Rising oil prices and economic diversification initiatives in Oman boost GDP growth and lower deficit

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Oman’s economy benefits from large oil and gas reserves, including a sizeable new gas field that began production in late 2017. Located between Asia and Africa – and adjacent to major international shipping routes – the sultanate’s geographic location also makes it a natural regional logistics and manufacturing hub. The authorities are seeking to leverage such advantages in order to diversify the economy and reduce its reliance on hydrocarbons production, particularly in light of the fall in the price of oil over the 2014-15 period. The consequent decline in oil revenue negatively affected growth, as well as government accounts and finances.

However, the authorities have so far been able to fund the deficit without difficulty through international borrowing. Furthermore, a partial oil price recovery in 2017 and 2018 – with Brent crude reaching $70 per barrel in early 2018, hovering near a three-year high – as well as moves by the government to cut expenditure and boost revenue, are reducing immediate pressure on finances.

There are hopes that an economic diversification strategy, which is the ninth five-year development plan, running from 2016 to 2020, will help pick up any remaining slack in the coming years.

Gdp Breakdown

According to figures from the sultanate’s National Centre for Statistics and Information, oil and gas production accounted for 27.1% of GDP in 2016, agriculture and fishing made up 1.9%, industry 21% and the services sector 53.7%. The figure for services includes public administration and defence, which comprised 14.4% of output.

The contribution of hydrocarbons to economic output has fallen in recent years as a result of the oil price fall – and, to a lesser extent, growth in non-oil sectors – from 46.4% in 2014 to 27.1% in 2016. However, as oil prices moderately recovered, its contribution to GDP rose in the first half of 2017, to 32.5%. Nonetheless, the government is working to increase the role of the non-oil economy through ambitious diversification plans, with a focus on logistics, tourism, fishing, mining and manufacturing.


Macroeconomists tend to focus on real GDP growth – which is calculated by looking at growth in each major sector on a constant-price basis – as the main measurement of a country’s economic expansion, in order to account for the effects of inflation and to determine increases in the volume of economic output. In these terms, Oman’s economy has been growing at a relatively stable rate in recent years, at 2.5% in 2013, 4.2% in 2015 and 3% in 2016. In the October 2017 update of its World Economic Outlook database, the IMF forecast the figure would fall to -0.02% in 2017 but rebound to 3.7% the following year.

However, nominal GDP growth, which is denominated in current prices, is arguably a more informative metric for countries dependent on hydrocarbons exports, such as Oman, as changes in the value of oil production reflect real changes in their ability to purchase goods from abroad, rather than exaggerating economic expansion, as other types of inflation are sometimes prone to do.

The high degree of dependence on hydrocarbons for economic growth has meant that swings in the international price of oil cause similarly volatile nominal growth in Oman. For example, GDP growth veered from 44.7% in 2008 to -20.5% the following year. It returned to double-digit figures in the first three years of the 2010s, averaging 16.6%, on the back of substantial oil price rises, before flattening out in 2013 and 2014, at 2.9% and 2.7%, respectively.

Following a dip in the price of oil that began in mid-2014 and gathered pace in 2015, nominal GDP contracted by 13.8% in 2015 and by a further 5.1% the following year, with the value of oil and gas production dropping from OR14.5bn ($37.7bn) in 2014 to OR6.97bn ($18.1bn) in 2016. This was solely due to falls in the value of oil production; gas output rose in value from OR1bn ($2.6bn) in 2014 to OR1.23bn ($3.2bn) in 2016. The non-oil sector saw growth over the period, of 2.8% in 2015 and 2.6% in 2016.

However, oil prices began to rebound from early 2016 onward, and saw another rally at the end of 2017 and beginning of 2018, helping put nominal growth back on a positive track, with the sultanate’s GDP expanding by 12.3% in nominal terms in the first half of 2017, according to data from the National Centre for Statistics and Information. The growth was driven largely by a 42.3% rise in oil production value, to OR3.58bn ($9.3bn), or 27.6% of GDP. The value of industrial output was more or less flat, with growth of 0.1%, while the services sector expanded by 6%, driven by growth of 13.5% in the wholesale and retail trade segment, and 7.8% in transport, storage and communications. The IMF forecast that nominal growth for the year as a whole would stand at 8.5%, slowing to 4.6% in 2018.


