expenditure as part of a 0.3 percent spending cut outlined in the 2022 budget. More reform measures are in the pipeline. “We’re assuming that personal income tax will happen next year, and that would be a symbolic landmark,” said Iles. “And it doesn’t have to be that painful. They could design it in such a way that thresholds are relatively high, so they don’t affect large swathes of the population.“ According to consultancy Capital Economics, the government first hinted in its 2020 Medium Term Fiscal Plan that it may introduce a personal income tax targeting foreign nationals with locally derived incomes of more than $100,000. These will be taxed at between five and nine percent, while Omani citizens with a total income of over $1m would be subject to a 5 percent tax. That still leaves the public sector payroll to be tackled – a significant change for Oman, as it is for all GCC countries. Iles said: “The government has already enacted some reforms so that there are less generous allowances, and more performance-linked pay.” Breathing room Having seen its debt-to-GDP ratio hitting 80 per cent last year, streamlining Oman’s debt portfolio is a priority. There are some causes for optimism on this front. First-half 2022 data showed a decrease in public debt from OMR20.8bn at the end of 2021 to OMR18.6bn at the end of July 2022. “The government faces large foreign currency debt repayments over the coming years, equivalent to nearly 80 percent of total sovereign wealth fund assets and foreign currency reserves,” said James Swanston, MENA economist at Capital Economics. “Ensuring a further non-oil revenue source will help to diversify the Sultanate’s revenues and provide them with more breathing room as oil prices fall back,” he said. “The flipside is that tight fiscal policy will be a headwind to Oman’s economic recovery.” External financing pressure for Oman has gone down. So the question of how Oman would meet its external debt repayments has become much less pressing. “They have bought some longer-dated bonds back, and managed to prepay a pre-export facility they undertook when they were under more financial stress,” said Iles. The government’s foreign currency debt maturities in 2023 are relatively low at $1.7bn, but then in the next few years that does pick up a bit, going above $3bn per year after that date. But, said Iles, overall it’s much more manageable – although it would come back into play if there’s a big slump in oil prices. Last but not least, Oman is committed to selling off a series of state-owned enterprises. Some 35 have been put up for sale. This would have the advantage of energising the Muscat Securities Market, as well as helping to secure new funding from the proceeds of the sales. Whether it will be able to boost the government’s balance sheet significantly in an uncertain regional and global market is another question.