January 7, 2005

THE SULTANATE OF OMAN'S BUDGET FOR 2005 COVERS THE ESSENTIAL COMMITMENTS AND DEVELOPMENTS IN THE FIELDS OF SCIENCE, HEALTH SERVICES, ROADS, SEWAGE NETWORKS AND WATER NETWORK EXTENSION. PROVIDING DECENT HOMES THROUGH THE IMPLEMENTATION OF MORE HOUSING PROJECTS. Sultan Qaboos bin Said has issued two royal decrees. Royal Decree No.1/2005 endorses the state general budget for the fiscal year 2005, in accordance with the attached tables. Article two of the decree says that all ministries and government departments shall implement provisions of this decree, each within the scope of its specialisations. Royal Decree No. 2/2005 grants concession to explore and exploit hydrocarbon at square (6) in the Sultanate of Oman, according to its definition in the agreement on expanding and unifying the aforementioned concession agreement as per the texts of this agreement. Article two endorses the agreement on expanding and unifying the concession agreement, the partnership agreement, the operation agreement and the amended copy of the articles of associations of Petroleum Development Oman (PDO) LLC company. Article three says that any future amendments of the partnership agreement, the operation agreement or the articles of the association of PDO company shall be effective on approval of the concerned parties and after being ratified by the government of the Sultanate of Oman if that is required, in accordance with the provisions of the Royal Decree No. 48/76 and its amendments. Such an amendment shall not require issuance of a royal decree. Article four says the texts of the agreement on expanding and unifying the concession agreement, the partnership agreement, the operation agreement and the articles of association of the PDO shall come into force regardless of any conflicting provisions in laws, regulations or directives enforced in the Sultanate of Oman. The decree comes into force from its date of issue. Ahmed bin Abdulnabi Macki, minister of national economy and deputy chairman of the Financial Affairs and Energy Resources Council, unveiled a cautious, prudent and fundamentally tough budget for the year 2005. The RO540 million deficit budget reveals that the government's fiscal plans are to essentially rationalise government expenditure and augment revenues. The deficit represents 17 per cent of total revenues and six per cent of gross domestic product (GDP). The excess of planned aggregate expenditure of RO3,680 million over budgeted revenue receipts of RO3,140 million leaves a deficit of RO540 million, as against a deficit of RO801 million (revised) in the previous budget. The budget deficit for the year 2004 was initially estimated at lower than RO500 million. However, it was revised to RO801 million as the government had allocated an additional RO301 million to the public expenditure during the year. More significantly, oil revenues recorded an increase of RO1.252 billion in 2004, wiping out the entire budget deficit for the year 2004. The additional revenue has covered the initially estimated deficit of RO500 million, RO301 million arisen out of additional allocations and payment of foreign loans amounting to RO207 million. The current year's budget is based on an average price of $23 a barrel for Oman crude. Oil production for the year 2005 has been estimated at 753,000bpd (barrels per day). Year 2005 is the last year of the 6th current Five-Year Plan (2001-2005). The budget 2005 shows a 7.4 per cent increase in expenditure and 7.3 per cent increase in revenues. The budgeted (initially) aggregate revenue and expenditure for the year 2004 were RO2,925 million and RO3,425 million, respectively. During the year, substantial rise in oil prices has boosted revenues and expenditure. Presenting the state general budget to the nation, Macki said: "The thrust of the budget is to diversify government resources and reduce dependence on oil revenues as the main source of budget. As it is evident from the previous budgets, the objective of the government is nation-wide development. "Oman's fiscal policies are based on prudent principles. Oil price estimate for the year has been made after taking necessary precautions against potential price fluctuations that might occur in the future." The minister said oil production for the year 2005 has been estimated lower at 753,000bpd as against 909,000bpd estimated in the Five-Year plan. Oil revenue budgeted for the current year accounts for 65 per cent of total revenues. Gas revenue and current and capital revenues constitute nine per cent and 26 per cent, respectively. Technically, the budget is tough in character as it has been a Herculean task for the government to estimate oil production. Despite significant fall in oil production, the oil revenue recorded substantial increase because of increase in prices. The decline in Oman's oil production has been attributed to a drastic fall in the daily output of Petroleum Development Oman. PDO's daily output fell drastically from 840,000 barrels in 2000 to 656,000 barrels in 2004. Though the budget for the year 2004 was based on an average price of $21, a barrel for Oman crude, the actual price realised during the year was $33.9, a barrel. The increase in Oman crude prices has added additional oil returns of RO291 million in 2004. The additional revenues, Macki said, will be utilised for increasing government's resources and reducing external debt. The current external debt of Oman stands at RO1.3 billion. Better than expected demand for oil in the international market coupled with tight supplies helped maintain oil prices at relatively stronger levels in 2004. Now, Opec and other producers are understood to be producing at or near full capacity. The budget exhibits the government's commitment to the process of economic and structural policy reforms. The government has allocated RO1.148 billion for defence and national security, accounting for 31 per cent of total expenditure and over 36 per cent of total revenues. It has allocated RO1.356 billion for civil ministries' expenditure. For oil and gas production RO168 million has been allocated. As the budget depends mainly on oil revenues, necessary precautions against price fluctuations, which characterise the international oil market, are instituted from time-to-time. Macki said the Sultanate follows realistic and flexible policies as far as estimating oil production, price and revenues are concerned. As in the past, the budget has given much importance to educational and health sectors as it allocates RO627 million for education and health sectors. Human resources development is an area where the government has been very keen in creating a competitive national workforce. The current year's budget allocations include RO546 million for human resources development, representing 15 per cent of the total expenditure. A total revamping in the basic education systems has already been proposed, Macki added. As far as the government's support to the private sector, the budget allocates soft loan of RO66 million, for sectors such as agriculture and fisheries, industry, tourism and education. Further, necessary support has also been provided to Oman Housing Bank and Oman Development Bank to finance sewage projects in Muscat and Salalah. The current year's budget deficit will be financed through foreign borrowings of RO150 million and RO390 million from the State General Reserve Fund. Significant amount of allocations for building roads have been among major highlights of the current plan. Allocations for new projects during the last year of the Five-Year Plan (2005) amounted to RO238 million. Sumail hospital, Nizwa/Thamrait road, sewage networks in nine towns, water network extension at Al Khoudh/Al Hail, schools, Bowshar/Al Amerat road, Al Ashqarah/Shana road and road network in Masirah are the new projects expected to be completed in 2005. As the expenditure continues to rise, the budget reveals that it is aimed at augmenting the economic growth. Though the budget is expansionary, it is cautious in character. Macki said the fall in the value of dollar has had negative impacts on Oman's oil export earnings and revenues. As far as the non-oil exports and re-exports from Oman are concerned, the dollar fall provides a price-advantage-stimulus for non-US markets. On the other hand, imports from non-US economies to Oman particularly from European Union economies emerge costlier. The minister said the effects of dollar decline leads to costlier imports of food, pharmaceuticals, machinery, etc. from Europe and other non-US economies. The falling dollar is a matter of continuing concern, as there are possibilities of potential cost escalation impact on mega projects. In general, possibilities of inflationary pressures cannot be ruled out. Macki said, in general, dollar had been on the decline against other major international currencies of the world, significantly the euro, for a long time. As the Omani rial is pegged to the dollar, any fall in the value of dollar will have its corresponding impact on rial. "Despite the negative impacts of dollar fall on the domestic economy, the government with its prudent fiscal, monetary and liberal trade policies, keep the inflationary pressures in check," Macki added. As far as the much-awaited IPO of Omantel, Macki said, "The government hopes to launch the public issue by the first half of this year." Despite the government re-assumed the management of Seeb and Salalah airports from the private sector, the minister said: "The proposed expansion of these airports is on track." It was after nearly three years of private sector control, the government re-assumed the management of Seeb and Salalah airports on November 17, 2004. Oman Airports Management Company (OAMC) had been managing the two airports since January 21, 2002 under a 25-year concession agreement with the government. The much-publicised privatisation contact was awarded to a consortium made up of Suhail Bahwan Group, British Airport Authority Plc and ABB through a competitive tender process in September 2001. Though many options were explored, the government and the partners of OAMC could not to reach an agreement on the financial basis for the