Oman, oil, and its outlook
As Oman moves away from relying on oil revenues, the Government is looking towards the private sector and foreign investment, writes Marcus Turner-Jones.
Until the 1970s, Oman was somewhat isolated. It’s the oldest independent state in the Arab World, strategically located at the mouth of the Arabian Gulf and rich in oil wealth, albeit fairly modest compared to its neighbours. Unlike other countries in the Gulf, Oman has not faced the same economic pressures caused by Islamist militant activity and a massive influx of refugees fleeing the crisis in Syria and Iraq. However, it has not remained impervious to political dissent from critics of the ruling family. In 2014, Oman had a population of 3.993 million, 43.4 per cent of whom were expatriates. A third of the population lives in Muscat, the capital of Oman.
The majority of Oman’s income is derived from oil, but since the 1970s, when Sultan Qaboos Bin Said deposed his father, Sultan Said bin Taimur, and took the reins of power, the country has embarked on a series of economic reforms. Tourism has become an increasing source of revenue and the government is exploring other revenue streams in a bid to diversify away from oil.
Oil makes up 44.8 per cent of Oman’s GDP, with non-oil activities at 57.1 per cent. GDP grew by 4.6 per cent between 2013 and 2014, but a fall in the international price of oil has cut deep into Oman’s national income, putting pressure on government revenue and hampering government spending. In 2014, oil production was 945,000 barrels per day. This is, in part, thanks to recent oil discoveries and improved recovery techniques.
The services sector dominates non-oil GDP, but industry, in particular manufacturing, accounts for 18.1 per cent and agriculture and fishing account for 1.3 per cent.
The IMF predicted Oman’s GDP will expand by 2.68 per cent in 2017, and a further 3.8 per cent in 2018, an improvement on previous GDP projections. This is due to a partial recovery in oil prices, as well as Oman’s successful economic policies.
The construction sector enjoyed growth of 8.3 per cent in 2014. It is now worth $5.3 billion of Oman’s GDP. Manufacturing also grew by a modest 0.4 per cent in 2014. Transport, storage and communications also grew by 7.2 per cent in 2014.
Omani banks are in good shape. According to KPMG, asset and profit growth is strong and their cost to income fell in 2015, but falling oil revenue has affected investor confidence and the banks have had their ratings downgraded recently.
Oil is the biggest single contributor to Oman’s GDP, but oil revenue has fallen and Oman’s oil wells are likely to dry up within 20 years. It’s imperative that the Sultanate finds other sources of income.
The Tanfeedh is a five-year plan which aims to reduce Oman’s reliance on oil income from 44 per cent to 26 per cent by 2020. Tanfeedh was launched in 2016. It aims to raise the profile of five key industries in Oman. These include tourism, mining, industry and manufacturing, fisheries, transport and logistics. However, growth in these sectors is unlikely to be straightforward.
Plans are afoot for the development for three ports along the coast. Oman occupies a strategic position at the gateway to the Gulf, so there is a market to exploit, but a proposed rail link between the planned ports and the wider region has been put on hold.
There are also tentative plans in place for a gas pipeline between Oman and its neighbour, Iran, but the government and financiers are fearful of moving forward for fear of causing ripples in Washington.
Between 12,000 and 13,000 private sector jobs were created in 2016. The government aim is to repeat this success in 2017. The Tanfeedh programme is supporting 121 projects and initiatives, which will lead to the creation of a further 30,000 jobs. This will add an extra $4.4 billion to the economy.
Falling oil revenue has hampered government spending. Budget cuts have allowed the government to reduce public spending by eight per cent in 2016, but spending still exceeded government targets by six per cent. This led to a deficit of $13.8 billion, which was 60 per cent higher than previous estimates.
The budget for 2017 is focusing on further reducing expenditure. New taxation is being introduced to increase government revenue. This includes an increase in corporation tax and a new tariff on tobacco and alcohol. The government hopes extra taxation will reduce the budget deficit to $7.8 billion.
The Oman government is also looking at the overseas bond markets and forex trading as a source of extra revenue. In June last year, Oman offered five- and 10-year notes, raising $2.5 billion in additional revenue. In 2017, it is planning more bonds offerings, which will raise a further $5.5 billion internationally and $1.6 billion locally.
For decades, Oman was a secretive state, jealously guarding its privacy and operating under near feudal rule. In recent years, this has changed and today Oman is keen to court the private sector and encourage international investment.
In 2016, the government launched the InvestEasy portal, which brought 76 government services together in one easy-to-use web portal. As a result, Oman is now ranked 32 in the World Bank ‘starting a business’ category. Capital requirements at incorporation have been lifted and it’s a lot easier to register employees. A public-private partnership initiative is expected to be introduced this year, which should encourage more private sector investment and faster delivery on projects, particularly in the healthcare sector.
Measures like this will further enhance Oman as a place to do business within the international community. It’s an important move in the right direction as Oman seeks build a sustainable economy and further diversify away from dwindling oil revenue.
Oman’s economic and political future is uncertain. Sultan Qaboos Bin Said has successfully guided Oman into the 21st century, transforming the country with bold economic initiatives and transforming it from a feudal state into a major power in the region. But Sultan Qaboos Bin Said has cancer, and with no offspring or close relatives, who will succeed him is unclear. There is a real danger than Oman will destabilise when Sultan Qaboos Bin Said dies, which could lead to further problems in the Gulf region.
Written by Marcus Turner-Jones:
Turner-Jones graduated from Economics at the University of Sheffield before going on to work for City Index in London. He now writes freelance and spends time between his hometown of Harrogate and Buenos Aires.