In 2013 and the first half of 2014 Oman’s economy continued to expand on the back of rising public and private investment, strong oil and gas revenues and steadily increasing levels of non-oil activity. According to data published by the IMF – Oman’s National Centre for Statistics and Information (NCSI) does not regularly release inflation-adjusted GDP numbers – real GDP growth rate in the sultanate was at 5.1% in 2013, a slight increase from 5% in 2012.
These figures are in line with Oman’s recent history. Indeed, in the four decades since Sultan Qaboos bin Said Al Said came to the throne in the early 1970s, Oman has been transformed into a modern economy. Like most of its neighbours in the GCC region, oil and gas serve as the sultanate’s economic backbone, making up 90% of government revenues and more than 50% of GDP, according to recent data released by Deutsche Bank. At the same time, over the past decade in particular, the government has successfully built up a variety of other key industries, such as tourism, agriculture and aquaculture, and manufacturing of various sorts. Given the sultanate’s status as a stable, business-friendly nation in an unpredictable region, not to mention its reputation for transparency and good governance, most local players expect to see continued economic growth for years to come.
However, Oman does face a variety of economic challenges. While the sultanate has recorded budget surpluses in recent years, the decline in the price of oil on international markets has the potential to undermine the government’s revenue base. At the same time, the sultanate is planning for steadily increasing expenditure in the coming years. Indeed, as of mid-2014 the government was in the early stages of what is widely expected to be a large-scale infrastructure revitalisation programme.
Major projects that are either under way or in the initial planning stages include the Oman National Railway network, the development of new industrial and logistics capacity at Duqm, Sohar and Salalah, among other locations, and a handful of major new airport and road initiatives. Additionally, in recent years the government has spent heavily on fuel and food subsidies, job creation and other programmes.
In an effort to boost revenues, the state has recently ramped up investments in the oil and gas industry, as well as in numerous non-oil segments. In 2013 oil production in Oman increased by 2.3%, down from a production increase of 4.1% in 2012. Meanwhile, the services sector, which is the second-largest GDP contributor, grew by 10% in 2013, down from 15.1% in 2012, according to IMF data.
When Sultan Qaboos came to the throne in 1970, the sultanate was primarily an agrarian society. While the first commercial oil discoveries were made in the early 1960s – at Yibal in 1962, Natih in 1963 and Fahud in 1964 – Oman did not begin to export oil until the summer of 1967, when it sold around half a million barrels at the then-going rate of less than $2 per barrel.
Major domestic industries during this period included various agricultural segments, including date, lime, coconut palm and banana production; livestock rearing, particularly activities relating to camels, goats and cattle; fisheries; and traditional handicrafts.
The 1970s were a period of considerable change in Oman, as a result of rapidly increasing oil revenues and ambitious economic development and modernisation plans. Oman was a major producer of crude through the oil boom of the 1970s. Facing declining oil prices in the 1980s, the sultanate reduced production in line with a strategy that was put in place by the Organisation of Oil Exporting Countries (OPEC), of which Oman is not a member. Production ramped up again in the 1990s and 2000s.
Facilitating economic diversification has been a key priority in Oman since the early 1980s. Initially this effort was focused largely on the industrial sector, with the government financing a series of major industrial developments through the 1980s. More recently the state’s economic diversification plan has been expanded to tourism, aquaculture and financial services, among other key development areas.
In 1988 the government launched the sultanate’s first Omanisation programme, which aimed to nationalise both the public and private workforce. This initiative – one of the first workforce nationalisation projects in the region – is still under way.
According to data from the World Bank, Oman’s GDP reached $80.57bn in 2013, up from $78.3bn in 2012 and $69.97bn in 2011. GDP per capita was at $22,181 at the end of 2013, down slightly from $23,624 the previous year, but up considerably from $18,115 in 2009. In recent years the oil and gas industry has accounted for around 47% of GDP, while the services sector makes up 35% and the industrial sector contributes around 17%.
According to forecasts by the IMF, Oman’s GDP is expected to grow by around 3.4% in both 2014 and 2015, before increasing slightly to 3.7%. These figures are down on recent years, when GDP growth has hovered around 5%. The government has forecast GDP growth of 4.5% in 2014.
