The 2017 Omani budget aims to reduce budget deficit and rationalize spending amid low oil prices. It estimates revenues of RO8.7 billion, lower than 2016 estimates, but reduces expenditures to RO11.7 billion. This would result in a deficit of RO3 billion, lower than 2016's projected deficit. The budget focuses on economic diversification, private sector growth, and increasing non-oil revenues through measures like tax reforms and public-private partnerships. Analysts believe the budget reflects fiscal prudence but that reduced government spending could impact growth. Privatization initiatives are key to achieving budget targets.

1. COVER STORY
20 February 2017
EMERGING LEANER
AND STRONGER
HE Darwish bin Ismail al Balushi, Minister Responsible for Financial Affairs
Amid subdued oil prices, the
2017 budget aims at reducing
budget deficit, rationalising
public spending, revitalising
non-oil revenues and enhancing
their contributions in total
government revenues. The
government also intends to
increase employment rates,
achieve medium-term fiscal and
economic stability and enhance
public-private partnership to
accelerate more investment
projects and private sector
initiatives. Oommen John P
reports

2. BUDGET AT A GLANCE
2017 (budget) 2016 (budget) 2016 (actual)
RO (million) Percentage RO (million) Percentage RO (million) Percentage
Oil revenue 4,450 51 4,560 53
5.050 69
Gas revenue 1,660 19 1,590 19
Other current revenue 1,127 13 1,071 12
2,310 31Capital revenue and repayments 40 – 50 –
Taxes and fees 1,423 17 1,329 16
Total 8,700 100 8,600 100 7,360 100
Deficit financed by:
Local borrowings 400
Foreign loans 2,100
Reserves 500
Total 3,000
Source:EYOman
S
pending cuts and austerity
measures notwithstanding,
Oman’s Budget 2017 in an
attempt to reduce dependency
on oil revenues has broadened
its diversification strategy through the
National Programme for Enhancing
Economic Diversification (Tanfeedh)
and public-private partnership (PPP)
initiatives to put the economy back on
the right growth trajectory.
HE Darwish bin Islmail al Balushi,
Minister Responsible for Financial
Affairs, who issued a press statement
on the budget, has said the focus of
the Budget 2017 is on investing in
promising and productive sectors
specified in the Ninth Five-Year Plan.
The aim is to enhance economic
diversification, increase employment
rates, achieve medium-term fiscal and
economic stability and strengthen
social development. Additionally, it
aims at enhancing PPP to accelerate
implementation of more investment
projects and private sector initiatives.
The general objectives of 2017 budget
include reducing budget deficit and
contain it within sustainable levels,
rationalising public spending and
enhancing its efficiency, revitalising
non-oil revenues and enhancing their
contributions in total government
revenues, motivating private sector
investments to achieve targeted growth
rates, limiting the growth of public debt,
and reduce it over the coming years
besides relying on external borrowing
only to financing development projects
and budget requirements. Aggregate
revenues are estimated at RO8.7bn (an
increase of 18 per cent as compared
to projected actual revenues for 2016),
while expenditure has been projected
at around RO4.4bn, decreasing by
5 per cent as compared to budget
estimates for 2016. The government
spending is projected to total RO11.7bn
decreasing by RO200mn compared
with estimated spending in 2016, and
revenues RO8.7bn, resulting in a deficit
of RO3bn (35 per cent of total revenues,
and 12 per cent of GDP). Subsidies are
estimated at RO395mn, which is almost
the 2016 budget level.
AbdulAziz Al Balushi, Group CEO,
Ominvest, says: “The 2017 budget is a
reflection of prudent policies set by the
government in response to the decline
in oil prices that began in August 2014.
The budget continues to lay emphasis
on issues of national importance
such as education and healthcare,
while continuing with fiscal austerity
programme initiated in 2015 through
reforms in energy subsidies and modest
increase in corporate taxes. Despite the
diversification strategy sought by Oman
over the long term, oil & gas sector still
accounts for around 70 per cent of total
government revenues.
Agreeing to his views, Mustafa Salman,
Chairman and CEO, United Securities
says the 2017 budget is based on the
current economic realities, but at the
same time tries to pave a good base
for the future economic growth of
the country. It is basically a balanced
approach of the government towards
management of its finances. On the
spending side, the focus shifts towards
efficient utilisation of funds that are
targeted to selected sectors. This
include rationalisation of subsidies and
reduced general spending. The budget
tries to strike a balance between

3. COVER STORY
22 February 2017
Diversification
Focus on the development
of non-oil sectors such
as manufacturing,
transportation and
logistics, tourism,
fisheries and mining
Investments
Planned investment
of RO41bn
Privatisation
Expanding the role
of private sector in
acquiring, financing
and managing
government projects
9TH DEVELOPMENT PLAN (2016-2020) AT A GLANCE
the forecasted income and efficient
spending of the funds.
