OMAN'S 2006 BUDGET: SURPLUS FUELS INVESTMENT

UNCLAS SECTION 01 OF 02 MUSCAT 000066

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EPET MU
SUBJECT: OMAN'S 2006 BUDGET: SURPLUS FUELS INVESTMENT

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SUMMARY
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1. (U) High oil prices in 2005 led to a record Omani budget
surplus of $3.8 billion and a blistering GDP growth of 21.7
percent. The 2006 budget, announced on January 1, projects
massive government spending on industrial and tourism
projects that could produce a deficit as large as 6 percent
of GDP. The government also unveiled its Seventh Five-Year
Plan, to cover 2006-2010, which projects a hike in the
average investment rate over that period to 24 percent of
GDP. End summary.

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BIG BUDGET FOLLOWS BOOM YEAR
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2. (U) National Economy Minister Ahmed Macki unveiled the
Sultanate's 2006 budget (covering the calendar year) on
January 1. The budget calls for government expenditures of
$10.9 billion, a steep 15 percent increase over the 2005
budget projection, though only modestly higher than the $10.4
billion actual expenditures for last year. While government
revenues for 2006 are projected to rise some 14.2 percent,
the budget still anticipates a record deficit of $1.68
billion, equivalent to 6 percent of GDP. That statistic is
put into perspective when weighed against the 2005 budget
surplus of $3.8 billion. Despite modestly lower oil
production, the 2005 budget had forecast an average oil price
of $23 per barrel, well below the actual average price of
$43.73. (Note: Omani budget makers traditionally use very
conservative oil price estimates. End note.) The projected
average price for 2006 is $32 per barrel, so sustained oil
prices above that mark will substantially lower the projected
deficit, as happened in 2005.


3. (U) The 2006 budget forecasts an annual GDP growth rate of
3 percent, as opposed to the meteoric 21.7 percent growth
realized in 2005. Among the beneficiaries of the increased
spending is the education sector, which will receive a 17
percent increase in expenditures. Government expenditures on
health are set to rise 13 percent. The bulk of the new
spending, however, will be on infrastructure and industrial
projects, particularly in the oil and gas, power and water,
and transportation sectors. 2006 defense and security is
projected to reach $3.2 billion, just under 30 percent of
total government expenditures.

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NEW FIVE-YEAR PLAN
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4. (U) Minister Macki also unveiled on January 1 the
government's Seventh Five-Year Plan. Once again, the plan
forecasts heavy investment and emphasis on the growing
industrial sector and tourism, as well as capital
improvements in the oil and gas sector. The Plan targets an
average annual GDP growth rate of 3 percent (down from the
4.5 percent GDP growth rate from 2000-2005),and an average
annual budget deficit of 3.9 percent of GDP. Budget
forecasts are based on projected average oil prices for
2006-2010 of $30, and a somewhat ambitious average daily oil
production of 827,000 bpd. (Note: Oman's oil production
continued its slide in 2005, falling to 774,400 bpd over the
first eight months of the year. End note.) The Five-Year
Plan anticipates that several billion dollars of investment
in enhanced oil recovery projects currently underway will
reverse the steady decline in production.


5. (U) The Seventh Five-Year Plan seeks to achieve a 7.5
percent increase in non-oil activities in the economy, and
nearly 12 percent growth in non-oil commodity exports. Large
projects slated for the period include expansion of Oman's
two major airports, and construction of three new regional
ones. Port expansion is planned for Muscat, Sohar and
Salalah, and a new port is to be constructed in Duqm. A
long-overdue wastewater system for Muscat, which, after
several false-starts, only recently got underway, is also to
be completed during the Seventh Five-Year Plan.

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COMMENT
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6. (SBU) While budgetary windfalls fed by elevated oil prices
have often led rentier economies into ruinous policies,
Oman's latest budget announcements seem to reflect a more
realistic and sophisticated fiscal understanding. Spending
priorities reflect the government's focus on using its
current robust oil revenues to build a sustainable, non-oil
economy. Employment-intensive sectors such as
industrialization and tourism are a clear priority. But
despite Oman's free-market traditions, these development
trends are driven primarily by government expenditures rather
than private-sector investment.
BALTIMORE