- Oman’s economic dependency on oil revenues
- Measures undertaken by Oman to diversify economy- Vision 2020 & Vision 2040 plans
Oman, an economy traditionally dependent on oil and natural gas exports, is attempting to structurally diversify and strengthen its non-oil sectors. With the lowest GDP per capita amongst the GCC (Gulf Cooperation Council) nations, Oman generates c. 71% of revenues from the oil & gas sector – a pertinent tool the government has used to fund development projects, cap the rising youth unemployment levels as well as subsidize approx. 84,000 low income households. Despite its fossil fuel reserves being the smallest in comparison to its neighbours, Oman’s heavy dependence on hydrocarbons, necessary for the bulk of the Sultanates revenue generation, exposes it drastically to both political and economic risk. To add to this, the country’s oil and gas supplies are reducing at a fast pace and are expected to deplete in the next 14 & 27 years respectively.
Oman’s once healthy state coffers have been significantly hit by the dip in oil prices during the recent few years. This has resulted in widening of the twin deficits posted by the country. As a result of this, rating agencies such as S&P, Moody’s and Fitch cut Oman’s rating to Junk with Fitch stating that the fiscal deficit has resulted in a sharp decline in the Sultanate’s sovereign & external balance sheet. Oman registered double-digit current account deficit and fiscal deficit during 2014 in view of the lower oil price environment. While it has managed to steadily cut its deficits since 2016, however, it still posted a deficit of 9% of GDP in 2018. Last year, the IMF, after a review of the Oman economy, had instructed the country to introduce substantial reforms in order to get its economy back on the right track. Many have termed this attempt of transitioning as a make or break for the economy and fear if Oman would need a similar bailout like the one granted to Bahrain in 2018.
Back in the day, like all GCC countries, Oman employed its hefty oil revenues to fund its expansive and modern infrastructure (including roads, electric utilities, medical services and public education) to catch up with developed countries, specifically after experiencing the oil boom in the 70s. It is worth noting that Oman’s attempt at weaning itself off oil dependency is not new: the country drafted its Vision 2020 plan back in the 90s. The plan, however, failed to achieve its desired results as the recommendations were never fully implemented nor monitored. This neglect was further exacerbated by the recovery of oil prices post 1996 as well as the steep increase during the 2002 – 2012 period when oil prices topped ~US$ 100/bbl. Given that, higher oil prices persistently boosted government coffers enough to fund development projects, the government carried on without paying much heed to the Vision 2020 plan until Oman was again hit with a severe drop in oil revenues. Since a drastic slump in crude oil prices in 2014, the country has seen its fiscal deficit shoot up, forcing it to slash its fuel subsidies as well as delay infrastructure projects whilst adopting several other austerity measures.
Amidst dwindling finances, the government has been heavily criticized for its increasing dependency on external borrowings coupled with lousy diversification efforts. IMF’s latest economic update, however, presents a slightly more optimistic tone for the country: IMF recently commented that economic activity in the Sultanate is gradually recovering. The report further added that real non-hydrocarbon GDP growth is estimated to have increased by 1.5% in 2018 vis-a-vis 0.5% in 2017. Oil and gas production increases brought overall real GDP growth to 2.2%. Fiscal deficit improved to 9% of GDP in 2018 in comparison to 13.9% the previous year owing to higher oil revenue generation. As per its 2019 budget, Oman is estimated to generate 74% of revenues via crude exports. For 2019, real GDP is expected to grow by just 1.1%, against the earlier forecast of 5%. However, on a positive note, fiscal deficit is expected to decline further to 8% of GDP as the impact of lower oil prices is expected to be offset by a one-off revenue, a decline in spending as well as implementation of excise taxes on certain selected products. Non-hydrocarbon growth is projected to increase gradually over the medium term, reaching about 4% assuming efforts to diversify the economy continue.
Rating agency Fitch predicts that Oman’s government debt would reach c. 47% of GDP by the year 2020 and the Net Assets currently at 7% of GDP (2018) would fall to a negative of 8% by 2020. Last year, Oman raised $8 bn in international bond sales that helped it cover the 3 bn riyal (US$ 7.79 bn) projected deficit in its 2018 state budget. An upswing in oil prices, however, reduced the budget deficit by 43% to 1.87 bn riyal. This year, Oman is expected to issue close to US$ 2 bn in bonds. The country plans to cover 86% of deficit via debt though the Sultanate might also resort to drawing down on the SGRF -State General Reserve Fund.
To tackle the long-term issues, ‘Vision 2020’ program has now been repackaged to ‘Vision 2040’ with Oman aiming to modernise agriculture, boost tourism, foster start- up ecosystems, as well as establish free industrial zones. In addition to these ambitious goals, the plan aims at doubling per capita share of GDP to 6% growth while share of non-oil sectors is aimed to account for upwards of 90% of GDP. Further, it aims to increase foreign investments to 10% of GDP and push for increase of Omani participation in the private sector to 42% by the year 2040.
To boost state revenues, the Ministry of Finance has announced plans to implement a 5% VAT effective from 1st September 2019. Oman’s VAT implementation has been rather delayed in comparison to other gulf countries - the government had signed the GCC VAT Framework (or the Common VAT Agreement) back in 2017 itself. The consumption tax was expected to aid the GCC countries in coping with the oil price swings and the possible recession that ensued. The UAE and Saudi Arabia had introduced VAT back in January 2018 itself. In fact, even Bahrain, that received a US$ 10 bn in Gulf aid pledges, implemented VAT this year as well. Further efforts to curtail spending and the planned introduction of VAT could reduce the deficit by another two percentage points of GDP over the next two years.
Oman very recently announced a slew of taxes, this time on products ranging from pork, alcohol, tobacco and energy drinks and termed this as the ‘sin tax’. The Sultanate expects this to generate an approx. revenue of US$ 260 mn in yearly revenues. Oman, like any of the Middle Eastern countries, has been reluctant to introduce strong measures which would upset the locals. The Sultanate, however, now has deemed it necessary to risk it. Apart from taxes, Oman is also investing in renewable energy projects, with the 2 most prominent ones being solar backed and ironically to be used in the oil industry. Additionally, the country is pivoting on several international strategies. Given the rather complex intra-GCC environment, Oman deftly developed a foreign policy accommodating China and Israel in order to boost its diversification plan. Tel Aviv, famous for its highly innovative start-up network, is seen by Oman as a valuable partner in assisting the latter in the high-tech and agricultural domain. Furthermore, Oman is setting itself up to play a crucial part in China’s ambitious and expanding footprint in the region thanks to its strategic geolocation, independent foreign policy and influence in energy markets. In line with this, there are plans on transforming its ports with its Duqm Port being its star project. In addition, the surrounding SEZ fits well into China’s Belt & Road Initiative portfolio as China hunts down operating bases to effectively expand its export markets in the Gulf regions.
Given the hefty oil revenues that GCC countries have enjoyed for decades, the citizens now need to undergo a social transformation as well while the economy undergoes an economic one for the Vision 2040 plan to work. Change, however, comes slow and this fact has been recognized by even the IMF who has advised the Sultanate to not implement any brash changes that might not go down well with the public. Although Oman has started implementing several measures to wean itself off the dependency of oil revenues, it’s going to be a long road ahead.