Public Finance and the Five-Year Development Plans

Persian Gulf States Table of Contents

Prior to 1970, the financial position of the sultan was virtually synonymous with the public finances of the sultanate. After Qabus ibn Said's accession to the throne, a formal separation was initiated. The first government budget was announced in 1971, and the First Five-Year Development Plan was initiated in 1976.

After recovering somewhat in 1987 after the collapse of oil prices in 1986, government revenue fell again in 1988 to RO1,198 million. Iraq's invasion of Kuwait resulted in a sharp rise in oil prices: average crude oil spot prices increased from US$16 per barrel in July 1990 to almost US$40 per barrel in September. Higher oil prices resulted in increased 1990 oil revenues, up 38 percent from 1989. The restoration of the Al Sabah monarchy in Kuwait and the defeat of Iraqi forces by an allied coalition stabilized the international oil market's uncertainty about supplies, and prices collapsed to precrisis levels. Omani government revenues dropped to RO1,570 million in 1991, from RO1,859 million in 1990. The government budget for 1992 was based on an estimate that total revenues would increase to RO1,628 million as a result of slightly higher oil income and as a result of increases in gas revenues and other domestic indirect taxes.

Although the government stresses investment, government expenditures are largely current expenditures, suggesting the importance the government places on maintaining its security, against both internal and external threats, and on its civil administration. Public corporations and ministries have provided a mechanism for income distribution and the creation of a salaried middle class. Reducing expenditures through public sector cuts is regarded as politically sensitive and therefore has been avoided, even after the oil price collapse in the mid1980s and the associated loss of income.

The 4.3 percent per annum increase in total expenditures after 1986 largely resulted from these concerns. Between 1987 and 1991, total government spending rose from R01,576 to RO1,853 million. During this period, current expenditures grew at 5 percent per annum. Although barely keeping pace with domestic inflation and increasing at a slower growth rate than that of the preceding ten years--when current outlays rose at 19.7 percent per annum--maintaining domestic income and defense and security expenditures prevented any retrenchment, despite wild fluctuations in income. Capital expenditures, however, had to be reduced between 1987 and 1990 and fell by 4 percent per annum. Higher oil prices in 1991 allowed the government to boost investment spending to pre-1986 levels, with a 37 percent increase over 1990. This adjustment restored the share of capital outlays in total government spending to 23 percent, after falling to about 12 percent in 1990. The 1992 budget called for further increases in spending to RO1,876 million, of which capital expenditures were slated to rise to RO404 million, or 22 percent of the total.

With the exception of a short period in the early 1980s, the government budget has registered sizable deficits. During 1986 the deficit (RO700 million) peaked at 28 percent of GDP. It was sharply reduced during the latter half of the 1980s but has continued to hover close to 10 percent of GDP. A lag in increased spending to match the rise in oil revenues late in 1990 permitted the government almost to balance the budget. But in 1991 spending more than offset oil revenues, and the actual budget deficit rose to RO283 million, or 10 percent of GDP. The 1992 budget forecast indicated another deficit of this magnitude.

The government has financed these budget deficits by drawing down on the Contingency Fund and by small amounts of commercial borrowing. Economic difficulties have compelled the government to raise money on international capital markets. In 1986 the government received a US$500 million syndicated Euroloan, the major sponsors of which were Gulf International Bank (in which the government is a shareholder) and Chase Investment Bank. In 1988 the government obtained a Japanese yen-denominated loan valued at US$130 million and a second US$100 million loan. Balanced fiscal conditions permitted the authorities to pay some of Oman's debt outstanding in 1990. During 1991 and 1992, authorities instituted a domestic development bond scheme, which has financed roughly one-half the fiscal shortfall.

The Fourth Five-Year Development Plan (1991-95) projected government revenue at RO8,571 million, up 22.8 percent from the previous plan. Oil revenue is expected to account for more than 76 percent of total revenue and to increase by an average of about 5 percent each year, reaching RO1,785 million in 1995 on a gross basis and RO1,429 million on a net basis (that is, gross oil revenues less subventions to the State General Reserve Fund and the Contingency Fund). The plan was based on an assumed average oil price of US$20 per barrel in the five years. During the first two years of the plan, total revenues roughly kept pace with planned earnings because oil prices held at those levels.

Expenditures during the Fourth Five-Year Development Plan were set at RO9,450 million, with current expenditures accounting for 76 percent of the total, investment expenditures set at 22 percent, and additional support to the private sector set at 1.4 percent. Defense and national security and civil ministries continue to make up the bulk of current expenditures. With expenditures exceeding revenues, the government projects a cumulative deficit of RO879 million. The government plans to finance the deficit by issuing RO430 million in government bonds on the Muscat securities market and by further drawdowns on the Contingency Fund.

The State General Reserve Fund is to be strengthened by allocating 15 percent of oil revenues to the fund, up from the previous 5 percent. This policy change was made possible after the creation of the Contingency Fund in 1990, which receives 7.5 percent of net oil revenues if the oil price is US$18 to US$20 per barrel and 10 percent if the oil price rises to US$20 to US$22 per barrel. Both policies are directed toward smoothing out the effects of oil price fluctuations and reducing the economy's vulnerability to unexpected changes in the international oil market.

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Source: U.S. Library of Congress