Inflation spiked in 2008, hitting 12.6%, but fell sharply in subsequent years, bottoming out at 0.1% in 2015. The indicator has risen since then but remains at low levels, standing at 1.1% in 2016 and 1.7% in December 2017. The consumer price index rose by an average of 1.58% in the first 11 months of 2017, according to data from the National Centre for Statistics and Information. Food and non-alcoholic beverage prices were up 0.42% over the period, with positive numbers throughout the second half of the year. The IMF expects annual average inflation to stand at 3.2% for the year as a whole and to remain at this level in 2018.

Population Size & Gdp Per Capita

The national population stood at 4.65m as of January 2018, according to figures from the National Centre for Statistics and Information. Of the total, 54.8% was made up by Omani nationals, and expatriates comprised 45.2%. According to World Bank data, the population grew by 5.2% in 2016, the fastest rate of any country in the world.

GDP per capita stood at $14,982 in 2016, according to figures from the bank, down from $16,627 the year before and a recent peak of $22,135 in 2012. The figure was the lowest among GCC states, albeit more than double the MENA average of $7125, and less than the OECD average of $36,741. However, a relatively low cost of living in Oman means that residents are, in practice, substantially wealthier than such figures imply: in purchasing power parity terms – that is, taking into account what a given amount of money can actually buy in the country in question, compared to other countries – the country had a GDP per capita of $42,737 in international dollars in 2015, above the OECD average of $41,730.

Labour Force

The size of the employed workforce stood at 2.25m in 2016, according to figures from the National Centre for Statistics and Information, of which 89.6% were working in the private sector. Private sector employment growth has outstripped that of the public sector in recent years, expanding by 35.9% between 2012 and 2016, compared to 20.1% for the public sector over the same period. Private sector employment is dominated by expatriates, who accounted for 88.4% of these workers in 2016. By contrast, citizens of Oman accounted for 83.9% of the 234,000-strong workforce in the public sector in 2016.

There were 1.86m expatriates working in the sultanate as of December 2017, according to National Centre for Statistics and Information figures, an increase from 1.85m at the beginning of the year. At 1.65m individuals, or 88.7% of the total, expatriate workers are overwhelmingly male. Furthermore, they come predominantly from South Asia; citizens of India, Bangladesh and Pakistan together account for 87.2% of the expatriate workforce.

The female labour force participation rate was 30.2% in 2017, according to World Bank figures. This rate was the second lowest in the GCC but above the MENA average of 23.2%. In December 2017, 8.9% of seats in national Parliament were held by women.


Unemployment has risen slightly in recent years, according to International Labour Organisation data. The body estimated the rate stood at 17.8% in 2017, up from 16.9% in 2014. The figure had previously been steadily decreasing from a peak of 19.5% in 2007. Youth unemployment – for individuals between 18 and 24 years of age – is a particularly substantial challenge, recorded at 52.7% in 2017, up from 45.3% in 2014.

Efforts to boost employment opportunities centre, in part, on strategies to develop small and medium-sized enterprises (SMEs). In May 2017 the publicly owned Oman Development Bank announced that a OR70m ($181.8m) fund it launched the previous February to support SMEs would tackle unemployment through low-interest loans that applicants would not need to start repaying for 12 months.

The government-backed Al Raffd Fund for entrepreneurship also focuses on youth and unemployment; 83% of the financing it has provided since its founding in 2013 has gone to 18- to 45-year-olds, and its Tasees financial programme (one of four it offers) specifically targets jobseekers willing to start their own businesses. Since the end of 2015 banks have also been required to dedicate 5% of their loans to the SME segment, though the target has yet to be reached (see Banking chapter).

