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Oman- a country on the rise and a country with a plan

Interview - September 12, 2012
As Oman´s finance minister explains the country´s 8th five year plan, he encourages the U.S. to take advantage of the free-trade agreement between the countries, for the benefit of everyone
H.E. DARWISH BIN ISMAIL AL BALUSHI, MINISTER RESPONSIBLE FOR FINANCIAL AFFAIRS
H.E. DARWISH BIN ISMAIL AL BALUSHI | MINISTER RESPONSIBLE FOR FINANCIAL AFFAIRS, OMAN

Please discuss the key factors that have contributed to Oman’s growth in recent years?

The key factors that contributed to Oman’s recent growth are:

• Strong energy prices with an average oil price well above the budget breakeven price  for the last two years.

• Continued increase in oil production for the last two years of around 4%.

• Prudent fiscal policies; creation of contingency and infrastructure reserves which enabled. Oman to continue with its expansionary fiscal policies; funding development expenditure both infrastructure and human.

• Investor friendly polices encouraging foreign ownership, uniform taxation policy for both local and foreign investments,  bilateral agreement with the USA.

• Stringent monitory policies managing liquidity through capital adequacy ratio, cash reserve ratio, lending to deposit ratio, and ceiling on personal loans.

• Strong and transparent corporate governance culture and practices.

• And Oman’s political stability and strategic location.

Could you give us more insight into the fiscal and monetary policy, as well as the steps taken to encourage growth while keeping inflation in check?

The increase in the oil production, high oil prices, low debts, reserve surpluses, along with the need to develop human, technology and infrastructure, have been the guiding force for Oman to continue with an expansionary fiscal policy with the 2012 budget providing for the highest single year spending of US $ 26 billion: an increase of 23% against the original 2011 budget with focus on job creation, human resources development, and infrastructure spending.

In an event of an unexpected and significant fall in the oil prices, the 8th five year expenditure plan (2011 – 2015) is flexible enough to adjust accordingly without creating any major economic stress; something that Oman has managed to do successfully in the past. We will continue to maintain prudent fiscal policies and be guided by the three principles of sound fiscal management: low debts, continue to build up the reserves and containing the budget deficit.

With the strengthening of the US $ since August 2011 and the fear of recession or low growth in developed economies the inflationary pressure is likely to reside. The 8th five year plan provides for inflation to be around 4% which is lower than the real GDP growth target of 6% projected in the 8th five year plan.

The monitory policy shall continue to be vigilant with timely interventions if necessary through mandatory maintenance of cash reserve ratios and lending to deposit rations to manage liquidity. Consumer prices will continue to be constrained by the Government subsidy mechanism, keeping a check through Public Authority of Consumer Protection. Oman’s strong external accounts and foreign assets shall be sufficient to maintain the dollar peg.

What are the main strengths of Oman’s financial system that helped cushion the impact of the global financial crises?

Omani Banks are not that exposed to the Euro zone and Oman energy exports are predominately to Asia. Oman is not a member of OPEC. Therefore Oman is not subject to OPEC production quotas. All this has helped Oman to be relatively immune from the global financial crises. The strength of the financial sector is underpinned by strong fiscal and external balances and a fast growing yet stable and well regulated financial sector.

The growth of the surplus of the Sultanate’s external balances is to remain at strong levels on the back of the rise in oil and non-oil exports. The ratio of the surplus of the balance of trade to the GDP in 2011 is expected to increase to 35 % compared with about 32 % for 2010. It is also expected that the rate of the current balance surplus is expected to be about 14 % of the GDP compared with about 10 % for 2010.

The latest assessment by IMF and Moody’s on Oman’s banking sector is positive.  The Oman banks’ solid capitalization, funding bases and high liquidity buffers; and low levels of non-performing loans are ascribed as the basis of Omani banking sector stable and promising outlook.

With capital adequacy ratio of 14.3 % as of end of September 2011 (against the regulatory limit of 12 %), and the NPL ratio of 2.6 % is below the GCC average. Stress testing conducted by the Central Bank of Oman indicates that most Omani banks are in a position to cope with significant macroeconomic shocks. The Omani banks earning registered 27 % year to year and 74 % quarter to quarter growth as at the end of the 3rd quarter 2011.

