Oman: Oil price decline adds pressure to reduce subsidies

KUWAIT CITY: Oman’s government is likely to start cutting some state subsidies next year as the decline in global oil prices pressures its finances, Minister for Financial Affairs Darwish Al-Balushi said.
The country’s original budget plan for 2014 assumed the government would run a deficit with an average oil price of $85 a barrel. For most of this year the oil price has been much higher, but in the last few months it has dropped steeply to as low as $82.
Oman has been considering ways to reform its costly and sometimes wasteful subsidy system, though reductions in spending would be politically sensitive. Asked by Reuters whether cuts were likely next year, Al-Balushi said.
“Yes, I think the time is probable and especially with the decline in oil prices.
“I think the people would be more understanding now, more accepting. They realize that this was natural wealth that is being overused, wasted...”
In an interview on the sidelines of a meeting of Gulf finance ministers and central bank governors in Kuwait, Al-Balushi also said the current subsidy system was ineffective because it did not focus on poorer people.
“Everybody gets, people who deserve and people who do not. I think if we rationalize it and use the saving for better priorities, that will definitely have a return for the people of Oman.”
The subsidy reforms will proceed gradually and make sure people who deserve state aid are not affected, Al-Balushi said.
He did not give details of which subsidies would be cut, but in the past has described petrol as an obvious target.
Omani officials have said the government may return to the international debt market for the first time since 1997 to cover a budget deficit.
Balushi said, however, that the government’s priority was to make its first issue of Islamic bonds for the domestic market.
“Sukuk for the local market is I would say more clear at the moment, and we might be doing it during the first quarter of next year.”
Omani bankers say a rial-denominated sukuk issue would be a boost for the country’s fledgling Islamic finance industry, giving sharia-compliant banks a badly needed tool with which to manage their liquidity.
The sukuk issue might be worth the equivalent of around $300 million or $400 million, Balushi said; the government has been considering maturities of five and seven years.
“We want to create a benchmark. We are not under pressure to go and take what comes. No, we look at more options and see which one will serve the government objective and also the economic objective and the financial market.”
The international bond issue is expected to follow later next year and its size “will depend on our requirement based on our 2015 budget,” Balushi said.
Oman’s original 2014 budget plan envisaged state spending of 13.5 billion rials ($35.1 billion), up just 5 percent from the original 2013 budget, which envisaged a 29 percent leap from 2012.
Al-Balushi said spending in the 2015 budget plan would be around the same level as the 2014 budget or marginally higher. He said there was no plan to cut spending on the big infrastructure projects which Oman is building to diversify its economy beyond oil.
“For years we have been growing at a relatively fast pace and I think we will slow down. But having said that, it is not our intention at the moment to cut expenditure where we would affect especially development projects for infrastructure,” he said.
“There is no intention unless if the trend with the oil price continues declining downwards. It is not clear at the moment if oil prices will sustain and at which level.
“We do not want to come up with a policy response that will create nothing but more confusion for our programs. We want to do it gradually, in a steady manner.”