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 -------------- SUMMARY -------------- ¶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. -------------- BIG BUDGET FOLLOWS BOOM YEAR -------------- ¶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. -------------- NEW FIVE-YEAR PLAN -------------- ¶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. -------------- COMMENT -------------- ¶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