(MENAFN- Muscat Daily) The implications of government borrowing to make up for the budget shortfall as a result of weak oil prices would not be hassle-free and could affect the country's economic growth adversely in the short run according to the Central Bank of Oman.
Falling oil prices have put pressure on the fiscal space of Oman. The IMF expects the 2015 budget deficit to be approximately RO3.6bn. Oman's fiscal break-even oil price is seen to be rising this year the central bank said in its Financial Stability Report 2015.
The sultanate's fiscal break-even oil price was US$108.2 per barrel in 2014.
'The fall in oil prices below the fiscal break-even price of oil would prolong [and worsen] the position of budget deficits. And the recently indicated policy responses to cover them by mobilising external resources through borrowing - both domestically and internationally - using reserves and some of its own savings as also trying to reduce expenditure on price subsidies look timely' the report said.
Oman's excellent credit rating augurs well for the prospects to increase borrowing both local and internationally the CBO said adding 'But the implications would not be hassle-free.'
'If the government were to borrow from the domestic market it would be issuing bonds hence reducing money supply. Reduction of money supply adversely affects GDP in the short run.'
The central bank added that foreign borrowing would increase the long-run interest rate. 'Both these operations carry the potential to put upward pressure on the rial exchange rate leading to a tight monetary policy which could also affect growth in GDP adversely. Further borrowing abroad would cloud the external space which does not augur well for Oman which is under a fixed exchange rate regime.'
Oman's 2015 budget mandates a net borrowing of RO600mn of which RO400mn will be from the domestic market and RO200mn from abroad. The Ministry of Finance recently announced that the country's first sovereign sukuk issue would open for subscription in the near future.
In its mid-year economic review in March the CBO had said borrowing money in the domestic market would help in financial deepening and development of financial markets in the country.
As the US prepares to reverse its stance on continuance of quantitative easing the CBO said the risk of rial appreciation looms large. 'This appreciation bears certain risk to the competitiveness of Oman its trade balance and eventually its GDP.'
It said the possible interest-rate hike in the US and drastic fall in oil prices could affect liquidity in Oman with a lag. 'Since the US is expected to raise the interest rate in 2015 falling oil prices and higher interest rate should probably lead to less government spending few investment projects and lower GDP in 2015' the CBO added.
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