What are your top priorities for 2012/14 in order to maximize the overall competitiveness of Oman’s economy and its financial sector?

Despite a year of global economic turbulence, Oman’s stable economic performance has seen it ranked as the world’s 32nd most competitive country in the 2011/12 World Economic Forum’s Global Competitiveness Index (GCI). This ranking, a rise of two places on 2010/11, places it above the emerging economies of Brazil, Russia, India and European Union members.

Our top priorities are: economic diversification, stimulating the private sector especially the SMEs, human resources development, creating jobs and enhancing productivity. Vision 2020 and the 8th five years plan (2011-2016) shall be the guiding factors for Oman to remain focused in achieving its priorities. Economic diversification shall focus on the development of the tourism, industry, agriculture and fisheries sectors. Development of the SME is an important element for innovation, entrepreneurship and job creation. SMEs shall create forward and backward linkage for the real economic growth.

The planned expenditure of US $ 111 billion for the next five years, the young demography, political stability and tourism potential are likely to provide an excellent environment for real private sector participation. Oman shall continue to allocate a significant part of its expenditure to education and human resources development. The 2012 budget provides for a 13% allocation to education from the total planned expenditure.

What is your strategy to maintain fiscal health against shifts in international oil prices and market volatility?

Through its sovereign wealth funds assets and foreign exchange reserves Oman is already fairly diversified. It will continue with the political reforms and encourage all elements of its people to get engaged in defining the economic prosperity road map. The recent elections of Majlis Al Shura and increase in the number of women participation in the National Council are aimed at getting the community at large involved in the discussions for Oman’s economic and social development. 

The political reforms along with strong corporate governance culture, expansionary fiscal policy and strong fiscal strength are likely to continue to encourage foreign investments and private sector participation to bring in the true diversification which will be the catalyst to protecting our economy from oil price and market volatility.

Please comment on your role in terms of overseeing Oman’s financial sector and the reforms that have been undertaken to date?

The Ministry of Finance (MOF) mandate is “to ensure the best use of financial resources of the state and quest for diversity of these resources and find a balance between revenues and expenditures.”  MOF is responsible for:

• The economic and social development of Oman.

• Presenting the Country’s Budget and Five year plan providing resources for health, education and building infrastructure for the nation’s development.

• Implementing laws relating to income tax and financial investments.

• Overseeing the development of projects and managing revenues from natural resources, especially from the oil and gas sector.

• Providing support to the Pension Funds.

• Controlling Public Debts.

Reforms include liberalization of tax and foreign investment law, successful privatization of the utility and telecom sectors, bilateral agreements, and introduction of ecommerce in the government departments which deal with public and legislative powers to members elected by the people.

What are the main competitive advantages of Oman’s financial sector and what additional reforms would you like to see implemented in order to further boost its potential?

The main competitive advantage for Oman is its willingness to become an effective partner to its foreign and private sector partners. The success of the Salalah Port and Sohar Free Trade Zone is an excellent example of this partnership. The 8th five years plans have allocated US $ 111 billion for the development of our nation including putting together a package which will create infrastructure and transport corridors of premium quality. This includes the introduction of a world class railway system linking Oman with the rest of the GCC region.

The introduction of Islamic banking will bring Oman in line with the recent phenomenal development of Islamic Financing thus providing a channel for savings for our people and investment within Oman.

With the recent increase in spending the fiscal surpluses of the GCC region is likely to narrow. The euro zone crises is likely to reduce the financing or  increase the financing cost and the introduction of Islamic Banking where a mechanism for short term placements  shall be required – all these call for a need to develop an Oman debt and fixed income market. I would therefore like to see the development of the Oman fixed income market and remove the supply side constraints by ensuring a steady flow of good papers in the market thus developing an active debt market in Oman.

Please elaborate on the reasons behind the decision to maintain the dollar peg?

