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Oman's GDP surges 13pc; inflation soars to10.5pc

MUSCAT - Oman's GDP grew by an impressive 13 per cent last year with a significant contribution from the non-oil sectors, but inflation remained an issue of major concern, according to the newly-published Central Bank of Oman (CBO) annual report for 2006.

It said besides robust economic growth, the year was marked by generation of a vast number of employment opportunities, notable progress in economic diversification, sustained surpluses in the fiscal and balance of payments positions, declining levels of public debt, comfortable levels of foreign exchange reserves, and a sound and resilient banking system.

"Most notably, the 12.9 per cent GDP growth in 2007 was driven by a significant acceleration in non-oil activities. Non-petroleum activities witnessed 18.3 per cent growth in 2007, and the share of non-petroleum GDP in total GDP was as high as 56 per cent," the report said.

The high levels of growth, it stressed, was particularly remarkable because of its "employment-intensity, which has also facilitated better distribution of the benefits of growth in the economy."

Citing data released by the Public Authority for Social Insurance (Pasi), the report said employment of Omanis in the private sector increased by 15.3 per cent during the year, adding:

"In view of the high demand for labour during this robust economic growth phase, there was an unprecedented increase in the number of expatriate labour by 213,659 in the private sector over the two-year period 2006-2007 to a total of 638,447 at the end of 2007 - which increased further to 680,099 at the end of March 2008.

Employment growth for expatriates, thus, remained very high at 25 percent in 2007, over and above a 20.2 per cent growth recorded in 2006.

"While such high dependence on expatriate labour was an unavoidable necessity for sustaining high growth and economic diversification, it had its adverse implications for the economy as a whole in terms of pressure on inflation from the wage-rent spiral, as well as large increase in outflow of foreign exchange from the country in the form of remittances," CBO observed.

It said rising price levels remained as the key macroeconomic policy concern in 2007. Inflation, as measured by the annual percentage change in the average Consumer Price Index (CPI) for the country, has been recording a rising trend, from 0.7 per cent in 2004 to 1.9 per cent in 2005, 3.4 per cent in 2006, 5.9 per cent in 2007 and 10.5 per cent in the first quarter of 2008.

"Several external and supply side factors have largely conditioned this inflationary trend, and these sources of inflation are not sensitive to domestic policy actions. That has been a major challenge for anti-inflationary policy making in Oman," the report said.

The overall structural character of the economy continued to be dominated by the oil and gas sector during 2007, accounting for 45.3 per cent of GDP, 75.9 per cent of merchandise exports and 75.8 per cent of net oil revenue in 2007. The declining trend in oil production that had started in 2001 continued last year, with 3.7 per cent fall in production.

"The oil sector in general benefited from the favourable international oil prices, and the average price of Omani crude rose further by 5.6 per cent in 2007, extending the trend of 22.7 per cent increase in 2006, 46.0 per cent in 2005 and 23.6 per cent in 2004," the central bank report said.

While production of natural gas rose by 1.8 per cent in 2007, domestic demand from upstream and downstream projects had also been rising consistently, it noted.

Of the total natural gas produced in 2007, about 45.8 per cent was used for LNG production by OLNG (Oman LNG) and QLNG (Qalhat LNG), another 16.0 per cent was used for fuel and re-injection purposes in the oil fields, and the government gas system required 25.5 per cent for use in power generation, industrial estates and mining.

Total government expenditure increased by 19.1 per cent, but there was a "healthy" change in the composition of this growth, as investment expenditure rose by 41.5 per cent in relation to a moderate 9.2 per cent increase in current expenditure, the report said, adding: "Another healthy development on the fiscal front relates to 25.3 per cent increase in non-petroleum current revenues in 2007, reflecting the strong performance of the corporates; income tax revenue increased by 119 percent from RO 85.4 million in 2006 to RO 187.1 million in 2007, and customs revenue increased by 39.3 per cent from RO 114.6 million to RO 159.6 million primarily on account of 46.6 percent growth in merchandise imports in 2007."

The government's outstanding debt, both external and internal combined, fell to 6.5 percent of GDP.

The report said 2007 was "another year of impressive performance" for the banking sector, in terms of capital adequacy, assets and profits. "Capital levels of commercial banks in relation to risk weighted assets remained adequate at 15.9 per cent as at the end of 2007, which was considerably higher than the regulatory minimum capital requirement of 10 per cent," it added.

The core capital and reserves of commercial banks increased by 62 per cent over the year to RO1,458.2 million. Aggregate assets rose by 42.5 per cent RO10.3 billion, while gross Non-Performing Loans (NPLs) recorded an absolute decline of RO33 million to about 320 million.

Net profits of commercial banks, which had almost doubled over a period of two years from RO79.4 million in 2004 to RO162.9 million in 2006, grew further to RO213.7 million in 2007.

Because of the strong oil prices, the current account of the balance of payments continued to be in surplus, even though as percentage of GDP it fell significantly from 14.2 percent in 2006 to 4.8 per cent.

"This order of deterioration in the current account position was driven by three major factors, namely, 46.6 percent increase in merchandise imports, 31.6 per cent rise in remittance payments, and 21 per cent growth in income payments on Oman's aggregate foreign investment liabilities," CBO said.

While the current account surpluses declined by almost 62 per cent in 2007 over the 2006 level, the capital and financial account witnessed a major trend reversal, yielding net inflows of RO1,234 million in 2007 as against net outflows of RO1,122 million 2006.

CBO's foreign reserves at the end of 2007 stood at RO3,662.1 million, providing cover for 7.2 months of merchandise imports and 4.4 months of all gross current account payments. The reserves further rose to RO 3,864.5 million at the end of June this year.