In the 12 months leading up to May 2014 Oman’s inflation rate averaged 1.5%, according to data from the Statistical Centre for the Cooperation Council for the Arab Countries of the Gulf, the GCC’s statistics organisation, which was the lowest rate in the region. The sultanate’s end-May 2014 inflation rate rose slightly – 1.48% – during this period.
According to data published by the NCSI, Oman’s statistics agency, the rise was the result of a 2.7% increase in the cost of food and non-alcoholic beverages, a 6.3% rise in the cost of education and a 1.66% increase in housing, water, electricity, gas and other fuels costs, among other contributing factors.
The NCSI produces the official statistics for Oman, which are used to support the formulation and design of the adopted national policies and programmes, but more can be done with the information. Khalifa Abdullah Hamed Al Barwani, CEO of NCSI, told OBG, “Geographic data is often underutilised for planning and forecasting purposes. National data is a necessity, but to be able to fully understand a segment of a market or a region through specialised data will greatly enhance the effectiveness of decision-making.”
In Oman’s 2014 budget, oil and gas revenues were forecast to reach OR9.65bn ($25bn) for the year, which was equal to 82% of state revenues. These figures are down on the 2013 budget, when revenues from the oil and gas sector were set at OR9.36bn ($24.2bn), which was equal to 84% of total revenues for the year. Government expenditure, meanwhile, is expected to rise 5% in 2014 on the previous year, from OR12.86bn ($33.3bn) in 2013 to OR13.5bn ($35bn) in 2014. A considerable percentage of this jump has been earmarked for capital expenditure and, in particular, infrastructure projects.
Budgeted expenditure on social security and welfare was up 8% in 2014, while spending on housing increased by 10%, spending on health rose by 16% and spending on education jumped by 6%. Additionally, the 2014 budget does not take into account OR800m900m ($2.07bn-2.33bn) in mandatory salary increases for public sector employees.
Over recent years the sultanate has increased its social spending. “The country must be careful not to become too dependent on subsidies and the general welfare state here in Oman. Innovation is born from necessity, and industries risk becoming uncompetitive if they do not strive to stay ahead of the curve,” Pankaj Khimji, director of Khimji Ramdas, told OBG.
For budgeting purposes Oman prices oil at a fairly conservative $85 per barrel. With real-world prices averaging well above $100 per barrel in recent years, actual reported revenues have tended to surpass budgeted revenues by a considerable degree. With this in mind, over the course of the past decade Oman has consistently posted a sizeable budget surplus, even when the budget initially forecasted a deficit. For example, in 2013 the projected deficit between revenue and expenditure was OR1.7bn ($4.4bn). At the end of the year, however, the government ended up with a surplus of OR401m ($1bn), according to provisional data published by Reuters in early 2014. This figure is down significantly on the 2012 budget surplus of OR3.22bn ($8.3bn).
Running a surplus for years has allowed the government to set aside a considerable amount of cash, which the state plans to draw on to cover any future deficits. Much of this financing is currently stored in the State General Reserve Fund (SGRF), a government-run sovereign wealth fund (SWF), which was founded in 1980. Since then the state has directed the majority of its excess oil revenues and other surplus holdings into the fund, which has grown by around 8% annually. As of the end of 2013 the fund had assets worth around OR14bn ($36.6bn).
In mid-2013 the ratings agency Standard and Poor’s (S&P’s) affirmed Oman’s A/A-1 long- and short-term sovereign credit ratings. The sultanate’s large fiscal reserves are considered to be a key strength. According to S&P’s report, “A risk to the government’s fiscal performance is its reliance on volatile hydrocarbons revenue. However, the government’s large stock of liquid assets – at more than 25% of GDP – mitigates this risk.” Then in early December 2014 – while affirming the sultanate’s “A/A-1” long- and short-term foreign and local currency sovereign credit ratings – S&P’s downgraded its outlook to negative from stable, citing weakened oil prices. Indeed, the declining price of oil, which reached $60 in December 2014, could negatively effect Oman’s balance sheet.
