Oman economy to remain stable

Overall, inflation is expected to average no more than 0.5 per cent in 2004-05, the report said and added, "While this will be countered largely by the maintenance of the government subsidy system, which will continue to hold the price of a range of core goods and services in check." Recent trends have also created low inflationary expectations, further constraining price growth, the report added.

While the report pointed out to little prospect of the fixed exchange rate of the Omani riyal ($1=OR0.385) altering, it indicated the peg would be tested in the event of a more prolonged and steeper fall in international oil prices. However, it said, "The strength of the Central Bank's foreign assets, its access to external support and its control over local interest rates leave it well placed to mount a robust defence." Export earnings are expected to fall by around 20 per cent to $9.4 billion in 2004 from an estimated $11.7 billion in 2003, as energy earnings decline sharply, the report said, "Despite a pick-up in non-energy revenue in 2005, a further fall in energy earnings will see total export revenue ease by a further eight per cent to $8.6 billion."

The import bill will continue to rise, however, driven by robust domestic demand for inputs for the development of Oman's gas resources, the industrial expansion programme and remedial work in the oil sector. This will boost import spending by an average of close to 7 per cent a year over the forecast period. The rise in import spending and decline in export earnings will see the trade surplus fall from an estimated $6 billion in last year to around $3.4 billioni this year and $2.2 billion next year.

The problems afflicting the Omani oil sector overshadow the sultanate's outlook, with output set to decline throughout the forecast period. Oil prices are also projected to fall, pushing the current and fiscal accounts into deficit and slowing growth. The downturn comes after several years of strong oil earnings. However, the past oil earnings have allowed the government to add to its reserves and have left it relatively well placed to weather the fall in oil revenue over the near term. Problems in the oil sector will nevertheless add additional urgency to the economic reform programme, focused primarily on the development of gas-driven industrial projects as well as expanding the role of the private sector.

The government's economic reform programme will take on greater urgency over the forecast period, as declining oil prices and weakening oil production depress economic growth and push the budget into deficit, reinforcing the necessity of structural change. In particular, Oman will seek to accelerate its economic diversification programme, focused primarily on the development of its gas resources.

Prospects for the service sector are strong, with growth of the Salalah container port set to continue and spending on new tourism ventures already under way. These projects will steadily reduce the economy's reliance on oil earnings, although by the end of the forecast period oil will still generate well over half of government revenue and export earnings.

The report forecasts the real economic growth to be poor over the forecast period, slowed primarily by problems within the Omani oil sector which will see production fall sharply in 2004 and ease further in 2005. This will lead to further falls in industrial production and export volumes, much as it did last year. The domestic demand is projected to be robust. Much of the industrial development will be import-dependent, however, which will act as a drag on the pace of GDP growth as import volumes pick up. Moreover, government spending growth is likely to weaken over the forecast period, as falling oil production and declining prices put the fiscal balance under growing pressure, particularly in 2005.

The report also says that the private-sector consumption growth is also likely to slow as government spending weakens and confidence declines. Overall, it projects a real growth of 0.3 per cent in this year, rising to around 0.9 per cent next year. The report assumes that the benchmark dated Brent Blend to decline sharply from the average $28.7/barrel recorded last year to $22.4/barrel this year and $20/barrel next year.