Ashok Hariharan, partner and head
of tax, KPMG Lower Gulf says “I
believe that this is a realistic budget in
challenging conditions. The fact that
within a year of FYP9 being issued, the
government has revised its revenue
and expenditure estimates downwards,
basing its budget on a lower oil price
of $45/bbl, suggests prudent fiscal
management. GDP growth of 2 per cent
is achievable despite strong economic
headwinds and shrinking government
expenditure if the government
expeditiously implements its Tanfeedh
and privatisation programmes.”
Overall, its a balanced budget taking
into account the new economic
realities and the continued weakness
in the oil prices, says Kanaga Sundar,
assistant vice president – research, Gulf
Baader Capital Markets (GBCM). The
budget has given greater emphasis on
investing in the productive sectors of
the economy, enhance steps towards
economic diversification and also
create new employment opportunities.
The government has taken key steps
towards increasing the non-oil revenues
and also in rationalising the spending
during the current year budget.
The government has continued its
conventional approach with a focus on
stabilising growth and also maintaining
employment levels, while continuing
to take steps towards further fiscal
consolidation, which would be the
key mantra going forward to ensure
fiscal discipline. The much awaited
privatisation scheme which commenced
during 2016, would continue at a much
faster pace during the coming years
leading to increase in private ownership
structure and also towards deepening
the local securities market. This would
in turn lead to the eventual listing
of the national champions in the local
markets over the medium to long
term, which would enhance foreign
investor participation.
S Venkatachalam, chief executive
officer, National Life and General
Insurance Company says: Oman’s
Budget 2017 appears to be very
practical and realistic given the current
conditions. The budget aims at tackling
the fluctuating oil prices as it has
remained at pretty low levels since mid-
2014 resulting in spending and subsidy
cuts. “I firmly believe that Oman
will weather the storm and emerge
unscathed in 2017. The government’s
policies will surely put the country on
the growth trajectory.”
Cut in government spending
Will the reduced government spending
have an impact on the economy?
According to Lo’ai B. Bataineh, CEO,
U-Capital, the spending cuts will have
an impact on the economy, but the
reduction will depend on certain
sectors. And such sectors will be
more negatively impacted than other
sectors. For instance, if the government
reduces the number and the value of
infrastructure projects, it will negatively
impact the construction sectors and
also the banks who usually fund and
finance these projects through issuing
The 2017 budget is a
reflection of prudent
policies set by the
government in response
to the decline in oil prices
that began in August 2014.
The budget continues to
lay emphasis on issues
of national importance
such as education
and healthcare, while
continuing with fiscal
austerity programme
initiated in 2015
– AbdulAziz Al Balushi
Group CEO, Ominvest

4. Budget
Maintain an average
budget deficit of 29 per
cent of total revenue
Oil reserve
Transfer of sale
proceeds of 15,000
barrels per day to
the oil reserve fund
Economic
growth
3 per cent annual
economic growth
84%
16%
18%
36%
46%
72%
28%
100
90
80
70
60
50
40
2017 Budget 2016 Budget 2016 Actual
30
20
10
0
Grants Borrowings Reserves
DEFICIT FINANCING
Source:KPMGOman
2017 budget 2016 budget 2015 actual
70%
Oil & Gas
30%
Non-oil & Gas
72%
Oil & Gas
28%
Non-oil & Gas
68%
Oil & Gas
32%
Non-oil & Gas
REVENUE BY SECTOR
Letter of Guarantees (LG) and Letter
of Credits (LC) as well as advance
payments. Overall, the agenda of 2017
Budget comes in line with the approach
adopted in the last couple of years. Such
approach aims at rationalising spending
and enhancing its efficiency, as well
as keeping public spending within
justifiable levels. Actually, the flexibility
of spending is so limited through
the concentration of the current
expenditures which is allocated more
than 72.7 per cent of total expenditures.
These current expenditures are not
flexible and can’t be reduced, he says.