A substantial number of government entities, private organisations and state-owned independent firms are involved in the formulation and implementation of Oman’s economic policy. At the federal level, the Ministry of Finance oversees the government’s assets and expenses, manages taxation and is in charge of the sultanate’s various funds, including the SGRF and the Oman Investment Fund, the latter of which is used to diversify the government’s revenue base. The federal-level Public Authority for Investment Promotion and Export Development (Ithraa), meanwhile, has a mandate to facilitate investment in Oman and boost the country’s exports. Ithraa works closely with the Oman Chamber of Commerce and Industry (OCCI), which offers support and advice of various types to Omani businesses and represents the sultanate at international business events.
“We have worked to support the government’s move away from oil revenues over the past decades,” Mohammed Khamis Al Hussaini, the director of the economic research and studies department at OCCI, told OBG. “This has been a very successful programme so far. Non-oil industry is growing quickly.”
The Public Authority for Small and Medium-sized Enterprises Development (PASMED), which was launched by royal decree in 2013, has a mandate to encourage Omanis to establish and develop SMEs. The authority is considered to be a key component of the government’s long-term economic diversification plans. “Previously SME development was handled by the Ministry of Commerce and Industry,” said Nasser Mubarak Al Alawi, the director of business development at PASMED. “However, in 2013 PASMED was formed on the recommendation of a study carried out by the consulting firm Booz Allen Hamilton.” The authority’s goals include establishing a culture of entrepreneurship in Oman’s school system; encouraging technology transfer between established firms and start-ups; ensuring that entrepreneurs and SMEs have access to finance; and advising SMEs on growth strategies and sustainability. “Now we have 23 initiatives under way,” Al Alawi told OBG in August 2014.
According to Usama Barwani, director of MB Holding Company, “We are delighted to note the support given by the government to SMEs. However, improved integration among government agencies, faster processing and greater clarity will be the most important enabler for SMEs going forward. Oman needs to further improve its standing in the “Doing Business” index for local businesses to thrive and to attract international investments.” A variety of other entities are involved in various aspects of economic development planning and implementation in Oman. The Central Bank of Oman (CBO) handles the sultanate’s monetary policy, which is regarded highly. The Capital Market Authority oversees the Muscat Securities Market, which is increasingly considered to be a reliable source of financing for local companies (see Capital Markets chapter). The Ministry of Manpower manages the country’s Omanisation strategy. Other entities involved in various aspects of economic development include the Ministries of Agriculture, Tourism, Social Development and Housing, among others.
Vision 2020, Oman’s long-term economic development strategy, was launched in 1995. The plan’s overarching goals include ensuring economic and financial stability, boosting private sector participation, diversifying the economy away from oil and other unsustainable resources and investing heavily in the Omani workforce, among others.
Major projects that have either been carried out or are currently being carried out under Vision 2020 include the development of new industrial estates at Buraimi, Nizwa, Salalah, Sohar and Sur; a series of important investments in the country’s power and water networks; the establishment of PASMED; a number of investments in the tourism sector, which is increasingly considered to be an important economic contributor; and a handful of large-scale projects aimed at improving the quality of Oman’s national workforce and ensuring that Omanis are able to compete effectively for jobs in the international market.
In 2009 an Oman-US free trade agreement (FTA) came into effect. The FTA allows US companies relatively easy access to the Omani market, and vice versa. Additionally, in 2009 the government introduced a new, comprehensive tax law, replacing a previous law dating from the early 1980s. The new law streamlined corporate taxation, setting a unified tax rate of 12% for both foreign and local firms. The legislation also included provisions aimed at streamlining tax compliance and assessment procedures.
As of mid-2014 Oman’s government was in the early stages of drawing up a new long-term economic strategy, provisionally known as Vision 2040. The new plan, which was being looked at by the Secretariat General of the Supreme Council for Planning and an independent committee made up of ministers and other senior policymakers, is expected to build on the goals laid out in Vision 2020. Key objectives of the new plan will likely include boosting non-oil economic growth, reducing government expenditure and expanding the existing SME and Omanisation programmes.