development of a new terminal at Seeb International Airport. BAA and its partners were disappointed that despite considerable success and commitment to delivering new airport infrastructure, it was not possible to reach an agreement. Macki said the government would endeavour to make the Seeb International Airport one of the Middle East's most modern airports in the next few years. By 2020, the proposed terminal at Seeb would have a capacity to handle 12 million passengers yearly. The capacity of Salalah Airport would also be expanded to nearly two million passengers. Macki, however said: "The government will not reverse its initiatives to privatise airports." Despite the International Monetary Fund call to consider adopting a broad-based value-added tax on imports and locally produced goods and services together with the introduction of personal income tax, Macki said, "The government has no plans so far to levy personal income tax." As far as the value added tax (VAT), the AGCC committee for financial and economic cooperation has already asked the AGCC secretariat to carry out a study on VAT, the minister said. The move is believed to be a cautious step towards applying taxes on sales. A proposal to privatise Oman's postal sector is under study. Terming Oman's budgets as growth-oriented, Macki said the economy grew 12.5 per cent in 2004 as against 6.9 per cent in 2003. Exports and imports (actual) in 2004 are expected to register 14.2 per cent and 20 per cent growth, respectively. The trade balance surplus is expected to increase by 6.1 per cent. Budget for 2005 is expected to give fresh boost to agriculture, industry and social and physical infrastructure. "The Sultanate has already made big strides towards economic and structural policy reforms and established flexible investment and tax regimes to attract foreign investments, allowing free repatriation of capital and profits," Macki said. Oman is already a member of the World Trade Organisation (WTO). Macki said the prevailing regulatory and legal frameworks have been adjusted to conform to the requirements of the WTO and the government will continue the process of such adjustments as and when necessary. Ahmed bin Abdulnabi Macki, minister of national economy and deputy chairman of the Financial Affairs and Energy Resources Council, unveiled the state general budget for the year 2005 on Sunday the 2nd of January 2005. The excess of planned aggregate expenditure of RO3,680 million over budgeted revenue receipts of RO3,140 million, left a higher deficit of RO540 million in 2005, as against a deficit of RO500 million estimated in the previous budget. The budget showcased the government's commitment to the process of economic and structural policy reforms. The budgeted aggregate revenue and expenditure for the year 2004 were RO2,925 million and RO3,425 million, respectively. "The government's fiscal plans are based on prudent principles, mainly adopting sustainable policies through rationalising government expenditure and augmenting revenues, especially the non-oil revenues, and of course, building up of financial reserves," Macki told the Times of Oman. The minister said as the state general budget depends mainly on oil revenues, necessary precautions against price fluctuations, which characterise the international oil market, are instituted from time-to-time. Macki said the Sultanate follows realistic and flexible policies as far as estimating oil production, price and revenues are concerned. The government had estimated the price for the year 2004 at $21 a barrel. The price for Oman crude estimated for the year 2005 is $23 a barrel. This estimates are made after taking into consideration necessary precautions against price fluctuations that might occur. As the expenditure continues to rise, the budget reveals that it is aimed at augmenting the economic growth. Though the budget is expansionary, it is cautious in character. Oman is targeting a lower oil output of about 750,000 barrels a day for the year 2005. The year 2005 is the last year of the current Five-Year Plan (2001-2005). The plan had projected an average annual growth rate of four per cent at constant prices. It is expected that the target would be comfortably met during the current plan. The price for Oman crude (February delivery) is quoted at $35.59, a barrel in the international oil market. A sharp increase in oil prices brought windfall profits for Oman in 2004. Oman crude realised an average price of $33.9 a barrel last year compared with the budgeted price of $21 a barrel, an increase of $12.9 a barrel. The government had increased public expenditure by another RO301 million during the year, resulting in a higher deficit of RO801million as against the budgeted deficit of RO500 million. Though the oil revenues were estimated at RO1.654 billion, it grew by a whopping RO1.252 billion to RO2.906 billion. Thus the total actual revenues rose by nearly 43 per cent to RO4.177 billion as against the estimated RO2.925 billion. Oil revenues contributed more than 69.5 per cent of total income in 2004. From the additional revenues