The economy contracted during the first half of 2007. This was driven by a drop in oil production following a strong outturn in 2006, reflecting cutbacks to optimize oil field utilization as well as ongoing facilities maintenance. The government and private nonenergy sector, on the other hand, provided a positive impetus to growth benefiting from energy-related income spillovers.
Inflation is subdued and credit growth has only recently picked up. Inflation remains low at 0.1 percent (year-on-year) through the first nine months of 2007, partly due to price controls and declining prices on clothing and recreation. Credit growth rose by around 5 percent in the first half of 2007 following a contraction in 2006, reflecting base effects and more broad-based credit expansion. Although nonperforming loans (NPLs) in the banking sector remain high, these mostly relate to credit losses incurred in the late 1990s following financial problems in the corporate sector; provisioning appears broadly adequate and the generation of new NPLs is low. Moreover, local banks' capital adequacy ratios remain high at close to 20 percent.
High oil and gas prices continue to drive large fiscal and current account surpluses. As in the past, energy-related revenue windfalls are being largely saved and invested abroad. The primary fiscal surplus reached 21½ percent of GDP in FY2006/07 (April-March) as oil and gas revenues remained very high. The current account surplus reached 56 percent of GDP in 2006 for the most part reflecting high nominal energy exports.
Growth will remain weak in the near term, but recover over the medium-term. Output is projected to slow to around ½ percent in 2007 and decline fractionally in 2008 due to extensive oil sector facilities upgrading as well as the maturation of oil fields; nonenergy private growth is expected to remain solid. The main risk to the near-term outlook is a global slowdown leading to lower energy prices. Over the medium term, growth is expected to recover and reach around 3 percent as oil production returns to current levels, with new and upgraded facilities coming on stream, and government capital spending is stepped up with improved implementation. There are upside risks to this outlook related to possible new hydrocarbon discoveries.