Concurring with the views, Mustafa says
the reduced spending by government
in 2016 already is having its toll on the
private sector. “We saw the spending
reduction affecting businesses across
sectors. However, a positive sign here
is that businesses are now slowly come
out of this difficult situation. They are
becoming more efficient by trimming
costs and channelising resources in a
more focused manner.”
Hariharan however contends that the
government’s message is very clear.
In the backdrop of continued subdued
oil prices, the economy can no longer
depend only on government spending
to achieve growth. The private sector
has to play a critical role. It is in this
context that the government has been
pushing its Tanfeedh initiative and
has in consultation with the private
sector identified 121 projects in the
Source: EY Oman

5. COVER STORY
24 February 2017
manufacturing, tourism and logistics
sectors to be implemented from
2017. These projects, if implemented
expeditiously will according to
government estimates, boost GDP by
over RO1.7bn. It is also expected to
create 30,000 jobs for Omani nationals.
The government also realises that
privatisation will be an important
driver of economic growth. In this
context, a holding company has been set
up in each sector to hold government
shares. Some government companies
have been transferred to sovereign
wealth funds, in preparation for further
privatisation. In the coming months,
the government expects to privatise
the Muscat Electricity Distribution
Company (MEDC). To achieve its growth
objectives, the government will have
to accelerate the privatisation process
during 2017 by speedily transferring
its interests in government assets to
the private sector. To ensure that the
privatisation programme succeeds,
it is important that the proposed
Public-Private Partnership (PPP) law
is enacted quickly so that the private
sector is aware of the framework
within which it can partner with the
government to ensure that the projects
are implemented expeditiously.
On its part, the government has
maintained its development
expenditure at almost the same level as
budgeted in 2016, ie RO1.34bn. Many
believe that a large portion of this
budget could be utilised for settling
the dues already owed to the private
sector and therefore, there may not be
sufficient left for new projects.
Sanjay Kawatra, assurance partner,
EY-Oman says the prevailing low oil
prices have significantly impacted
Oman’s economy, which resulted
in certain challenges such as tight
liquidity position and reduced growth
opportunities. Government continues
to monitor the situation closely
and implements appropriate policy
measures, as warranted. Oman’s
2017 budget is another example of
such policy decisions. The budget is
balanced and realistic, which includes
several measures for stimulating
growth and sustaining employment.
The growth is expected to be achieved
through diversification (Tanfeedh),
public private partnerships and
privatisation. The budget is prepared
based on an estimated oil price of
$45 per barrel, which is realistic and
somewhat conservative considering
the prevailing oil prices. “A significant
reduction in 2017-budgeted deficit over
2016-estimated deficit is definitely a
step in the right direction. Gradual
reduction of subsidies and expected
additional inflows due to increased
taxes and fees are also welcome moves,”
says Sanjay.
Sundar insists that despite the lower
level of projected revenues, the
government has committed to maintain
the level of development expenditure
which would ensure the completion of
the key on-going and priority projects
during the year and also ensure timely
payments to contractors. This would be
positive for private sector companies
operating in the government contracts
where the payment cycle has been
delayed during the last year. The
absence of new big ticket projects would
in turn impact the level of activity in
the overall economy. As part of its cost
rationalisation, the government has
adopted several measures towards
reduction in current expenditure and
also in defence allocations. Effectively
this would mean the support would
be given to the priority development
projects. 2017 would remain as year
of transition for the local economy
and getting adjusted to new level of oil
prices with a reduced level of spending.
ANALYSIS OF EXPENSES
2017 (budget) 2016 (budget)
RO (million) Percentage RO (million) Percentage
Defence and security 3,340 29 3,500 29
Oil & gas production expenditure 1,820 15 1,790 15
Development expenditure 1,355 11 1,350 11
Participation and subsidies 535 5 550 5
Education 1,585 14 1,645 14
Health care 612 5 631 5
Other civil ministry 2,188 19 2,344 20
Interest on loans 265 2 90 1
Total 11,700 100 11,900 100
Source:EYOman

6. Corporate tax and VAT
The government expects its tax and
fees revenue to increase by 7 per
cent compared to the 2016 budget.
A further analysis of taxes and fees
indicates that corporate tax revenue is
expected to decline by as much as 23
per cent compared to the 2016 budget.