of RO1.252 billion, the total exposure is RO961 million, comprising budgeted deficit of RO500, additional allocations of RO301 million and payment of foreign debts of RO207 million. The remaining surplus amount is expected to be reserved as additional resources for the government. The actual public expenditures were RO3.726 billion. The increased revenues indicate that the government's estimates of RO2.925 billion revenues were conservative and prudent, based on a conservative oil price forecast of $21 per barrel, significantly lesser than the price realised during the year. The record revenues achieved in 2004 will help government continue its ongoing economic reform programmes and other development initiatives. Oman's external debt position comfortably stands at RO1.3 billion as against staggering debts of many other countries in the region. The RO540 million deficit budget reveals that the government's fiscal plans are to essentially rationalise government expenditure and augment revenues. The deficit represents 17 per cent of total revenues and six per cent of gross domestic product (GDP). Despite a negative GDP growth projected for the year 2004, it grew by 12.5 per cent to more than RO9.385 billion as against RO8.343 billion in 2003. The excess of planned aggregate expenditure of RO3,680 million over budgeted revenue receipts of RO3,140 million leaves a deficit of RO540 million for 2005. The 2005 current expenditure of RO2.747 billion accounts for 75 per cent of total expenditures, with investment spending (RO867 million) and support to private sector (RO66 million) taking the remaining 25 per cent. The oil price estimated for 2005 budget at $23 a barrel also seems lower than the expected actual realisation. As for the developmental programmes in the Sixth Five-Year Plan, the total allocations for implementation of projects in 2004 amounted to RO616.8 million as against RO214.7 million allocated in the plan. The net additions and amendments to the plan as at the end of December 2004 amounted to RO983.6 million. Major sectors that received these allocations as at the end of December 2004 were roads (RO304.5 million), ports (RO139.7 million), power (112.3 million), water (RO134.6 million), housing (RO43.2 million), health (RO29.3 million), education (RO20.6 million) and youth centres (RO11.2 million). As of 2004-end, 965 housing units costing RO10.4 million were under construction in different areas of Oman. The increase in oil prices had ensured record revenues and exports for most Arab Gulf Cooperation Council states last year. Record oil prices pushed up by geo-political compulsions and attacks on oil facilities in Iraq are believed to be promising another buoyant period in 2005 for most oil producers in the region. Oman enjoys a stable political, economic, and social system, which is enhanced by the excellent relationships between the Sultanate and neighboring countries. His Majesty, Sultan Qaboos, encourages market-orientated policies and private sector development as the mechanism for prosperity and growth. Commercial export of oil began in 1967 and since Sultan Qaboos' accession to the throne in 1970, many more oil fields have been found and developed. In June 1999, Petroleum Development Oman (PDO) discovered a new oil field in southern Oman after drilling and testing three wells which demonstrated the commercial viability of the reservoir. This is the most significant find in five years. There is currently only one oil refinery in the Sultanate, which is located at Mina al Fahal. Plans are now underway to build a refinery at Sohar with an associated polypropylene programme. The Sohar Refinery is expected to produce 75,000 barrels/day. The basic engineering design has been finished and completion of the whole project is anticipated for the end of 2003, with beneficial operation achieved in early 2004. Since the slump in oil prices in 1998/99, Oman has made active plans to diversify its economy and is placing a greater emphasis on other areas of industry, such as tourism and liquid natural gas. Oman's Basic Statute of the State expresses in Article 11, that, "The National Economy is based on justice and the principles of a free economy." The Vision Conference: Oman 2020, held in June 1995, has developed the following aims with regard to securing Oman's future prosperity and growth: To have economic and financial stability To reshape the role of the Government in the economy and to broaden private sector participation To diversify the economic base and sources of national income To globalise the Omani economy To upgrade the skills of the Omani workforce and develop human resources By 2020, it is expected that the economy will not be reliant on oil, but rather, will have diversified into non-oil sectors, raising higher levels of savings and investments The crude oil sector's share of GDP is estimated to drop to 9% in 2020, compared with 41% in 1996 The gas sector is expected to contribute around 10% to GDP, compared with less than 1% in 1996 The non-oil industrial sector's contribution is expected to increase from 7.5% to 29%.