Due to the hydrocarbons-focused nature of its economy, the sultanate was not immune to the global economic shocks of the past decade. The government is therefore pursuing broad economic diversification, with specific sectors strategically targeted for development. While this is a familiar narrative across the GCC, motivated in large part by the global transition to clean energy, the need for diversification in Oman is perhaps more pressing due to the limited lifespan of its oil and gas supply – the former is estimated to last until 2030, and the latter up to 10 years longer based on current rates of extraction.
The government has rolled out a number of new laws in order to create a more accommodating legislative environment for local and international investors, while current economic development plans seek to harness the country’s strategically advantageous location on the Gulf and proximity to key regional consumer markets. While the post-Covid-19-pandemic spike in hydrocarbons prices has enabled Oman to narrow its fiscal deficit, diversification will remain a key policy focus.
Oman Vision 2040
The government’s long-term development agenda, Oman Vision 2040, was launched in December 2020 and developed through extensive collaboration with public and private representatives and a range of stakeholders from broader society. Its four central pillars are designed to support a competitive economy, foster a creative and innovative society, establish and augment responsible public agencies, and promote environmental sustainability.
Those goals were broken down into 12 priorities and 75 strategic objectives, through which the government aims to revamp and strengthen education and research capacities; boost human capital and employment opportunities; improve public health and health care infrastructure; and ensure fiscal sustainability through diversification while empowering the private sector and stimulating increased investment through enhanced governance, regulatory and judicial frameworks.
“Oman is an organised growth market, offering attractive risk-adjusted return premium, compared to capital-crowded markets. The country has exhibited rising infrastructure demand and investment, economic and demographic expansion over the last 20 years,” Muneer Al Muneeri, CEO of Rakiza – an infrastructure fund focused on Oman and Saudi Arabia, and co-managed by Oman Infrastructure Investment Management and Equitix – told OBG. “The foregoing coupled with government diversification and privatisation initiatives, and favourable foreign direct investment (FDI) as well as public-private partnerships and investor protection laws make Oman a business-friendly environment.”
Medium-term Programmes
Oman’s economic progress has long been guided by five-year development programmes. At the outset of the ninth five-year development plan, which ran from 2016 to 2020, the government set sector-specific objectives for contribution to GDP. Prior to the onset of the pandemic, indicators were on the whole positive, with manufacturing exceeding its 10% target, contributing 10.8%; tourism accounted for 2.5%, falling short of its 3.3% expectation; logistics activities also narrowly missed its target of 6.8%, reaching 6.4%; fisheries accounted for 1.3%, surpassing its target by 0.7 percentage points; while mining nearly achieved the 0.5% goal set by the government, at 0.43%. Those figures were recorded up to the end of 2019, which raises the possibility that further progress could have been made had the business disruptions of the pandemic not taken place. During the period 2016-19 the contribution to GDP recorded by non-oil sectors grew by an average of 2.3%.
The 10th five-year plan covers the 2021-25 period, making it the first to be implemented alongside Vision 2040. The framework retains focus on previously targeted sectors, while modifying specific goals to fit post-pandemic realities. For example, production lines with high social value, such as medical supplies and pharmaceuticals, will be given increased attention, as will the digital economy. Boosting private sector participation is vital to the success of the 10th five-year plan.
Emergency Measures
The 10th five-year plan was being formulated when Covid-19 began to spread and the World Health Organisation declared a global pandemic. In response, the government built contingencies into the plan to account for the challenges presented by the health crisis, developing initiatives to balance the national budget while still achieving its 2021-25 goals. The government launched an emergency financial package, which included tax- and fiscal-relief measures to support individuals and businesses and ensure essential services and supplies remained available. Banks were directed to extend emergency loans and adapt services to enable financial procedures to continue.
In March 2021 the government introduced its Economic Stimulus Plan in order to mitigate the mediumand long-term impacts of the pandemic, incorporating programmes to support the banking sector and small and medium-sized enterprises (SMEs); improve the business and investment environment; and extend further tax exemptions to private enterprises, providing preferential treatment for large investors involved in the sectors targeted to drive economic diversification.
Implementation
The Ministry of Economy (MoE) and the Ministry of Finance (MoF) are the leading bodies involved in strategy execution. The MoE is working with various government authorities to align sector-specific strategies with overarching medium- and long-term objectives. This affords prominent roles to the Ministry of Commerce, Industry and Investment Promotion (MCIIP); the Ministry of Transport, Communications and IT; the Ministry of Heritage and Tourism; and the Ministry of Agriculture, Fisheries and Water Resources, mirroring the sectors prioritised in the 2021-25 plan. Furthermore, the Ministry of Education will play an important role in strengthening the country’s talent pool, in line with the goals of Vision 2040, while other government organisations, such as the Oman Investment Authority (OIA), which is the Sultanate’s sovereign wealth fund; the Oman Vision 2040 Implementation Follow-up Unit; the Public Authority for Special Economic Zones and Free Zones (OPAZ); and the Public Establishment for Industrial Estates, known as Madayn, are key to attracting private investment.