Hariharan says this is principally
because the government’s corporate
tax revenues realised during 2016
were significantly lower than what
was budgeted because of lower profits
reported by businesses and as the
tax rates remained unchanged. The
government in its budget statement for
2017, has mentioned that while the long
overdue Corporate Tax amendments
should be expected in 2017, these
are not reflected in its 2017 budget
revenues. The main reason for this is
the fact that any amendment to the
corporate tax rates would be effective
only from tax year 2017 and the
government would be able to realise
the additional tax only in 2018 when
companies file their tax returns. The
amendments that could be expected to
the corporate tax law in 2017 include
raising the Corporate Tax rate from
12 per cent to 15 per cent, removing
the RO30,000 tax free limit, widening
the scope of withholding taxes and
significantly reducing the scope of
tax exemptions. Certain amendments
particularly those related to withholding
tax could improve the government’s
revenues for 2017 given that these
changes could be made applicable from
the date the decree is issued.
“As far as VAT is concerned, the GCC
governments have indicated that this
would be implemented during 2018,”
adds Ashok. “The government will
therefore, not generate any revenues
from VAT during 2017.” As far as
the impact of VAT on businesses is
concerned, it should be noted that VAT
is not a tax on business. Businesses
would only act as the agents for the
government to collect VAT from the final
consumer. The burden will fall on the
final consumer. While the VAT rate is
expected to be 5 per cent, the one-off
inflation on introduction of VAT is likely
to be around 3 per cent.
The biggest advantage for the
government is that VAT collections
are made throughout the supply
chain and the government does
not have to wait till the goods and
services are actually sold to the final
consumer. The 2017 budget indicates
a 22 per cent increase in Omani
labour licence fees. The government
increased fees for obtaining labour
clearances for expatriates by 50 per
cent in November 2016. Revenue from
Key highlights
of Budget 2017
Budget announced with
estimated oil price of
$45 per barrel
Revenue budgeted at RO8.7bn
(2016 budget: RO8.6bn, 2016
estimated actual: RO7.36bn)
Expenditure budgeted at
RO11.7bn (2016 budget:
RO11.9bn, 2016 estimated
actual: RO12.65bn)
Deficit estimated at RO3bn
(2016 budget: RO3.3bn, 2016
estimated actual: RO5.3bn)
Planned oil production during
2017 is expected at 990,000
barrel per day (bpd) after
taking into consideration a
commitment to cut production
by 45,000 bpd as part of
a global pact effective
January 1, 2017
December prices of oil futures
indicate average oil prices for
Oman Crude of $44.54 for
January 2017 delivery and
US$52.72 for February 2017
delivery
With expected improvements in
oil prices over 2017, GDP in the
oil and gas sector is projected
to experience a growth of 2
per cent while the GDP growth
through the non-oil activities are
expected to rise by 4.7 per cent
The government
should attract more
and more FDI, do more
enhancement of the
business environment
through amendments,
and come up with new
rules and regulations
to enable the investors
locally, regionally and
internationally to do
business in Oman
– Lo’ai B. Bataineh
Chief Executive Officer, U-Capital

7. COVER STORY
26 February 2017
Source:KPMGOman
COMPARING THE 2017 BUDGET WITH 2016 BUDGET AND ACTUALS
2017 budget
RO (million)
Change (%)
2016 budget
Change (%)
2016 actual
2016 budget
RO (million)
2016 actual
RO (million)
Change (%)
2016 budget
Revenue
Oil 4,450 (2)
21
4,560
5,038 (18)
Gas 1,660 4 1,590
Non-oil and gas 2,590 6 12 2,450 2,312 (6)
Total revenue 8,700 1 18 8,600 7,350 (15)
Expenditure
Defense and security (3,340) (5) (3,500)
Oil and gas production (1,820) 2 (1,790)
Civil ministries (4,400) (5) (4,620)
Development (1,340) (1) (1,350)
Others (800) 25 (640)
Total expenditure (11,700) (2) (8) (11,900) (12,650) 6
Deficit (3,000) (9) (43) (3,300) (5,300) 61
Deficit (% of total revenue) 35% (8) (51) 38% 72% 89
2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017F 2018F 2019F 2020F
120
61.7 65.2
101.1
56.7
76.6
102.9
109.6 105.5 103.2
56.4
40.1
55.0 55.0
60.0 60.0
100
80
60
40
20
0
OIL PRICE VOLATILITY OF OMAN CRUDE ($)
Source:EYOman
customs duties is also budgeted to
increase by 18 per cent.
