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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. The budget was prepared in light of the persistent financial and economic challenges resulting from the COVID-19 pandemic and decline in oil prices, including the agreement of the Petroleum Exporting Countries (OPEC +) to reduce crude oil production due to the decline in global growth and demand for oil, in addition to other commercial and geopolitical challenges.
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.
Actual revenue in 2020
The actual revenue realised in 2020 was OMR 8.464 billion, which represents c. 21% decrease (OMR 1 billion) compared to the 2020 budget estimates of OMR 10.7 billion. This revenue decrease can mainly be attributed to the following factors:
- Oil Revenues: In light of the global pandemic and the economic circumstances the world had to endure, global demand for oil products had decreased significantly. Oil revenues decreased by OMR 1.1 billion due to the decrease in the average oil price below the budgeted price in the FY20, by 10 US dollars per barrel. This was further reflected in the lower gas revenue as proceeds from sale of gas fell by OMR 500 million showing an overall reduction of average gas prices and a lower quantity supplied.
- Non-hydrocarbon Revenues: Total non-hydrocarbon revenues in 2020 were down by c. 20% compared to 2020 budget estimates (i.e. OMR 600 million). This mainly relates to the relief supplied by the government to the economy industries to help the businesses sustain the economic downturn caused by COVID-19. The relief measures included waiving collection of taxes from tourism tax, municipality fees and taxes, rent due on factories operating in industrial areas, penalty fines on expired labor cards and the reduction of shipping and handling fees.
Expenditure
Total expenditure in FY21 is estimated at OMR 10.88 billion, a decrease of OMR 2.32 billion (18% lower) as compared to total expenditure projected in the 2020 budget. This decrease in expenditure can be mainly attributed to lower development expenses, a decrease of 31% from 2020 budget estimates and lower oil and gas expenses (65% decrease). This is further attributable to lower defense and security expenditure and a lower civil ministries expenditure.
Expenditure of ministries and government units accounts for OMR 4.075 billion (37% of total budgeted expenditure for 2020). The biggest current expense for government units relates to payroll of government employees. Further, investment spending is estimated at OMR 900 million, down from OMR 1.3 billion. Loan interest expenditure has been projected to increase by c. 40% which is mainly on account of external borrowing obtained to fund the budget deficit and to maintain economic development.
Finally, following the incorporation of Economic Development of Oman (“EDO”), all expenses relating to the operation of Petroleum Development of Oman (“PDO”) has been allocated to EDO hence shouldering off a huge expense from the government budget.
Actual expenditure in 2020
The actual expenditure in FY 2020 was OMR 12.66 billion, a 4% decrease compared to the 2020 projection. This decrease can mainly be attributed to the following factors:
- Deduction of 10% from the approved budget for civil, military and security units
- Reducing administrative and operating expenses of government companies by not less than 10%
- Reducing approved liquidity for development projects of ministries and government units by not less than 10%
- Suspending the execution of most of the ongoing projects of government companies
Deficit
The actual deficit in 2020 was c.OMR 4.196 billion, while the 2021 budget estimates the deficit at OMR 2.24 billion.
Following the spike in the actual deficit in 2016 at c. OMR 5.3 billion (initially budgeted at OMR 3.3 billion), the deficit appears to be managed and is showing recovery. The estimated deficit in 2021 is lower than the deficit of 2020 by c. 10%, or OMR 260 million.
Deficit financing
The 2021 budget deficit is expected to be covered by external and domestic borrowing c.73%, while the balance c.27% will be covered by drawing on the reserves. This is in line with the Government's guidelines to maintain the sovereign reserve funds and to rely upon borrowing to finance any deficit.
Credit Rating
The three credit rating agencies described in the statement below downgraded the Sultanate's credit rating during the period (from 2014 to October 2020) from the safe investment category in 2014 to the high-risk investment category in 2020. The reasons behind the downgrade are due to the drop in oil prices and their impact on the continuation of the budget deficit in the past six years and the high indebtedness to that peaked to record levels.
In addition, the continuing expected effects of the COVID-19 pandemic on the financial situation of the Sultanate is pressuring heavily on the state fiscal balance.
The government, in response, has incorporated EDO and allocated related expenses to the oil and gas industry to EDO. This is seen as a positive step towards stabilising the state budget and would, in the long-term, strengthen the state’s credit rating.
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% |
The financial framework of the 10th FDP aims to achieve the following:
- Achieving financial balance by implementing measures and initiatives aimed at controlling public finances
- Improving the credit rating of the Sultanate to enhance investment by controlling deficit and public debt
- Increasing government revenues by raising the contribution of non-oil revenues
- Continuing to implement measures aimed at rationalising public spending while the government continues to provide its services with greater efficiency
- Enhance social protection system to protect low-income people from any consequences result from implementing the proposed measures
- Maintaining the level of spending on basic services, including education, health, housing and social care and insurance
- Setting financial and investment incentives for the governorates of the Sultanate to enable each governorate to exploit its advantages in order to achieve sustainable development, stimulate trade and create job opportunities for citizens
- Stimulating economic diversification and developing economic sectors by finding additional means of financing for some productive projects and raising the level of partnership between the public and private sectors.
- Commitment to transfer the proceeds of selling 20 thousand barrels per day of oil during the years of the plan to be used to pay part of the loan installments.
The following table illustrates the financial framework of the 10th FDP:
| Particular | 2021 | 2022 | 2023 | 2024 | 2025 |
Average daily production (thousand barrels) |
960 | 1,107 | 1,133 | 1,140 | 1,140 |
| Average Price (USD / barrel) | 45 | 45 | 50 | 50 | 50 |
| Total revenue | 8,640 | 9,490 | 10,815 | 11,315 | 11,500 |
| Total public spending | 10,880 | 11,150 | 11,420 | 11,480 | 11,435 |
| Surplus / (deficit) | (2,240) | (1,660) | (605) | (165) | 65 |
The 10th FDP aims to achieve a surplus of OMR 65 million in 2025 under the current trend and the fiscal measures taken by the government.
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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Director - Tax Reporting & Strategy Leader for Oman, PwC Middle East
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