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CBO Releases Annual Report 2017<img alt="" src="https://publishing.bnet.om/sites/assets/PublishingImages/English/News/News9Aug18.jpg" style="BORDER:0px solid;" />8/8/2018 8:00:00 PMCBO Releases Annual Report 2017The Central Bank of Oman which recently released the Annual Report for 2017, has indicated that Sultanate's economy is witnessing a structural transformation with increased diversification leading to accelerated non-oil economic activities <p style="text-align:justify;">The Central Bank of Oman which recently released the Annual Report for 2017, has indicated that Sultanate's economy is witnessing a structural transformation with increased diversification leading to accelerated non-oil economic activities and reduced dependence on hydrocarbon sector over the last few years. International oil prices also recovered significantly due to a resurgent global demand and OPEC and Non-OPEC oil producers' agreement clearing the global supply glut. The recovery in oil prices and improved non-oil activities led Oman's nominal gross domestic product (GDP) to grow by 8.7 percent in 2017 as against a contraction of 3.0 percent in 2016. The economic recovery was fairly broad-based with both hydrocarbon and non-hydrocarbon activities growing by 20.8 percent and 3.9 percent, respectively. All three non-oil hydrocarbon groups viz. industry, services, and agriculture & fishing witnessed growth during 2017. The non-oil external demand also surged and contributed to the growth, suggesting the diversification program gaining traction. The surge in international oil prices helped Oman to recover some portion of its nominal GDP that was lost during the contractionary period. Accordingly, the hydrocarbon sector's contribution to the nominal GDP increased to 30.1 percent in 2017 from 27.1 percent during 2016.  </p><p style="text-align:justify;"><br>The agriculture and fishing sector is gaining focus due to a huge scope especially in fishing as Oman is endowed with a long marine belt. Agriculture and fishing sector witnessed a robust growth of 7.0 percent in 2017, <em>albeit</em> lower as compared to an annual average growth of 11.7 percent during the period 2015-2016. The accentuated public policy's thrust on the economic diversification in the economy also helped the growth in services sector. The services sector continued on the upward trajectory and grew by 4.6 percent in nominal terms in 2017 and accounted for 51.6 percent share in the overall GDP. The rebound in domestic demand led by the economic recovery along with resurgent external demand conditioned the growth of various services in the Sultanate. </p><p style="text-align:justify;">Employment scenario has been very challenging, despite economic activity gaining a momentum. The employment provided to Omani nationals by the private sector, however, increased by 7.0 percent during 2017, which was notable given the limited employment capacity available in the public sector. The growth of overall employment in the private sector decelerated to 1.2 percent in 2017 from an average of 8.5 percent in the previous two years, mainly on account of lower incremental employment to the expatriates. The overall employment in the public sector recorded a growth of 1.8 percent in 2016, marginally higher as compared to 1.6 percent in 2015 but much lower compared to the average 7.8 percent during 2013 and 2014. </p><p style="text-align:justify;"><br>Inflationary conditions in Oman remained comfortable and supportive of growth, despite some surge in inflation in the recent past. The average inflation based on consumer price index (CPI) for the Sultanate edged up to 1.6 percent in 2017 from 1.1 percent during 2016 and 0.1 percent in 2015, which was mainly attributed to hardening of international commodity prices, depreciation in US dollar exchange rate, less-than-anticipated reduction in government spending, and reduction in subsidy especially on electricity. The increase in inflation under the groups 'transport', 'furnishings, household equipment & routine household maintenance', 'education',  'housing, water, electricity, gas & other fuels', and 'food & non-alcoholic beverages' was  partly offset by decline in inflation under 'communication'.   </p><p style="text-align:justify;">  <br>The hydrocarbon sector continued to remain the major driver of economic activities in the Sultanate, despite diversification making tangible progress in the last few years. The hydrocarbon sector accounted for 30.1 percent of the nominal GDP in 2017, higher as compared with 27.1 percent in 2016, due to a sharp recovery in oil prices. The average price for the Omani crude oil increased by 27.8 percent to US$ 51.3 per barrel in 2017 from US$ 40.1 per barrel in 2016. Daily average oil production, however, declined in 2017, reflecting implementation of OPEC and Non-OPEC oil producers' agreement to cut production. Oil and gas contributed 72.9 percent to total government revenues and 58.3 percent to merchandise exports during 2017. The annual production of natural gas inched up marginally by 0.1 percent in 2017. As domestic production fell short of demand, the natural gas was imported during the year. However, the natural gas production from Khazzan project would be able to meet the growing demand for natural gas, reducing country's dependence on imports. <br><strong> </strong><br>Oman's fiscal position improved due to a sharp recovery in oil prices and reform measures undertaken by the government. Omani crude oil price averaged at US$ 51.3 per barrel in 2017, while 2017 budget had assumed average oil prices at US$ 50 per barrel. Consequently, oil & gas revenues grew by 19.6 percent and total government revenue increased by 11.9 percent in 2017 (in comparison with a decline of 16.1 percent during 2016).  On the other hand, the expenditure declined for the third year in a row during 2017, reflecting the government's commitment towards fiscal consolidation. The decline in government expenditure by 4.9 percent during 2017 was contributed by moderation in both current and investment expenditure. Overall, the fiscal deficit declined by 29.1 percent to RO 3,760 million in 2017 from RO 5,300 million during 2016. The 2018 budget also continued with reforms agenda, emphasizing on diversification and private sector-led growth. The 2018 budget also stressed upon reducing the breakeven price of oil to ensure a sustainable economy. The government revenues are budgeted to grow by 11.6 percent in 2018 over actual in 2017, while total expenditure is estimated to increase by 1.8 percent during the year. Overall, the fiscal deficit is budgeted at RO 3,000 million in 2018, which will be largely financed through external debt. </p><p style="text-align:justify;">The Central Bank of Oman (CBO) continued to pursue monetary policy supportive of growth by ensuring appropriate liquidity and credit availability in the system. Consequently, the banking sector in Oman remained on the positive growth trend in 2017, consistent with the overall GDP growth. Broad money (M2) grew by 4.2 percent in 2017, responding to the growing money demand associated with economic recovery. The total outstanding credit extended by Other Depository Corporations (ODCs) increased by 6.4 percent, while aggregate deposits held with ODCs registered a growth of 5.6 percent during 2017. After witnessing some liquidity tightening in the previous years, the domestic liquidity conditions eased somewhat in 2017 due to recovery in oil prices and narrowing down of difference between the growth of credit and deposits. Interest rates, however, further hardened during 2017, following an increase in interest rates in the USA. The weighted average interest rate on total RO deposits increased by 0.174 percentage points to 1.667 percent, while the weighted average RO lending rate increased by 0.119 percentage points to 5.203 percent at the end of 2017.   </p><p style="text-align:justify;">Notwithstanding the overall macroeconomic challenges, the Omani banking sector remains resilient and financially sound. The banks are adequately capitalized with the Basel capital adequacy ratio at 17.4 in December 2017, much higher than the mandated at 13.25 percent (12.0 percent plus the 1.25 percent conservation buffer). Gross NPLs ratio of the commercial banks (excluding specialized and Islamic banks) moved up marginally to 2.4 percent in December 2017 from 2.1 percent in December 2016. The CBO undertook a number of accommodative policy measures recently, enabling banks to facilitate economic growth and manage their liquidity gaps more efficiently. The minimum capital adequacy ratio for banks has been reduced from 12 percent to 11 percent effective from April 1, 2018, which is expected to enhance the banks' lending capacity and reflect positively on overall credit growth. The CBO also relaxed the lending ratio, allowing banks to reckon net domestic inter-bank borrowings from other commercial banks as part of their deposit base. </p><p style="text-align:justify;">The external sector continued to face challenges despite a recovery witnessed in oil prices since the second half of 2017. Although the balance of payment (BoP) position of Oman remained under stress, the current account