When Oman’s finance minister declared this month that the public sector wage bill might jump $2.3 billion next year – money which the government had not yet found – it was a fresh sign of a budget crunch looming in the Gulf state.
Government spending has been rising rapidly since 2011, when street protests demanding jobs and an end to corruption prompted authorities to boost welfare handouts. The government is also spending heavily in an attempt to diversify the economy before oil reserves start to run out.
Other Gulf Arab countries face the same social and economic pressures, but their oil resources are much larger and they have built up huge fiscal reserves that may allow them to spend their way out of trouble.
Oman, with a population of about 3.9 million, over a third of them foreign citizens, faces a tougher financial outlook in coming years. It may force the country to resume borrowing in international markets next year for the first time since 1997.
With the outstanding level of public debt still very low and the likelihood of support from diplomatic allies such as Saudi Arabia if needed, Oman does not face disaster. But the budget pressures may complicate the efforts of its 73-year-old ruler Sultan Qaboos, who has not publicly designated an heir, to keep social stability.
“We see a significant erosion in Oman’s public finances in the coming years, as oil revenues plateau and expenditure pressures remain high,” said Farouk Soussa, Citigroup’s chief economist for the region.
“The rate of expenditure growth in recent years has been alarming, particularly current expenditures, mainly wages and subsidies, which have risen by 122 per cent in the two years between 2010 and 2012.”
Next year, state spending is expected to rise to a record 13.5 billion rials ($35 billion) from 12.9 billion planned for 2013, a draft of the government’s budget showed last week. But that is excluding the additional 800-900 million rials of wage costs which the government may have to pay following a royal order to standardise public sector salaries and grades.
Including that factor, overall budget expenditure could climb as much as 12 percent to 14.4 billion rials next year, according to Reuters calculations. That would follow a 29 percent jump in planned spending for 2013.
It is not clear exactly when Oman will start posting substantial state budget deficits, but the trend seems clear.
The International Monetary Fund predicted in October that Oman would slip into a fiscal deficit of 0.2 percent of gross domestic product in 2015, widening gradually to as much as 7.1 percent or about $6.8 billion in 2018 – but that was before the additional public wage expenditure was revealed.
Much will depend on global oil prices. They have remained at historically very high levels – Brent crude has averaged $109 a barrel so far this year – but any sustained drop into the $90s, perhaps due to renewed Iranian supplies to the world market if Tehran reaches a final agreement with world powers on its nuclear programme, would worsen the outlook for Oman.
