WINDFALL FOR SOME, INFLATION FOR ALL

UNCLAS SECTION 01 OF 02 MUSCAT 001582

SIPDIS

SENSITIVE

STATE FOR NEA/ARPI, EB/ESC/IEC, INR/EC

E.O. 12958: N/A
TAGS: ECON EFIN ENRG EPET PGOV SOCI MU
SUBJECT: WINDFALL FOR SOME, INFLATION FOR ALL

REF: A. STATE 186514

B. MUSCAT 1473


1. (U) Summary: Increasing oil prices have provided a
windfall for the Omani government, even as its production
declines. Consumer prices have risen accordingly, however,
and some question whether the benefit of higher oil revenues
is reaching the general public. End summary.

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REVENUE UP, PRODUCTION DOWN
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2. (U) According to the Ministry of National Economy's most
recent figures, revenue from oil is up almost 50% over the
first eight months of 2005, as compared to the same time
period in 2004. Oil revenues contributed over $7.1 billion
to state coffers from January to August 2005, as compared to
$4.8 billion over the same period last year. The dramatic
increase in revenues directly reflects the rapid increase in
oil prices, as oil production actually fell 1.4% during the
first eight months of 2005.

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GOOD TIMES FOR ALL?
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3. (SBU) Dr. Hatim al-Shanfari (protect),Professor of
Economics at Sultan Qaboos University and board member of the
Omani Economic Association, told Emboffs that increased oil
revenues, while beneficial to the government's finances, have
not been perceived by the general public as beneficial to
their daily lives. Al-Shanfari remarked that one reason for
this perception is the government's focus on large,
capital-intensive industrial projects in a limited number of
areas, such as in Muscat and Sohar. He is concerned that
while the promoters of these industrial projects envision the
larger companies creating "downstream" opportunities,
appropriate mechanisms won't be in place to facilitate the
establishment and growth of small and medium-size
enterprises. Al-Shanfari lamented that oil production had
robbed Oman of its traditional entrepreneurial spirit, and
thus the government should channel funding toward educational
awareness and training to restore it.

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SQUEAKY WHEEL GETS THE SCHOOL
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4. (SBU) Al-Shanfari also opined that oil revenue gains would
enable the government to stall on meaningful internal reform.
He noted that the Omani government previously has been able
to use oil revenue to co-opt dissident segments of the
population through public works projects, and that a flush
treasury would allow the government to continue to stifle a
new generation of leaders. Al-Shanfari also believes that
spending on frivolous projects, such as the recent $2 million
spent to upgrade a stadium's lighting and speaker systems,
would add to inflationary pressures, especially in the areas
of building materials and related construction costs.
Spending of this nature gives al-Shanfari pause in predicting
how the government would be able to manage its resources
during a period of sustained low oil prices or other revenue
crisis.

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CONSUMERS FEEL THE PINCH...
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5. (SBU) Dr. Said al-Riyami, Economic Advisor for the
Ministry of Commerce and Industry, noted that as rising fuel
prices have affected Oman's business community, the
businessmen generally have passed the increased costs along
to the consumers, making Oman more expensive as a result. He
specifically pointed out that increased transportation costs
have resulted in relatively larger price increases in Oman's
interior regions. These increases have caught the attention
of the Minister of Commerce and Industry, and as a result the
Ministry is studying the issue more closely.


6. (SBU) Al-Shanfari noted that the government's Consumer
Price Index survey, while procedurally sound, is artificially
weighted with inflation-proof inputs that lead to howls of
disbelief each time the government announces new inflation
figures. The government has commissioned a firm to
re-examine the market basket used in the survey. Al-Shanfari
estimates that true inflation rates for average Omani
families are easily above 5 percent. Inflation in some
sectors, such as construction materials, is even greater. A
mid-level government official recently lamented to Emboff
that the "dream house" he has been building should be
finished in December, but construction costs have soared so
high that he will now have to rent it out just to make ends
meet.

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...BUT IS IT ACTUALLY FROM OIL?
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7. (U) The Ministry is interested in investigating the
relationship between oil and consumer price increases.
Commerce Ministry Under Secretary Ahmed al-Dheeb acknowledged
before the press that the increase in oil prices and decline
of the dollar (to which the Omani currency is tied)
contributed to general inflation, but also questioned whether
the greed of local businesses may also be playing a role.
Al-Dheeb commented that "The Ministry will take serious
measures against those who contribute to the rise in prices
with no legitimate reason."

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NO SUCH THING AS A FREE FILL-UP
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8. (U) Increasing fuel costs have translated into higher
prices at the pump for Omani drivers. However, fuel prices
have risen in the UAE at an even higher rate, causing fuel
shortages along Oman's northern border as UAE drivers cross
the frontier for cheaper gas. In Buraimi, Oman's largest
border town, 24-hour gas stations curtailed their operations
as their fuel inventories ran out. One Omanoil salesman
noted that rather than increase inventory, fuel suppliers
actually decreased supplies to his company's station, causing
a temporary barring of UAE taxis and commercial vehicles from
fueling in Buraimi. While the situation has stabilized,
Omani drivers are concerned that fuel hikes are fast
approaching in their rear-view mirrors. The government
already raised diesel prices by 43% in early May, which
provoked a storm of complaints and parliamentary debate.

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POLITICAL IMPLICATIONS
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9. (SBU) The government has not raised public-sector salaries
since the Omani riyal was tied to the U.S. dollar in 1986,
using the purported lack of inflation as its justification.
As noted ref B, popular expectations for a long-awaited
salary increase have risen steadily in recent years, often
cresting on national occasions such as the Sultan's annual
address to parliament or the November 18 national day. With
the bicameral parliament forming special committees to
investigate price rises, the Ministry of Commerce's warning
of price gouging, and the local media carrying feature
articles on higher prices for essential Ramadan holiday
cooking ingredients, the government has no cover on the
inflation front. In view of hefty government surpluses, it
also cannot plead poverty. Popular pressures for a gesture
such as a pay increase are likely to build as both a way to
offset the impact of rising costs and to share more broadly
the current oil revenue windfalls. A more meaningful use of
the windfall might be substantial increases in health care,
education, and infrastructure investment in all regions of
the country. Thus far, however, there has been little sign
of government bending to these forces.
BALTIMORE