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His Majesty Sultan Haitham bin Tarik issued two Royal Decrees (“RD”) on 1 January 2021, published in the Official Gazette on 3 January 2021, promulgating the Tenth Five-year Development Plan (“10th FDP”) (RD 1/2021) and the 2021 State Budget (RD 2/2021). In this News Alert, we are setting out the key features of the 2021 State Budget and the 10th FDP.
Oman Budget 2021
Royal Decree (“RD”) No.2/2021 was issued on 1 January 2021, and published in the Official Gazette dated 3 January 2021, promulgating the State’s Budget for the year 2021. Below are the key features of the 2021 budget :
|Projected Revenue||OMR 8.6 billion|
|Projected Expenditure||OMR 10.8 billion|
|Projected deficit||OMR 2.2 billion|
|Projected income from the Oman Investment Authority||OMR 1.2 to 1.4 billion|
|Projected investments by the OIA||OMR 2.9 billion|
|Projected income from Energy Development Oman (“EDO”)||OMR 2.3 billion|
|Projected average oil price||$45|
Although the 2021 budget is predicated on a prudent average oil price of $45/barrel, the forecasted deficit is the lowest since the financial crisis in year 2015. The budget is based on guaranteeing the sustainability of basic social services such as health, housing, education, & social security, and to ensure spending is maintained at 40% for these services.
Tenth Five-years Development Plan (2021-2015) ( “10th FDP”)
RD No.1/2021 was issued on 1 January 2021, and published in the official gazette dated 3 January 2021, promulgating the Tenth Five-year Development Plan (2021-2015) (“10th FDP”). The 10th FDP is an optimistic plan made on the basis of the following :
The 10th FDP is expected to generate 135,000 job opportunities, with an average of 27,000 job opportunities annually over the period of the plan. It is also anticipated that it will result in gradual decrease in deficit to reach 1.7% by year 2024 and achieve a surplus of OMR 65 million by year 2025.
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Oman Budget 2021 (RD 2/2021)
The FY 2021 Oman budget represents the first year of the Tenth Five-Year Development Plan (2021-2025) (“the 10th FDP”), which paves the way to implement Oman Vision 2040 development objectives. The budget was prepared in light of the persistent financial and economic challenges resulting from the COVID-19 pandemic and decline in oil prices, including the agreement of the Petroleum Exporting Countries (OPEC +) to reduce crude oil production due to the decline in global growth and demand for oil, in addition to other commercial and geopolitical challenges.
It has been prepared taking into account Oman Vision 2040 priorities and fiscal framework and objectives to achieve fiscal sustainability, and reduce the ratio of the size of public debt to GDP. Also, to achieve a level of economic growth that contributes to the employment of Omani nationals, and continue to enhance the role of private sector institutions in the development process, maintaining the stability of inflation rates in a manner that preserves the level of per capita income.
In order to achieve fiscal balance, there has been a change in the strategies used to deal with the persisting conditions to find ways to reduce general expenditure. This includes issuing financial publications with the aim of accelerating plans for a reduction in general expenditure, boosting non-oil revenue by revisiting fees and taxes, governance of state-owned companies by transferring them to OIA, and endorsing the Medium Term Fiscal Plan (2020-2024).
The State's general budget for 2021 is based on:
The budget sets a prudent and measured tone in both its revenue and expenditure projections with a deficit of OMR 2.2 billion, which is considered the lowest since the financial crisis in year 2015, although on the assumed low average oil price of $45. This is mainly attributable to the transfer of the oil and gas sector expenditure burden, estimated at OMR 2.3 billion to the newly formed state-owned company Energy Development Oman SAOC (“EDO”).
Revenue is budgeted to decrease by 19% to OMR 8.6 billion (cf. FY20 OMR 10.7 billion), with oil and gas revenue representing c.63% (OMR 5.4 billion). The FY21 revenue forecast assumes a precautionary average oil price of $45 per barrel (cf. FY20 $58 per barrel), which is below the actual realised oil price in FY20 was $48 per barrel.