Foreign Trade

Oman has historically recorded substantial surpluses as regards trade in merchandise goods. The surplus peaked at OR9.24bn ($24bn) in 2012, as a result of high oil prices at that time. The value of exports peaked the following year, at OR21.7bn ($56.4bn). However, export values have fallen sharply since, hitting OR10.3bn ($26.8bn) in 2016, their lowest level since 2007. Imports also fell in value, allowing the country to maintain a continued – though narrower – merchandise goods trade surplus of OR1.4bn ($3.6bn).

The value of Omani exports (including re-exports) grew 17.8% year-on-year in the first half of 2017, to OR5.84bn ($15.2bn). This was largely driven by a 32.4% rise in the value of oil and gas exports, to OR3.46bn ($9bn), or 59.4% of total exports. Such hydrocarbons exports were dominated by crude oil sales, up 32.2% to OR2.91bn ($7.6bn).

The growth of non-oil exports outpaced that of general exports, up 26.7% at OR1.68bn ($4.4bn), largely driven by rises in the value of mineral, chemical and metal exports (up 43.6%, 36.7% and 33.8%, respectively). Re-exports, in contrast, fell in value, to OR788.3m ($2bn), a drop of 27.6%, while imports grew by 16.6% to OR4.93bn ($12.8bn).

The UAE was the largest non-oil export market in the first half of the year, on sales of OR358.5m ($930.9m), followed by Saudi Arabia (OR244.9m, $635.9m) and India (OR151.4m, $393.1m). The UAE was also its largest re-export and import market, on figures of OR283.8m ($736.9m) and OR2.05bn ($5.3bn), respectively. However, much of the imports figure is likely to be made up of re-exports rather than goods originating in the UAE. This put the UAE ahead of the US at OR587m ($1.5bn) and China with OR246.8m ($640.9m) of imports over this period. The country’s largest oil export market in the first 10 months of 2017 was China, with 172.1m barrels, followed by India with 24.4m.

Imaad Al Harthy, acting deputy CEO of the Export Credit Guarantee Agency of Oman (also commonly known as Oman Credit), told OBG that historically, the sultanate’s export markets had been geographically constrained, but that it was now seeking to expand and export to countries further afield. Key targets include Ethiopia and Iran, which he said could respectively act as gateways to East African and Central Asian markets. Other target markets include Brazil, China and the UK.

Measures being taken by the agency to boost exports generally include targeted support for the SME segment, for which the Export Credit Guarantee Agency of Oman has developed a service to provide collateral for financing. Al Harthy told OBG that obtaining such funding was the main challenge such smaller firms faced when trying to bring goods to export. In April 2017 the agency also launched a new scheme to support re-exporters.

Other measures to bolster trade include the launch by the sultanate’s Customs department in mid-2015 of Bayan, a single-window electronic Customs clearance service. These and other measures have facilitated trade in recent years, with the sultanate’s position in the World Bank’s “Doing Business” report in the trading across borders category improving from 49th out of 190 countries in the 2013 edition to 11th in the 2018 edition.

Current Account

Having remained in surplus since 2010 and peaking at 13% of GDP in 2013, the sultanate’s current account balance moved into the red in 2015, to the tune of 15.5% of GDP, as a result of the decline that year in international oil prices. The deficit expanded in 2016, to 18.6% of GDP, according to figures from the IMF.

However, amid a partial recovery in oil prices, the fund expected the deficit-to-GDP ratio to improve in 2017, to 14.43%, and to gradually continue easing over subsequent years. Hettish Karmani, head of research at Ubhar Capital, an investment firm headquartered in Oman, said that increasing levels of economic diversification will help to improve public accounts in the coming years, even in the absence of a full oil price recovery. Bader Al Nadabi, executive director at Al Hae’l Ceramic Company, voiced further support of these endeavours. “While the economic slowdown has undoubtedly brought some hardships, it has given an important boost to the diversification drive, as it has underscored the dangers of relying on oil,” he told OBG.

Foreign Exchange System

As is the case in most GCC states – with Kuwait a partial exception, aligning the dinar to a basket of currencies – the Omani rial is pegged to the US dollar, at a rate of $1:OR0.3849. This has been in place since 1986.

