Economic Review: First Quarter 2007 Sultanate of Oman

     • Nominal GDP growth of 4.8% in Q1 2007 represented a significant deceleration of the pace of economic growth from 15.6% in 2006 and 24.6% in 2005. This was led by negative oil sector GDP growth of -8.1%, the result of both lower Oman Crude prices in Q1 2007 and a continued decline in crude production at -6.2% in Q1 2007 compared to Q1 2006. Still, the oil sector added more value to the economy in Q1 2007 than in the first quarter of any other year apart from 2006 so that oil revenues continued to pour into the economy. 2006 saw the largest recorded budget surplus at RO 1.058 billion. Q1 2007 government budget data suggested that 2007 could yield a similar level of surplus although it is most likely to be lower due to the cost of the reconstruction of infrastructure damaged by Cyclone ‘Gonu’.

• The deceleration of overall GDP growth masks the very positive trend of accelerating growth gathering pace in the non oil economy, which grew by 16.8% on a year on year basis in 2006 and 18.5% in Q1 2007. This was the highest non oil sector growth in twelve years, the main engines of which were first, the continued growth in trade, transport and communication and second, the accelerated growth in both health, education and professional services and the construction sector.

• The strong non oil sector growth was driven by both strong external and growing domestic demand. The strong export growth in 2006 at 46.3% on a year on year basis was maintained with January 2007 data showing a 42.9% year on year increase. Domestic demand acted as a driver of growth in Q1 2007 more than ever before. Net Import growth of 37.2% in January 2007 showed early signs that import growth in 2007 will be stronger than 2006 when it reached 23.7%. Household demand was likely to have been boosted by the growing private sector workforce, which continued to grow at the accelerated pace of 22.7% in Q1 2007 year on year, increasing the demand for all household items.

• Whilst the strong growing demand side has been a driver of economic growth it has also contributed to accelerating inflationary pressure on prices. Increases in the Consumer Price Index (CPI) of 4.6% in Q1 2007 were the highest year on year increases recorded, showing a continuing acceleration of consumer price increases in Q1 2007.

 • The highest quarterly growth of liquidity (M2) recorded and the lowest real interest rates of 2.6% combined to make it easier to borrow in Q1 2007 than ever before.

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