Expenditure is budgeted to decrease by 18% to OMR 10.8 billion (cf. FY20 OMR 13.2 billion), with a commitment to complete a number of strategic infrastructure projects to help incentivise economic growth.
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Oman’s 2021 budget estimates total revenues at OMR 8.64 billion, an increase of 2% compared to actual revenues in 2020. Oil and gas revenues comprise a percentage of 63% at OMR 5.42 billion and the remaining OMR 3.22 billion is estimated from non-oil and gas revenues.
Revenue estimates are based on the following considerations:
The actual revenue realised in 2020 was OMR 8.464 billion, which represents c. 21% decrease (OMR 1 billion) compared to the 2020 budget estimates of OMR 10.7 billion. This revenue decrease can mainly be attributed to the following factors:
Total expenditure in FY21 is estimated at OMR 10.88 billion, a decrease of OMR 2.32 billion (18% lower) as compared to total expenditure projected in the 2020 budget. This decrease in expenditure can be mainly attributed to lower development expenses, a decrease of 31% from 2020 budget estimates and lower oil and gas expenses (65% decrease). This is further attributable to lower defense and security expenditure and a lower civil ministries expenditure.
Expenditure of ministries and government units accounts for OMR 4.075 billion (37% of total budgeted expenditure for 2020). The biggest current expense for government units relates to payroll of government employees. Further, investment spending is estimated at OMR 900 million, down from OMR 1.3 billion. Loan interest expenditure has been projected to increase by c. 40% which is mainly on account of external borrowing obtained to fund the budget deficit and to maintain economic development.
Finally, following the incorporation of Economic Development of Oman (“EDO”), all expenses relating to the operation of Petroleum Development of Oman (“PDO”) has been allocated to EDO hence shouldering off a huge expense from the government budget.
The actual expenditure in FY 2020 was OMR 12.66 billion, a 4% decrease compared to the 2020 projection. This decrease can mainly be attributed to the following factors:
The actual deficit in 2020 was c.OMR 4.196 billion, while the 2021 budget estimates the deficit at OMR 2.24 billion.
Following the spike in the actual deficit in 2016 at c. OMR 5.3 billion (initially budgeted at OMR 3.3 billion), the deficit appears to be managed and is showing recovery. The estimated deficit in 2021 is lower than the deficit of 2020 by c. 10%, or OMR 260 million.
The 2021 budget deficit is expected to be covered by external and domestic borrowing c.73%, while the balance c.27% will be covered by drawing on the reserves. This is in line with the Government's guidelines to maintain the sovereign reserve funds and to rely upon borrowing to finance any deficit.
The three credit rating agencies described in the statement below downgraded the Sultanate's credit rating during the period (from 2014 to October 2020) from the safe investment category in 2014 to the high-risk investment category in 2020. The reasons behind the downgrade are due to the drop in oil prices and their impact on the continuation of the budget deficit in the past six years and the high indebtedness to that peaked to record levels.
In addition, the continuing expected effects of the COVID-19 pandemic on the financial situation of the Sultanate is pressuring heavily on the state fiscal balance.
The government, in response, has incorporated EDO and allocated related expenses to the oil and gas industry to EDO. This is seen as a positive step towards stabilising the state budget and would, in the long-term, strengthen the state’s credit rating.
Tenth Five-Year Development Plan (2021-2025)- (RD 1/2021) (10th FDP)
The 10th FDP presents the first executive plan for paving the way to implement vision 2040. It considered as a starting point for achieving fiscal sustainability and economic growth. The plan focuses on arranging spending priorities in light of the various changes in the local and global economic situation to ensure high economic growth rates.