The government has indicated that they
would, along with other GCC countries,
introduce an excise tax on specific
commodities such as tobacco likely to
be taxed at 100 per cent and soft drinks
at 50 per cent. Municipality fees on
rented properties is expected to go up
by 22 per cent following the increase
last year in the fees payable from 3 per
cent to 5 per cent. A 43 per cent increase
is also budgeted for fees from real
estate transactions which represents
the fees collected by the Ministry of
Housing on the transfer of legal title in
real estate. The government has also
budgeted a significant increase in fees
from transport licences, concessionary
facilities, business licences and other
miscellaneous fees. These increases in
taxes and fees would have some impact
on business as it would constitute
an increase in cost of conducting
operations. However, this alone is
unlikely to be a competitive disadvantage
for Oman given that other countries in
the region are also increasing taxes and
fees, says Hariharan.

8. Stock market impact
2017 provides lot of challenges as well
as opportunities. Unlike 2016, we are
starting the year on an optimistic note
for oil prices, says Mustafa. Global oil
market is likely to get rebalanced this
year as supply side restrictions become
effective from January 2017. Market
participants expect this rebalancing to
cause increased crude oil prices, thus
benefitting the regional economy. The
present crisis helped the government
to learn a lot in terms of prudent
spending and finding new income
streams. These diversified income
streams, along with higher oil income
should bode well for the regional
economy this year, he says.
Oman’s economic growth slowed
down in 2016, and it recorded one of
the slowest growth rates in the recent
times. “Average oil price realised by
Oman was $40 per barrel. Despite these
economic scenarios in the background,
our market returns were 7 per cent net
of dividends. Now with the initiatives
taken by oil producers, we are looking
at an improved economic situation in
the country. Stock markets in general
try to discount the future economic
developments and corporate earnings.
As such, we are more optimistic on
the stock market performance for the
current year. The companies have
become more efficient, their margins
have improved as the result of cost
control measures adopted by them
in the past. With an improvement in
economic activity supported by active
private participation, we should be
seeing improved corporate sentiment
this year,” he says. Valuations of
companies are in single digits now,
banks are trading at or below their
book value. These valuations should
expand once we see earnings growth in
companies, and expect that to be visible
this year itself. As such, I am looking at
double digit returns from MSM stocks
this year, says Mustafa.
Role of private sector
Oman can witness an increase in public-
private partnership deals following
reduction in government spending
and other austerity measures, says
AbdulAziz. Government is inclined to
continue with major infrastructure
projects but requires more private
sector participation in project
financing. Hence greater collaboration
between public and private sector in
infrastructure projects of national
importance can give a boost to the
economy. The government’s total
development expenditure in 2017 is
expected to decline by 14 per cent to
RO1.34bn from a budgeted RO1.55bn
in 2016. Development expenditure will
account for 11 per cent of total expenses
in 2017, down from 12 per cent in 2016.
The reduction comes in the wake of
Oman’s austerity programme amid low
oil prices and large budget deficits.
In 2016, the Tanfeedh Programme was
initiated as part of government’s 9th
five-year development programme
(2016-2020) with the goal of enhancing
economic diversification in Oman. The
sectors identified for diversification
were manufacturing, tourism and
logistics. The programme is now
looking at ways to maximise private
sector’s role in economy through
involvement in major government
sector projects and financing of
projects through debt and equity. If
Tanfeedh’s initiatives are realised, they
will generate investment opportunities
of around RO16bn by 2020 of which
RO14bn will be contributed by the
private sector and remaining from the
public sector.
Oman’s capital markets will play an
important role in funding government
projects as issuances of government
bonds will stimulate an otherwise
small inactive debt market. In addition,
privatisation of state enterprises will
lead to a bigger, more liquid and well
diversified stock market. Therefore,
Oman’s private sector has a crucial role
to play in the coming years. A successful
collaboration between private and
public sector will be key to ensuring
healthy and sustainable economic
growth, says AbdulAziz.
Key highlights
of Budget 2017
Oman’s crude averaged $40.14
during 2016
Inflation rate in Oman remained
at low level in 2016, i.e., 1.85
per cent. The inflation rate is
expected to be 2.8 per cent
in 2017
Privatisation policies to
continue
Diversifiation of economy
set to receive a boost under
the National Economic
Diversification Programme
(Tanfeedh)
Income Tax Law expected to be
amended during 2017 among
the measures to address the
budget deficit
Income tax and customs
exemptions to be reviewed as
part of measures to address the
budget deficit
Certain fees for civil services
provided by Royal Oman Police
will be amended to increase
revenue for the government
Revenue from corporate income
tax reduced to RO400mn in
2017 budget from RO520mn in
2016 budget