The aftermath of the 2014-15 oil price dip caused some to worry that Gulf countries, including Oman, could struggle to maintain these pegs. “Certain market commentators expressed concerns about regional GCC pegs holding against the US dollar,” Lloyd Maddock, CEO of Ahlibank, told OBG in October 2017. “However, such fears abated in light of the governments’ initiatives to diversify their economies, curb spending and subsidies, introduce a value-added tax and avail themselves of international funding, coupled with the modest rise in oil prices.” In September 2017 the Central Bank of Oman publicly reiterated its commitment to the peg system, saying the rial was not facing significant pressure in foreign exchange markets.

Investment Inflows

Inward foreign direct investment (FDI) stock in the sultanate totalled OR7.4bn ($19.2bn) in 2016, up OR800m ($2.1bn) over 2015, according to Omnivest. The UK was the largest foreign investor, accounting for around 46% of the total, and hydrocarbons was the leading sector, attracting 48% of total FDI.

FDI inflows have decreased in recent years, in part resulting from the fall in the international price of oil, which prompted some investment outflows. According to figures from the UN Conference on Trade and Investment, total FDI inflows were $142m in 2016, after averaging $1.53bn in the 2011-14 period. This performance was, nonetheless, an improvement over 2015, when the country had negative inflows of $2.69bn. FDI inward stock stood at $18.55bn in 2016, an increase from $14.99bn in 2010.

Doing Business

The sultanate ranked 71st out of 190 countries in the World Bank’s “Doing Business 2018” report, which measures the ease of doing business across a range of categories and various metrics. The country’s relative position has fallen in recent years, from 47th in 2013. Its strongest performance in the 2018 edition was in the trading across borders category, in which it ranked 11th, while its weakest was in the protecting minority investors category, in which it came 133rd.

Improvement in these metrics – particularly in protecting minority investors – will be a crucial part of development. “Oman’s diversification efforts must include initiatives that improve the ease of doing business and support SMEs,” Redha Juma Mohammed Ali Al Saleh, vice-chairperson for administration and finance affairs, and chairperson of financial, banking and insurance committees at the Oman Chamber of Commerce and Industry, told OBG.

Investment Law

Moves to bolster FDI and improve the business environment include planned changes to key investment legislation. The government, in cooperation with the World Bank, has been drafting a revised version of the country’s Foreign Capital Investment Law since 2015, and some reports have suggested that the new version could see a relaxation or even the abolition of the 70% foreign ownership cap currently applied to onshore companies in most sectors. Such restrictions are common in the region, and indeed Oman’s local ownership requirements are on the low side, with some states requiring majority-local ownership.

In April 2017 the Central Bank of Oman confirmed that plans to revise the law remained in place, though it did not comment on the content of the planned changes. Karmani told OBG that foreign ownership limits might be relaxed, which he said would help in attracting more investment. Other industry players also believe that relaxation of these requirements would yield positive results for the economy.


Oil production fell by 3.7% in the first 10 months of 2017 to an average of 970,000 barrels per day, from record levels of 1m during the same period a year earlier. The drop followed an agreement reached in December 2016 by the Organisation of the Petroleum Exporting Countries, of which Oman is not a member, and other oil exporters to collectively cut output in order to support international oil prices. In late November 2017 the countries agreed to maintain the cuts to the end of the following year, the second extension agreed upon.

Gas production, by contrast, is expected to have risen substantially in 2017, with September witnessing the launch of production several months ahead of schedule at the Khazzan gas field. The lead partner in the project is UK oil major BP on a 60% stake; the other 40% is held by the state-run Oman Oil Company Exploration and Production. The field should produce a total of 297bn cu metres of gas across two phases. Under the initial phase, which is due to come fully on-stream in 2018, production will be around 28.3m cu metres per day, boosting national output by one-quarter. This will rise to 42.5m cu metres under the second phase.

Hamid Hamirani, senior economist at the Office of the Minister Responsible for Financial Affairs, described the launch of the field as a game-changer. “One of the old challenges for the economy was a lack gas availability for industry. However, Khazzan can now help to fill that gap,” he told OBG. He added that this would provide the country with better margins than selling the gas abroad, given what he described as the current oversupply of international energy markets. However, he said that some of the gas would initially have to be exported, while industrial projects using it as feedstock are developed.