Objectives of the 10th FDP:
Main sectors targeted for economic diversifications as per 10th FDP:
The plan focuses on economic diversification mechanisms and programs and increasing the contribution of non-oil sectors and activities. The plan sets a target for growth in the gross domestic product of non-oil activities, by focusing on sectors such as manufacturing industries with high technological content, agriculture and fisheries, fish farming, agricultural and food processing, transport, tourism,storage and logistics.
The table below illustrates the expected contribution from non oil activity by the end of 10th FDP:
|Sector||Current contribution to GDP||Contribution expected by the end of 10th FDP|
|Transportation and logistics||6.4%||7.5%|
The financial framework of the 10th FDP aims to achieve the following:
The following table illustrates the financial framework of the 10th FDP:
Average daily production (thousand barrels)
|Average Price (USD / barrel)||45||45||50||50||50|
|Total public spending||10,880||11,150||11,420||11,480||11,435|
|Surplus / (deficit)||(2,240)||(1,660)||(605)||(165)||65|
The 10th FDP aims to achieve a surplus of OMR 65 million in 2025 under the current trend and the fiscal measures taken by the government.
In 2020, the world has faced a global health crisis with the COVID-19 pandemic, alongside a sharp fall in oil prices during the year. The dual shock of these two factors resulted in a severe economic impact and business disruption worldwide, which is expected to take significant amount of time to recover. Like the vast majority of countries, Oman attempted to control the spread of COVID-19 by enforcing phased lockdowns, travel restrictions, and temporary closure of businesses, which in turn caused major slowdown of the economic growth.
Further, at a local level, 2020 marked a turning point in the history of Oman with the demise of His Majesty Sultan Qaboos bin Said, the former Sultan of Oman who ruled Oman for approximately 50 years. His Majesty Sultan Haitham bin Tarik took over the ruling of the country effective from 11 January 2020. He was formally the Minister of Heritage and Culture, and he was leading and supervising “vision 2040” initiative.
Despite of the economic downturn caused by the pandemic, 2020 witnessed massive changes to the business, legal, and tax frameworks in the country, forming a continuation of development steps, set forth by the former Sultan in previous years with the aim of achieving, among other objectives, fiscal sustainability & economy diversification. Under His Majesty’s administration, a number of key strategic developments took place in 2020 such as restructuring of the government, removal of Oman from the EU blacklist , the enforcement of the MediumTerm Fiscal Plan (MTFP) for the years 2020-2024, and introduction of the long awaited VAT law.
Although of the economic challenges resulted from dual shock of COVID-19 pandemic and fall in oil price, Oman’s 2021 State budget maintains a focus on economic diversification and the need to manage expenditure to ensure the deficit is maintained within sustainable levels, whilst still providing sufficient investment to promote economic stimulus and growth.
Together with the 10th FDP, the budget is paving the roadmap to Oman’s 2040 vision which is based on four pillars :
The budget indicates that the Government is putting efforts to improve Oman’s credit rating by reducing public debt and containing the deficit within sustainable levels.
Strategic steps to diversify the economy, such as widening the tax base scope and outsourcing of various Government services to the private sector are a welcome sign, as is the continued commitment to targeted investment to boost employment and social development.
Further, steps taken to improve the business environment and investment climate, such as the Foreign Capital Investment Law, Bankruptcy Law, and labour law reforms should facilitate an increase in foreign direct investment (FDI) which is expected to boost the economy, in addition to the key government reforms initiated that are expected to bear fruitful results in years to come.
Omar Al Sharif
Oman Country Senior Partner, PwC Middle East
Tel: +968 2455 9118
Partner, Oman Tax Leader, PwC Oman
Tel: +968 2455 8154
Tax Leader, Libya, PwC Middle East
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Assurance Partner, PwC Middle East
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Assurance Partner, PwC Middle East
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Assurance Partner, PwC Middle East
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Consultancy Partner, PwC Middle East
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Indirect Tax Director, PwC Middle East
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Tax Director, PwC Middle East
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