deficit dropped to RO 4.1 billion in 2017 from RO 4.7 billion in 2016. The decline in current account deficit was mainly attributed to increase in trade surplus by 40 percent on account of surge in oil prices and a considerable improvement in non-oil exports. Services, income, and current transfers, however, continued to remain in deficit mode, given the intrinsic nature of the Omani economy, and together resulted in a net outflow of RO 7.5 billion in 2017 as compared to RO 7.1 billion in 2016. The higher outflow under this combined head during 2017 was mainly conditioned by an increase in net outflows under services and income. The net inflows under capital and financial accounts increased by more than two-fold to RO 3,481 million in 2017 from RO 1,614 million during 2016. The main drivers of net inflows under capital and financial accounts were portfolio investments and loans. The net portfolio investment increased by 29.6 percent to RO 2,492 million mainly due to the government's external borrowing through Euro bonds to finance the fiscal deficit. Since net inflows under capital and financial accounts were lower than the current account deficit, the drawdown of foreign assets amounting to RO 1,066 million was resorted to finance the gap (which was, however, much lower than last year's drawdown of RO 3,615 million).</p><p style="text-align:justify;"><strong>Outlook for Oman</strong></p><p style="text-align:justify;">Omani economy recovered from the contractionary run and posted a positive nominal growth during 2017, which was attributed to a rapid surge in oil prices and pick up in non-oil activities resulting from focused diversification efforts. As the excess global supply of crude oil has been tackled to a large extent, the global oil market has rebalanced and a strong global demand is keeping an upward pressure on the international oil prices. The agreement to cut oil production between OPEC and non-OPEC oil producers has been extended up to the end of 2018, while some supply shock is anticipated on account of expected drop in oil production from Venezuela (due to political instability and lack of investment) and uncertainty with regard to oil supply from Iran after withdrawal from the nuclear agreement by the USA. At the same time, shale production from the USA has displayed the inability to compensate for a drop in oil production by OPEC and non-OPEC oil producing countries. On the other hand, global demand for oil is expected to remain robust over the foreseeable future as the world economy has gained further momentum with fairly broad-based recovery. </p><p style="text-align:justify;">The government authorities are also endeavoring continuously to bolster non-oil economic activities to diversify the economy away from hydrocarbon sector. The policy efforts are producing positive results and the non-hydrocarbon sector recorded an accelerated nominal growth in the recent past. The 'Tanfeedh', continues to concentrate on five sectors for implementing specific projects and initiatives with a potential for diversification. Various other policy efforts, such as public-private partnership (PPP), enactment of Foreign Investment Law and Bankruptcy Law, privatization of government companies etc., are also underway to propel non-oil economic activities and private-sector-led growth. The financial sector has also been actively participating in nurturing the non-oil sector in the economy by providing requisite funding and other services, including promoting Small and Medium Enterprises (SMEs). The CBO has also implemented certain policy measures recently, enabling banks to support higher economic activities in the Sultanate through meeting the requirements for credit and other banking services. </p><p style="text-align:justify;"> <br></p><p style="text-align:justify;">In the above backdrop, the growth outlook for the Omani economy appears to be robust over the short-term. Nonetheless, some downside risks to the outlook over the medium-term may emanate from tightening of global financial conditions and uncertainty about oil prices, especially on account of progress with regard to the alternative fuels and increase in supply by the countries outside the cartel of OPEC and non-OPEC oil producers.    </p><p style="text-align:justify;">The full Report is available at <a href="http://www.cbo.gov.om/"><span style="text-decoration:underline;">www.cbo.gov.om</span></a> under the title Publications.<br></p><p><br></p>0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900075E4FF44B3F64489802BE694C5C6FB701001A1EADFFD0CD66409B1A45E335F4666A

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