Diversification Plans

Diversifying the economy away from hydrocarbons is a core element of development plans and has been given added impetus by declining oil prices. Under the ninth five-year development plan, the authorities launched the National Programme for Enhancing Economic Diversification, or Tanfeedh (which translates to “implementation”), in early 2016. The programme, inspired by Malaysia’s efforts to diversify its economy, has a particular focus on five sectors: manufacturing, logistics, tourism, fisheries and mining. It will follow eight steps, the fifth of which – the implementation phase – is set to begin in 2018.

Pankaj Khimji, director of Omani conglomerate Khimji Ramdas, told OBG he thought that the programme had been well conceived, focusing on some areas of the economy with high growth opportunities, and that these would start to make significant contributions to GDP from around 2020 onward. Awad bin Mohammed Bamkhalif, CEO of Oman & Emirates Investment Holding Company, echoed the potential of the initiative. “I hope that the Tanfeedh programme lives up to its namesake and leads to the swift execution of diversification efforts, as it is now more important than ever,” he told OBG.

Other initiatives that are supporting the sultanate’s diversification efforts include the 2014 founding of Muscat National Development and Investment Company, which is also known as ASAAS. The organisation is jointly owned by 10 government institutions and is mandated to invest in the tourism, health care, retail, and logistics and transport sectors. The firm has a primary intention to act as a partner to foreign investors with investment horizons in the region of five years, helping, for example, to approve local administrative measures.

ASAAS has focused on travel and tourism, which are ripe for further development, benefitting from Oman’s long coastline, year-round warm temperatures and geographically diverse interior, which affords numerous opportunities for outdoor activities and adventure sports. Initiatives by ASAAS in the sector include its establishment of the sultanate’s first budget airline, SalamAir, which launched its maiden flight in January 2017, and plans announced in late 2016 for a 1.5m-sq-metre leisure and entertainment cluster to be built in Barka. The entity had invested OR100m ($260m) in the industry as of early 2018, and there are plans to raise this by a factor of 10 over the next decade.


OBG spoke with several observers who identified mining as a particularly promising sector. Interest in the industry is expected to increase in the wake of a soon-to-be-revised mining law. Among other measures, this will establish a one-stop shop for operators seeking mining licences, and will lengthen licence periods. In October 2017 the authorities announced they would unveil a new strategy to develop the sector in 2018. “Oman is rich in natural resources such as chromite, copper and building material aggregates. Currently, however, mining is mostly focused on lower-margin bulk minerals such as limestone and gypsum,” Maddock told OBG. “The new mining law is eagerly awaited and it should facilitate more investment in the sector by international players partnering with local mining operators. A UK consultancy, SRK, is currently preparing recommendations for sector development, after which the new regulations will be announced.”

Special Economic Zones

A key element of the sultanate’s long-term diversification plans is a network of free zones at the ports of Sohar and Salalah, and at Al Mazunah near the Yemeni border. Such zones offer benefits, including 100% foreign ownership, reduced Omanisation requirements, 10-year corporate tax holidays and exemptions from Customs duties. The Sohar and Salalah free zones are operated by companies under Asyad, a holding company responsible for grouping state-owned companies, formerly known as the Oman Global Logistics Group until a rebranding in mid-2017.

Another major investment hub is in development, in the form of a port and special economic zone at Duqm, located approximately midway along the coast between Muscat and Salalah. The area’s regulatory framework is more detailed than those of the free zones, and allows the free zone authority to issue its own secondary legislation in areas such as land rights, Customs duties and licensing, but otherwise offers broadly similar incentives and exemptions to investors. Port and dry-dock facilities have already been completed at the site. Headline investment projects at the zone include the eventual construction of a 230,000-barrel-per-day refinery by a 50:50 joint venture between Oman Oil Company and Kuwait Petroleum, a partnership agreement for which was signed in April 2017.

