World Economy

Oman’s Tight Liquidity Posing Economic Challenges

Oman’s Tight Liquidity Posing Economic ChallengesOman’s Tight Liquidity Posing Economic Challenges

Oman’s economy is one of the most vulnerable to prolonged lower global oil prices and the impact is expected to reflect in a prolonged slowdown in public spending and non-oil economy, according to a recent study by Institute of International Finance, a Washington-based association of global financial institutions.

Data shows further decline in oil prices in 2016 led to wider fiscal deficit. Oil revenues in 2016 were less than half the 2014 level. In response, government spending has been restrained, including cut in fuel subsidies and postponement of few major infrastructure projects such as the national railway. Government spending has been reduced by a cumulative 12% in the past two years. More than half of the deficits have been financed by external borrowing to avoid crowding out private sector, Arabian Business reported.

Overall growth has slowed from 3.7% in 2015 to 2.9% in 2016, weighed down by weaker private confidence due to the fall in oil prices and lower government spending. The non-hydrocarbon growth is being affected by tighter banking sector liquidity, rising cost of borrowing, and weak domestic demand. Household consumption, including car purchases, has been hurt by cuts in benefits and a moratorium on recruitment in the public sector.

“We expect real GDP growth to slow to less than 1% in 2017, due to oil production cuts and continued fiscal consolidation. Hydrocarbon real GDP is projected to contract by 2.6% due to the production cuts related to the agreement between Opec and non-Opec producers,” said Boban Markovic, research analyst at the IIF.

In 2018, the hydrocarbon sector is expected to rebound, driven by a significant increase in gas supply from the Khazzan field. However, analysts expect growth in non-hydrocarbon to remain subdued amid prolonged low oil prices and fiscal consolidation.

Although the fiscal deficit and current account deficits have widened significantly over the past three years, analysts expect the twin deficits to narrow from this year following the fiscal consolidation measures and external borrowing programs.

“We expect the fiscal deficit to narrow to around 11% of GDP in 2017 helped by the modest increase in average Brent oil prices (from $44/bbl in 2016 to $52/bbl in 2017), the introduction of corporate income tax, and further cut in spending,” said Markovic.

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