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Oman: Budget 2021 & 10th Five year development plan (2021-2025) - continued focus on diversification & maintaining deficit
05 January, 2021
His Majesty Sultan Haitham bin Tarik issued two Royal Decrees (“RD”) on 1 January 2021, published in the Official Gazette on 3 January 2021, promulgating the Tenth Five-year Development Plan (“10th FDP”) (RD 1/2021) and the 2021 State Budget (RD 2/2021). In this News Alert, we are setting out the key features of the 2021 State Budget and the 10th FDP.
Snapshot of the key features
Oman Budget 2021
Royal Decree (“RD”) No.2/2021 was issued on 1 January 2021, and published in the Official Gazette dated 3 January 2021, promulgating the State’s Budget for the year 2021. Below are the key features of the 2021 budget :
| Projected Revenue | OMR 8.6 billion |
| Projected Expenditure | OMR 10.8 billion |
| Projected deficit | OMR 2.2 billion |
| Projected income from the Oman Investment Authority | OMR 1.2 to 1.4 billion |
| Projected investments by the OIA | OMR 2.9 billion |
| Projected income from Energy Development Oman (“EDO”) | OMR 2.3 billion |
| Projected average oil price | $45 |
Although the 2021 budget is predicated on a prudent average oil price of $45/barrel, the forecasted deficit is the lowest since the financial crisis in year 2015. The budget is based on guaranteeing the sustainability of basic social services such as health, housing, education, & social security, and to ensure spending is maintained at 40% for these services.
Tenth Five-years Development Plan (2021-2015) ( “10th FDP”)
RD No.1/2021 was issued on 1 January 2021, and published in the official gazette dated 3 January 2021, promulgating the Tenth Five-year Development Plan (2021-2015) (“10th FDP”). The 10th FDP is an optimistic plan made on the basis of the following :
- promoting sustainable human development
- stimulating economic activity
- expanding the economic diversification base
- developing the economic environment
- achieving fiscal sustainability
- achieving a balanced development for the governorates and maintain economic diversification in different sectors.
The 10th FDP is expected to generate 135,000 job opportunities, with an average of 27,000 job opportunities annually over the period of the plan. It is also anticipated that it will result in gradual decrease in deficit to reach 1.7% by year 2024 and achieve a surplus of OMR 65 million by year 2025.
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Overview
Oman Budget 2021 (RD 2/2021)
The FY 2021 Oman budget represents the first year of the Tenth Five-Year Development Plan (2021-2025) (“the 10th FDP”), which paves the way to implement Oman Vision 2040 development objectives.
It has been prepared taking into account Oman Vision 2040 priorities and fiscal framework and objectives to achieve fiscal sustainability, and reduce the ratio of the size of public debt to GDP. Also, to achieve a level of economic growth that contributes to the employment of Omani nationals, and continue to enhance the role of private sector institutions in the development process, maintaining the stability of inflation rates in a manner that preserves the level of per capita income.
In order to achieve fiscal balance, there has been a change in the strategies used to deal with the persisting conditions to find ways to reduce general expenditure. This includes issuing financial publications with the aim of accelerating plans for a reduction in general expenditure, boosting non-oil revenue by revisiting fees and taxes, governance of state-owned companies by transferring them to OIA, and endorsing the Medium Term Fiscal Plan (2020-2024).
2021 Budget Objectives
The State's general budget for 2021 is based on:
- Setting a ceiling for the budget of each government authority so that it does not exceed the revised budget in 2020;
- Implementing measures aimed at rationalising spending and increasing its efficiency;
- Achieving the first stage of financial measures towards achieving fiscal sustainability;
- Controlling the deficit and aim to record a budget surplus by the year 2025 as per the tenth five-year plan;
- Completing the transformation to implement the program and performance budget through the expansion of the government units implementing the project; and,
- Seeking innovative means to finance government projects and services, mainly through partnership between the public and private sector.
The budget sets a prudent and measured tone in both its revenue and expenditure projections with a deficit of OMR 2.2 billion, which is considered the lowest since the financial crisis in year 2015, although on the assumed low average oil price of $45. This is mainly attributable to the transfer of the oil and gas sector expenditure burden, estimated at OMR 2.3 billion to the newly formed state-owned company Energy Development Oman SAOC (“EDO”).
Revenue is budgeted to decrease by 19% to OMR 8.6 billion (cf. FY20 OMR 10.7 billion), with oil and gas revenue representing c.63% (OMR 5.4 billion). The FY21 revenue forecast assumes a precautionary average oil price of $45 per barrel (cf. FY20 $58 per barrel), which is below the actual realised oil price in FY20 was $48 per barrel.
Expenditure is budgeted to decrease by 18% to OMR 10.8 billion (cf. FY20 OMR 13.2 billion), with a commitment to complete a number of strategic infrastructure projects to help incentivise economic growth.
