This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 MUSCAT 001582 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/ARPI, EB/ESC/IEC, INR/EC 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ENRG EPET PGOV SOCI MU
SUBJECT: WINDFALL FOR SOME, INFLATION FOR ALL 
 
REF: A. STATE 186514 
     ¶B. MUSCAT 1473 
 
¶1. (U) Summary:  Increasing oil prices have provided a 
windfall for the Omani government, even as its production 
declines.  Consumer prices have risen accordingly, however, 
and some question whether the benefit of higher oil revenues 
is reaching the general public.  End summary. 
 
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REVENUE UP, PRODUCTION DOWN 
--------------------------- 
 
¶2. (U) According to the Ministry of National Economy's most 
recent figures, revenue from oil is up almost 50% over the 
first eight months of 2005, as compared to the same time 
period in 2004.  Oil revenues contributed over $7.1 billion 
to state coffers from January to August 2005, as compared to 
$4.8 billion over the same period last year.  The dramatic 
increase in revenues directly reflects the rapid increase in 
oil prices, as oil production actually fell 1.4% during the 
first eight months of 2005. 
 
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GOOD TIMES FOR ALL? 
------------------- 
 
¶3. (SBU) Dr. Hatim al-Shanfari (protect), Professor of 
Economics at Sultan Qaboos University and board member of the 
Omani Economic Association, told Emboffs that increased oil 
revenues, while beneficial to the government's finances, have 
not been perceived by the general public as beneficial to 
their daily lives.  Al-Shanfari remarked that one reason for 
this perception is the government's focus on large, 
capital-intensive industrial projects in a limited number of 
areas, such as in Muscat and Sohar.  He is concerned that 
while the promoters of these industrial projects envision the 
larger companies creating "downstream" opportunities, 
appropriate mechanisms won't be in place to facilitate the 
establishment and growth of small and medium-size 
enterprises.  Al-Shanfari lamented that oil production had 
robbed Oman of its traditional entrepreneurial spirit, and 
thus the government should channel funding toward educational 
awareness and training to restore it. 
 
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SQUEAKY WHEEL GETS THE SCHOOL 
----------------------------- 
 
¶4. (SBU) Al-Shanfari also opined that oil revenue gains would 
enable the government to stall on meaningful internal reform. 
 He noted that the Omani government previously has been able 
to use oil revenue to co-opt dissident segments of the 
population through public works projects, and that a flush 
treasury would allow the government to continue to stifle a 
new generation of leaders.  Al-Shanfari also believes that 
spending on frivolous projects, such as the recent $2 million 
spent to upgrade a stadium's lighting and speaker systems, 
would add to inflationary pressures, especially in the areas 
of building materials and related construction costs. 
Spending of this nature gives al-Shanfari pause in predicting 
how the government would be able to manage its resources 
during a period of sustained low oil prices or other revenue 
crisis. 
 
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CONSUMERS FEEL THE PINCH... 
--------------------------- 
 
¶5. (SBU) Dr. Said al-Riyami, Economic Advisor for the 
Ministry of Commerce and Industry, noted that as rising fuel 
prices have affected Oman's business community, the 
businessmen generally have passed the increased costs along 
to the consumers, making Oman more expensive as a result.  He 
specifically pointed out that increased transportation costs 
have resulted in relatively larger price increases in Oman's 
interior regions.  These increases have caught the attention 
of the Minister of Commerce and Industry, and as a result the 
Ministry is studying the issue more closely. 
 
¶6. (SBU) Al-Shanfari noted that the government's Consumer 
Price Index survey, while procedurally sound, is artificially 
weighted with inflation-proof inputs that lead to howls of 
disbelief each time the government announces new inflation 
figures.  The government has commissioned a firm to 
re-examine the market basket used in the survey.  Al-Shanfari 
estimates that true inflation rates for average Omani 
families are easily above 5 percent.  Inflation in some 
sectors, such as construction materials, is even greater.  A 
mid-level government official recently lamented to Emboff 
that the "dream house" he has been building should be 
finished in December, but construction costs have soared so 
high that he will now have to rent it out just to make ends 
meet. 
 
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...BUT IS IT ACTUALLY FROM OIL? 
------------------------------- 
 
¶7. (U) The Ministry is interested in investigating the 
relationship between oil and consumer price increases. 
Commerce Ministry Under Secretary Ahmed al-Dheeb acknowledged 
before the press that the increase in oil prices and decline 
of the dollar (to which the Omani currency is tied) 
contributed to general inflation, but also questioned whether 
the greed of local businesses may also be playing a role. 
Al-Dheeb commented that "The Ministry will take serious 
measures against those who contribute to the rise in prices 
with no legitimate reason." 
 
------------------------------- 
NO SUCH THING AS A FREE FILL-UP 
------------------------------- 
 
¶8. (U) Increasing fuel costs have translated into higher 
prices at the pump for Omani drivers.  However, fuel prices 
have risen in the UAE at an even higher rate, causing fuel 
shortages along Oman's northern border as UAE drivers cross 
the frontier for cheaper gas.  In Buraimi, Oman's largest 
border town, 24-hour gas stations curtailed their operations 
as their fuel inventories ran out.  One Omanoil salesman 
noted that rather than increase inventory, fuel suppliers 
actually decreased supplies to his company's station, causing 
a temporary barring of UAE taxis and commercial vehicles from 
fueling in Buraimi.  While the situation has stabilized, 
Omani drivers are concerned that fuel hikes are fast 
approaching in their rear-view mirrors.  The government 
already raised diesel prices by 43% in early May, which 
provoked a storm of complaints and parliamentary debate. 
 
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POLITICAL IMPLICATIONS 
---------------------- 
 
¶9. (SBU) The government has not raised public-sector salaries 
since the Omani riyal was tied to the U.S. dollar in 1986, 
using the purported lack of inflation as its justification. 
As noted ref B, popular expectations for a long-awaited 
salary increase have risen steadily in recent years, often 
cresting on national occasions such as the Sultan's annual 
address to parliament or the November 18 national day.  With 
the bicameral parliament forming special committees to 
investigate price rises, the Ministry of Commerce's warning 
of price gouging, and the local media carrying feature 
articles on higher prices for essential Ramadan holiday 
cooking ingredients, the government has no cover on the 
inflation front.  In view of hefty government surpluses, it 
also cannot plead poverty.  Popular pressures for a gesture 
such as a pay increase are likely to build as both a way to 
offset the impact of rising costs and to share more broadly 
the current oil revenue windfalls.  A more meaningful use of 
the windfall might be substantial increases in health care, 
education, and infrastructure investment in all regions of 
the country.  Thus far, however, there has been little sign 
of government bending to these forces. 
BALTIMORE