The Energy Sector
Oil and gas are an integral component of Oman’s economy, and are expected to play a central role in economic development for years to come. As of 2013, Oman was the world’s 25thlargest oil producer, with production in excess of 940,000 barrels per day. In 2013 oil output jumped 2.3% over the previous year to reach 343.8m barrels for the year. The rate of expansion of oil production was down slightly – from 4.1% in 2012. Additionally, the average price of crude oil dropped from $109.6 in 2012 to $105.5 in 2013, according to IMF data. In an effort to make up for declining oil prices, Oman has invested heavily in a variety of enhanced oil recovery (EOR) techniques, which have boosted output in recent years and are expected to continue to do so in the future. As a result of this activity, Petroleum Development Oman, a leading state-owned energy company, has become a major player in the global EOR arena in recent years. The government’s oil and gas in-country value initiative, which was launched in 2012 by the Ministry of Oil and Gas (MoG) along with a number of local oil companies, aims to improve local participation in the energy sector (see analysis).
Oman’s gas segment has become increasingly important in recent years. As of the end of 2013 the sultanate produced 10m tonnes of liquefied natural gas per year from estimated deposits of around 30trn cu feet of natural gas. Average gas production reached 102m cu metres per day in 2013, up 3.7% from the previous year. The 2013 figures included 83m cu metres of non-associated gas and 19m cu metres of associated gas. In recent years Oman’s gas exports have been limited as a result of rising domestic demand.
A handful of upcoming projects are expected to boost gas supply. During the period 2014-18, the MoG expects to see gas output jump to 120m cu metres per day, which represents an increase of 17.7% over 2013, for example. The UK-based BP’s $16bn Khazzan tight gas project, which involves drilling 300 new wells in Oman through 2030, is expected to boost production by around 28m cu metres per day by 2018.
Additionally, in March 2014 the sultanate also reportedly signed an agreement to receive some 10bn cu metres of gas annually from Iran via a $1bn pipeline that has yet to be constructed.
Oman’s financial services industry, which includes the banking, capital markets and insurance sectors, is widely considered to be one of the most transparent and well regulated in the GCC region. The sultanate is home to seven local commercial banks and nine foreign banks, plus two Islamic banks, two government-owned specialised banks and a variety of other non-bank financial institutions. Largely as a result of the CBO’s stringent regulatory framework and careful oversight, Oman’s financial sector fared relatively well in the wake of the 2008-09 international economic downturn.
Since then the market has expanded rapidly. As of mid-2014 the financial sector was considered to be a key contributor to economic growth. By end-May 2014 total commercial banking sector assets had reached OR24.33bn ($63bn), up 7% from the end of 2013 and 17% from the end of 2012. Oman’s three largest banks, namely Bank Muscat, the National Bank of Oman and Bank Dhofar, together accounted for more than 62% of total banking sector assets at the end of 2013, according to data from the CBO. Indeed, Bank Muscat – the sultanate’s largest bank – alone made up 37% of total banking assets. With rising demand for lending and deposit services on both the retail and corporate sides, the industry is looking forward to continued expansion for the foreseeable future (see Banking chapter).
Incoming visitors are increasingly considered to be a key source of revenues in Oman. According to data published by the NCSI, in the first four months of 2014 the number of visitors staying at Oman’s four- and five-star hotels increased by nearly 24% as compared to the same period in 2013. Occupancy rates at four- and five-star hotels grew from 67% in the first four months of 2013 to nearly 72% in the same period in 2014; and hotel revenues were up 10.5% during the same timeframe. Passenger traffic at Muscat International Airport, the primary point of entry for most tourists, also jumped by 8% in the first four months of 2014 as compared to the previous year, with around 3.6m passengers coming through the terminal. In 2013 tourism as a whole contributed approximately 6.4% to Oman’s GDP, according to data published by the World Travel & Tourism Council, an international industry organisation, and this figure is forecast to jump to 8.2% by 2024.
Oman boasts a rich cultural history and a variety of natural attractions, including a lengthy and largely untouched coastline and the Al Hajjar Mountains, which cover a huge swathe of the northern part of the sultanate. Consequently, Oman is a popular destination for outdoor sports enthusiasts. The country is home to four UNESCO World Heritage sites, including an ancient irrigation system, a variety of ancient archaeological sites and a series of oases and ports relating to the frankincense trade. Over the past decade the government has invested heavily in tourism, encouraging the development of a wide variety of new high-end hotels and beach resorts, new flight connections and other related projects.