The zone is also attracting large-scale investment from China. Both Duqm specifically and Oman in general are strategically located across the Gulf of Oman from the Pakistani port of Gwadar, which makes up one end of the China-Pakistan Economic Corridor, a series of infrastructure projects throughout Pakistan under the wider agenda of China’s Belt and Road initiative. Oman is also well located to serve as a gateway to both the Middle East and East Africa for Chinese firms.

Oman Wanfang, a consortium of six Chinese companies from the country’s northern Ningxia Hui Autonomous Region, is developing a Chinese-Omani industrial park in the city, in which it says Chinese firms intend to eventually invest a total of $10.7bn. A $138m construction materials storage facility is due to be completed at the facility by early 2019, to be followed by a methanol plant, built at a cost of $2.8bn, among nine projects in total.

The authorities plan to develop the port and special economic zone into a major regional logistics and trans-shipment hub. A key advantage in this respect is its geographic location: it is closer to international shipping lines in the Indian Ocean than ports located inside the Straits of Hormuz. Being situated outside this area also means that ships docking there are not at risk of being affected by any closure of the straits – through which a substantial portion of the world’s oil is transported – reducing insurance costs. “Duqm’s strategic location, with deep waters and proximity to international shipping lines, is a big attraction, as are tax breaks available for free zone companies, low prices and less stringent Omanisation requirements,” Karmani told OBG. “Oman also has good relations with everyone, and low levels of political and conflict risk, which gives investors a sense of security.”

Regional Ties

Another major potential investor in Duqm and Oman more generally is Iran. Underscoring this, in January 2016 Iran Khodro Industrial Group, the country’s largest carmaker, signed a memorandum of understanding to conduct a feasibility study on the construction of a $200m vehicle-assembly facility in the Duqm Special Economic Zone. The announcement came against the backdrop of wider hopes for increased trade and investment ties between the two countries in the wake of the 2015 international agreement to resolve the dispute over Iran’s nuclear programme, which Oman helped forge by hosting preliminary secret talks between Iran and the US.

Increased Trade

Such hopes have partly come to fruition, with trade between the two countries nearly doubling from $650m in 2015 to $1.2bn in 2016. However, US President Donald Trump has voiced disapproval of the nuclear deal, and some US sanctions that remained in place following the conclusion of the deal effectively restrict banks’ abilities to deal with Iran, which has made it difficult for local banks to move money to and from the country. Nevertheless, the Omani government reiterated its desire to strengthen trade ties with Iran during a visit by Yusuf bin Alawi bin Abdullah, Oman’s minister of foreign affairs, to Tehran in July 2017.

The sultanate has also made efforts to maintain good relations with its neighbours and increase trade with Qatar in the wake of the economic blockade of the country imposed by the UAE, Saudi Arabia, Bahrain and Egypt in June 2017. “The commercial relationship between Oman and Qatar strengthened in 2017,” Osama Maryam, CEO of Al Hosn Investment Company, told OBG. “Qataris have now become especially interested in investing in Oman’s education, mining and food sectors, among others.”

Omani-Qatari trade grew approximately 20-fold in the three months following the imposition of the economic embargo, as Qatari logistics firms shifted their operations from Dubai – where most Qatar-bound cargo stops to be transferred from larger vessels onto smaller ships – to Oman, with a particular focus on the Port of Sohar.


The post-2014 fall in oil prices is likely to see the economy remain under pressure in the coming years. Government finances will feel a pinch as debt repayments kick in from 2019 onward. However, the partial recovery in prices in 2017 and 2018, as well as successful moves to bring down the fiscal break-even oil price through spending cuts and tax rises, will reduce such pressure in the months and years ahead. The implementation of these measures will need to be carried out in a way that continues to support growth (see analysis). “Given that Oman’s private sector has not yet reached the maturity level of those in more advanced economies, there should be a fair balance between increases in corporate and consumption taxes,” Stephen Thomas, CEO of Renaissance Services, an Omani offshore vessel fleet support services firm, told OBG.

Over the longer term, moves to diversify the economy look set to develop various non-oil sectors, and bolster the sultanate’s status as a regional transport and logistics hub. This is expected to boost employment, non-oil exports and government revenue.


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