Country Report Oman
Economic growth is expected to maintain its momentum in the medium term underpinned by strong domestic demand and economic diversification. However, the combination of high government spending and a decreased oil price puts pressure on fiscal sustainability.
Author: Jan-Willem van Tongeren (trainee)
Strengths (+) and weaknesses (-)
(+) Strong external position
Oman’s continuously high oil export revenues have resulted in years of subsequent external surpluses, significant amount of FX-reserves and low public debt.
(-) Weak labour market
The education level in Oman remains low and results in a poorly skilled Omani workforce and high dependence on expatriate workers.
(-) Narrow economy is too dependent on the oil sector
The economic structure of Oman is very weak with the high dependence on oil export revenues resulting in a very high vulnerability to fluctuations of global oil prices.
1. Low oil price puts pressure economic growth and budget balance
In response on the social turmoil in 2011, Oman undertook several policy initiatives which focused on labor market issues and public investment. The government measures resulted in expanded public employment, higher wages and (unemployment) benefits and new infrastructure as well as social investment projects. The government spending program could be financed on the back of high oil prices. As oil and gas contributes approximately 50% to GDP and amounts to 90% of total government revenues, Oman’s economy is vulnerable to a sharp drop in oil prices. The sharp fall of the oil price in the second half of 2014 is thus having a serious negative impact on the economy. This is especially visible in the expected budget deficit for the coming years (approximately 6% of GDP in 2015 and 5% of GDP in 2016) and a slowdown of economic growth. This situation will not improve as long as the crude oil price is below Oman’s fiscal breakeven oil price of USD 110/bbl (one of the highest in the Gulf region). Meanwhile the government expenditures are inflexible, as a large part has been introduced as an answer on the social turmoil of 2011. It will thus become more difficult for the Omani government to maintain the social spending if low oil prices persist, which could lead to increased public unrest.
2. Diversification of the economy
Diversification of Oman’s economy is important, as the country is very dependent on hydrocarbon revenues while its hydrocarbon reserves will last only approximately 16 years according to BP Statistical Review of World Energy 2014 (e.g. Saudi Arabia and UAE respectively 66 and 81 years). During 2014, the government continued pursuing reforms aimed at diversifying the economy away from oil and gas by promoting non-oil exports, private sector growth and creating jobs for the Omanis (unemployment stands at about 15%). To facilitate this, the government announced in November 2013 that more than USD 50bn worth of development (infrastructure) projects are planned for the next five years. Next to this, the government has increased subsidies on core goods (e.g. food and fuel) and services and raised public sector wages in response of the social turmoil of 2011. The raising of public wages however works contra productive for diversifying the economy away from the hydrocarbon sector. The increased government spending has had a serious impact on Oman’s fiscal breakeven oil price, which increased from USD 60/bbl to USD/110 bbl between 2008 and 2014.
The government spending mentioned above has weakened the government’s financial position and even before the oil price decreased, budget deficits were anticipated in 2014-2016. As long as the oil price is far below the fiscal breakeven oil price, unchanged government spending will lead to high budget deficits and, in turn, a combination of increasing public debt and/or drawdowns from wealth funds. For the short term however, Oman has a buffer based on the low public debt (currently 5% of GDP) and wealth funds (worth approximately USD 19bn). For the medium term, however, spending restraint and non-oil revenues enhancing measures are needed to support a sustainable fiscal policy and economy. This can be realised by: i) decreasing the large public-sector and gradually curtailing high public-sector wages (in line with the private sector), ii) targeting generalised subsidies, especially on fuel prices and iii) an increasing focus on small medium enterprises for improving economic diversification and employment.
Oman is a small high income economy that is heavily dependent on its oil resources. It possesses around 0.3% and 0.5% of the world’s proven oil and gas stocks and contributes 1% of total world production (2013). Aware of dwindling oil reserves (approximately 16 years), the government actively pursues a development plan that focuses on industrialisation, privatisation and diversification away from oil, with the overall objective of reducing the oil sector's contribution to GDP to 20% by 2020. However, oil is gradually being replaced by natural gas, which was discovered in large quantities since the late 1980s. Diversification plans now are de facto limited to stimulate the export of liquefied natural gas (LNG) and gas-based industries, such as petrochemicals. However, by shifting oil for gas, the dependence on external demand for hydro-carbons in China and other Asian markets (two-thirds of all exports) is unlikely to be reduced in the coming decade. Agriculture is not a priority in terms of diversification efforts; it contributes only 1% to GDP in spite of the vital role it plays in employment. Among services, tourism is being promoted and is a successful key component of the diversification strategy. Just 40 years ago, Oman was almost totally isolated from the global economy. But over the years, the sultanate encouraged foreign involvement, particularly in tourism, information technology and manufacturing to speed up economic growth. Efforts to liberalise the business environment are aimed towards the protection of national interests via programs such as "Omanisation" of ownership and the weak labour market. Thus, the business environment is far from ideal, but red tape, slow decision making and political interference in the legal system and corruption are common, are at lower levels than in most other Arab countries.