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Further insights Oman Budget 2021
- Revenue
- Actual revenue in 2020
- Expenditure
- Actual expenditure in 2020
- Deficit
- Deficit financing
- Credit Rating
Revenue
Oman’s 2021 budget estimates total revenues at OMR 8.64 billion, an increase of 2% compared to actual revenues in 2020. Oil and gas revenues comprise a percentage of 63% at OMR 5.42 billion and the remaining OMR 3.22 billion is estimated from non-oil and gas revenues.
Revenue estimates are based on the following considerations:
- Oil price assumed at $45 per barrel;
- Transferring the proceeds of selling 20 thousand barrels per day of oil to the Oil Reserve Fund account to be used to repay part of the loan installments that will be due in the coming years;
- Oman’s commitment to cut oil production (i.e. 960k barrels/day) in line with OPEC’s decision to reduce production volumes. This commitment quota is effective for the period starting from May 2020 to April 2022; and
- Revenue generated from the estimated sale of gas as per consumption expected for the year 2021.
Overview
Tenth Five-Year Development Plan (2021-2025)- (RD 1/2021) (10th FDP)
The 10th FDP presents the first executive plan for paving the way to implement vision 2040. It considered as a starting point for achieving fiscal sustainability and economic growth. The plan focuses on arranging spending priorities in light of the various changes in the local and global economic situation to ensure high economic growth rates.
Objectives of the 10th FDP:
- Promote sustainable human development and preserve human capital
- Achieve a balanced development for the governorates and increasing income of citizens
- Expand the base of economic diversification and developing productive structures mechanisms and programs
- Develop the macroeconomic environment and achieving financial sustainability
- Stimulate economic activity in partnership with the private sector and supporting the role of small and medium enterprises
Main sectors targeted for economic diversifications as per 10th FDP:
The plan focuses on economic diversification mechanisms and programs and increasing the contribution of non-oil sectors and activities. The plan sets a target for growth in the gross domestic product of non-oil activities, by focusing on sectors such as manufacturing industries with high technological content, agriculture and fisheries, fish farming, agricultural and food processing, transport, tourism,storage and logistics.
The table below illustrates the expected contribution from non oil activity by the end of 10th FDP:
| Sector | Current contribution to GDP | Contribution expected by the end of 10th FDP |
| Transformative Industries | 10.8% | 12.2% |
| Transportation and logistics | 6.4% | 7.5% |
| Education | 4.9% | 6.2% |
| Tourism | 2.5% | 3% |
| Fisheries Wealth | 0.9% | 2% |
| Mining | 0.5% | 0.7% |
Key developments during FY 2020
In 2020, the world has faced a global health crisis with the COVID-19 pandemic, alongside a sharp fall in oil prices during the year. The dual shock of these two factors resulted in a severe economic impact and business disruption worldwide, which is expected to take significant amount of time to recover. Like the vast majority of countries, Oman attempted to control the spread of COVID-19 by enforcing phased lockdowns, travel restrictions, and temporary closure of businesses, which in turn caused major slowdown of the economic growth.
Further, at a local level, 2020 marked a turning point in the history of Oman with the demise of His Majesty Sultan Qaboos bin Said, the former Sultan of Oman who ruled Oman for approximately 50 years. His Majesty Sultan Haitham bin Tarik took over the ruling of the country effective from 11 January 2020. He was formally the Minister of Heritage and Culture, and he was leading and supervising “vision 2040” initiative.
Despite of the economic downturn caused by the pandemic, 2020 witnessed massive changes to the business, legal, and tax frameworks in the country, forming a continuation of development steps, set forth by the former Sultan in previous years with the aim of achieving, among other objectives, fiscal sustainability & economy diversification. Under His Majesty’s administration, a number of key strategic developments took place in 2020 such as restructuring of the government, removal of Oman from the EU blacklist , the enforcement of the MediumTerm Fiscal Plan (MTFP) for the years 2020-2024, and introduction of the long awaited VAT law.
The Takeaway
Although of the economic challenges resulted from dual shock of COVID-19 pandemic and fall in oil price, Oman’s 2021 State budget maintains a focus on economic diversification and the need to manage expenditure to ensure the deficit is maintained within sustainable levels, whilst still providing sufficient investment to promote economic stimulus and growth.
Together with the 10th FDP, the budget is paving the roadmap to Oman’s 2040 vision which is based on four pillars :
- Creating wealth through economic diversification and private sector partnership
- Ensuring balanced governorates development
- Preserving environment sustainability
- Building world-class Infrastructure and livable cities
The budget indicates that the Government is putting efforts to improve Oman’s credit rating by reducing public debt and containing the deficit within sustainable levels.
Strategic steps to diversify the economy, such as widening the tax base scope and outsourcing of various Government services to the private sector are a welcome sign, as is the continued commitment to targeted investment to boost employment and social development.
Further, steps taken to improve the business environment and investment climate, such as the Foreign Capital Investment Law, Bankruptcy Law, and labour law reforms should facilitate an increase in foreign direct investment (FDI) which is expected to boost the economy, in addition to the key government reforms initiated that are expected to bear fruitful results in years to come.
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