In mid-December 2014 the first phase of the new Muscat International Airport became operational including the new northern runway and associated taxiways, air traffic control tower and data centres. The new terminal building is expected to be completed by the end of 2016. These projects will likely underpin growth in the tourism sector for years to come (see Tourism chapter).
Oman’s industrial sector, and particularly the downstream oil and gas segment, are also considered to be key economic drivers. In an effort to support industrial development, over the course of the past decade the government has invested heavily in industrial areas, free zones, ports, roads and other transport and infrastructure networks. Consequently, Oman has become a major exporter of a variety of manufactured goods, including chemical products, mineral products, base metals, plastics and rubber products, in addition to a number of construction materials and related goods.
In recent years the sultanate’s primary export destinations for industrial products have included India, the UAE, Saudi Arabia, China and the US. Given Oman’s location in the middle of a rapidly growing geographic area, many local players expect the sultanate to become a major transport and trans-shipment centre in the coming years, which bodes well for the local industrial sector overall. Indeed, the Port of Salalah, which is located near Oman’s southern border with Yemen, has become one of the region’s largest transshipment hubs over the past decade (see Transport and Industry & Retail chapters).
The agriculture and fisheries sectors, while not as important as they used to be, remain a key contributor to Oman’s economy. Prior to the discovery of oil in commercial quantities in the early 1960s, the sultanate was primarily an agrarian society, and was a major producer of dates and numerous types of fish.
The industry’s contribution to GDP has declined to around 1% today, largely due to the expansion of the rest of the economy, and particularly the oil and gas, industrial and financial services sectors. That said, agriculture and fisheries remain major employers in the sultanate, and in recent years the government has shown that it is committed to supporting the industry (see Agriculture & Fisheries chapter).
Oman’s foreign trade is managed by the Ministry of Commerce and Industry, which has a mandate to facilitate economic growth, diversify domestic production and exports, and create new jobs for Omanis. Oman has been a member of the WTO since 2000. The sultanate is also a member of the GCC and the Pan-Arab FTA, the latter of which came into effect in 2005. Oman is one of only two countries in the Gulf region – the other being Bahrain – to have a bilateral FTA with the US, which came into effect in 2009. Additionally, in September 2013 the GCC-Singapore FTA came into effect, boosting the sultanate’s access to markets throughout South-east Asia. At the time of writing, the GCC was in trade talks with a variety of other regional entities and individual countries.
In the first quarter of 2014 the total value of Omani exports was OR5.14bn ($13.3bn), down 7.9% from the same period the previous year, according to NCSI data. The decline was due in large part to a drop of 9.3% in oil and gas exports, which fell from OR3.72bn ($9.6bn) in the first quarter of 2013 to OR3.37bn ($8.7bn) in the same period in 2014. Oil and gas products have accounted for 60-70% of total exports from the sultanate in recent years, though as non-oil exports continue to grow this figure is expected to drop. Oman’s major non-oil exports include mineral products, organic chemicals, fertilisers, metals, plastics and a wide variety of consumer goods and agricultural products. Major export markets include China, which buys more than 50% of Oman’s hydrocarbons exports, Japan, South Korea, Singapore, India, the US and the EU.
Oman faces a number of key challenges. During the period 2011-13 state spending increased by 27%. Given the recent increase in state expenditure and the potential for declining oil revenues in the coming years, in 2014 the IMF forecast a possible budget deficit of 3% of GDP as soon as 2015. The government is aware of the potential for an upcoming potential crunch. Regardless, Oman’s medium- and long-term outlook is considered to be broadly positive. The sultanate’s location at the mouth of the Arabian Gulf, outside the Strait of Hormuz and halfway between East Africa and the Indian subcontinent, bodes well for future growth. The rapid expansion of the financial sector, including the banking and capital markets segments, is expected to play a major role in economic expansion. Finally, the government’s continued push to develop local businesses, and particularly SMEs, has already begun to bear fruit, and is set to continue doing so for the foreseeable future.
You have reached the limit of premium articles you can view for free.
Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.
If you have already purchased this Report or have a website subscription, please login to continue.