The US Dollar value comes from its functionality and liquidity. According to the Bank of International Settlement around 85% of the global foreign exchange transactions are in the US Dollar, and as per the IMF, 61% of the entire world FX reserves are in the US Dollar. The total reserves are estimated to be US 10 trillion, so if 61% of it is in the US $ it means 6 trillion are in US $ which is higher than China’s GDP, the second largest economy in the world.  If there is even a 1% shift to the Euro ( the  second largest currency FX reserve)  it will take 15 years for the Euro FX reserves to be equal to the US $. Therefore we believe the US Dollar is likely to continue to be the anchor currency for a foreseeable time.

What measures are you taking to encourage foreign investment in Oman? In your opinion, what are the most promising sectors in terms of business development?

Oman’s main competitive advantages are: free and open market oriented economic policies, vigorous privatization program, no restriction of capital repatriation, currency pegged to the US Dollar, unified tax rates for foreign and local business,  foreign ownership is allowed up to 70% and in exceptional cases even 100% for selected industries and sector, establishment of Public Authority for Investment Promotion and Export Development (PAIPED), bilateral agreements, FTA with USA abolishing duties between the two countries, specialized law for free trade zones and incentives for investment in the energy and tourism sector all contribute to promoting  foreign investments.

Muscat was recently voted the 2nd best city to visit in the world by the Lonely Planet, and the National Geographic ranked Oman as one of the Top 10 travel destinations in the world. Surely this puts tourism as one of the most promising sectors in Oman.

Oman is also one of the leading players in the development of the enhanced oil recovery (EOR) technology which represents a promising place for the energy sector investors. In its 8th five year plan, the government of Oman along with its foreign partners (Shell, TOTAL and Partex) has already committed multibillion US $ investments into the EOR projects.

The education and health sectors also provide an exciting future with Oman’s young demography, as 31% of the population is under the age of 15 and 66% of the population under the age of 64.

How would you evaluate the current state of Oman-US relations? In which areas would you like to see increased cooperation?

Oman’s friendly relationship with the USA goes back 200 years when in 1841 Oman became the first Arab country to recognize the United States of America.

The US-Oman Free Trade Agreement (FTA) represents an important tool to foster continued economic engagement between our two countries. The FTA spurs US trade with Oman in goods and services by eliminating most tariff and non-tariff barriers. Under the market access provisions of the FTA, the United States and Oman provided each other immediate duty-free access for tariff lines covering almost all consumer and industrial goods and 87% of all agricultural tariff lines.

In 2010, the US exports to Oman totaled $1.1 billion. Growth sectors included organic chemicals, optical and medical instruments, plastics, and iron and steel products. Principal US exports to Oman in 2010 were vehicles, machinery, and electrical machinery.

We would like US technology companies to invest in Oman. We have some of the youngest and brightest minds in the IT sector. With US technological and innovative credentials and Omani talent, its zeal for learning and hard work can be an excellent combination to make Oman the IT hub for the GCC.

Oman has made considerable investments in the USA ranging from strategic and trade imports to our sovereign wealth Funds investments in the USA. Oman fiscal strength and strong corporate governance backed with investment friendly policies provides an excellent opportunity for a US investor to participate in the growth story of the next decade where Oman has committed in excess of hundreds of billion dollars with no restrictions on capital & profits repatriation and a unified and simple tax regime.

Oman offering a niche tourist destination fits in well with the American tourists aspirations. Oman has something to offer to every visitor; whether they are elderly travelers, luxury travelers or simply travelers seeking adventure or an activity holiday. Oman’s diversity and splendor, with a majestic landscape, un-spoilt coast line, white beaches, natural habitat, friendly people and a relaxed pace of life are part of the true essence of Oman's timeless appeal. Oman offers excellent opportunities for US citizens to establish a second home through its integrated tourism projects where non-Omanis can own a house.

I would like to encourage US Companies to take the advantage of the Free Trade Agreement and develop joint ventures with the Omani businesses in the tourism, technology, energy especially renewable energy, and health and education sectors. I would also like to see an increase in the cooperation between our national airline and major US air carriers so that we can develop and promote jointly tourism and business markets which benefit both our countries.

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