Recent Initiatives
Multiple fiscal schemes were rolled out in 2021, including the introduction of a 5% value-added tax (VAT). However, as part of its social protection initiatives, launched in April 2021, the government issued an extended list of food items not subject to VAT and pledged to absorb the cost of VAT on water and electricity services. Meanwhile, the OIA detailed its eight-point agenda for stabilising the economy, which it will pursue during the period 2022-26. Key priorities include reducing its debt by 32%, boosting capital expenditure, driving GDP growth, attracting an additional OM1bn ($2.6bn) of private investment, privatising a range of government assets, increasing in-country value, improving synergies across OIA investments and raising governance standards. In August 2022 the MoE partnered with the Oman Vision 2040 Implementation Follow-up Unit to launch its national programme for economic diversification, Tanwea’a. The plan centres around two components – one focusing on planning, research and policy formulation; and the other focusing on strengthening partnerships with operators across the sectors targeted for diversification. The hope is that by better aligning stakeholders and harmonising the implementation of Vision 2040 and the 10th five-year plan, progress towards diversification can be accelerated. Multiple initiatives will therefore be launched to that end under the banner of Tanwea’a.
Performance
Historically, petroleum activities have contributed between 30% and 40% to Oman’s real GDP each year, providing around 80% of total government receipts. Having registered a 3.2% contraction in 2020, Oman’s real GDP growth rate rebounded to 3% in 2021 to reach a value of OM34.7bn ($90.2bn). As of November 2022 the IMF forecast GDP growth would accelerate to 4.3% in 2022 and settled to 4.1% in 2023.
While Oman is not a member of the Organisation of the Petroleum Exporting Countries, it adheres to the group’s practices and recommended production rates. For a decade preceding the global oil price crash of 2014, real GDP growth averaged 4.7% per year, compared to an average of 1.4% per year between 2014 and 2021. According to the National Centre for Statistics and Information, average annual growth of petroleum-related GDP during the period 2011-21 was 1.2%, whereas non-petroleum activities averaged 3.3% growth in real terms. In 2011 petroleum activities accounted for 37.4% of GDP, and by 2021 that figure had dropped to 32.7%, reflecting both the volatility of hydrocarbons prices and the gradual progress of the government’s diversification drive.
Budget & Accounts
High oil prices, continued diversification and the introduction of VAT are expected to bring significant fiscal relief for the government over the medium term. In 2020 the budget deficit totalled OM2.2bn ($5.7bn), but the factors outlined above saw that shrink by 45.4% to OM1.2bn ($3.1bn) in 2021. Notably, public revenue that year was 29.6% higher than the budgeted figure. The reduced deficit was achieved in spite of the fact that spending was 14.1% above budget, reaching OM10.9bn ($28.3bn). This was attributed to a 32.6% increase in investment spending, 4.2% higher-than-anticipated spending by government bodies, and a 9% increase across a group of other expenses and contributions.
The 2022 budget was devised in line with the following nine policy priorities: maintaining prudent and sustainable levels of public spending; enhancing nonoil revenue; establishing projects capable of driving productive sectors; prioritising digital transformation; maintaining recent levels of spending on basic services; redirecting government subsidies to low-income households; improving Oman’s credit rating; raising investor confidence; and continuing support for training schemes, job creation and SMEs. Initial estimates from the MoF, based on four key assumptions, forecast spending of OM12.1bn ($31.4bn), 0.3% lower than in 2021, and revenue of around OM10.6bn ($27.5bn), which, if accurate, would be 3.3% lower than the preceding year. Oil and gas revenue was forecast to account for OM7.2bn ($18.7bn), or 68%, of that figure.
In March 2022 the government announced that it had revised some of the figures presented in the original budget announcement, stating that an additional OM200m ($519.8m) would be allocated to the development budget, bringing the amount available for development projects to roughly OM1.2bn ($3.1bn). The government also announced that it would add some OM650m ($1.7bn) to the budget for the 10th five-year plan, with that amount to be injected incrementally over the duration of the plan.
Those increased allocations came on the back of strong economic performance throughout 2022, which saw Oman record a OM1.1bn ($2.9bn) fiscal surplus in the first nine months of the year. By comparison, as of September 2021 the sultanate had generated a yearto-date deficit of around OM1bn ($2.6bn). In addition, over that same period of 2022 public revenue hit the OM10.6bn ($27.5bn) target for the full year, representing a 43.6% y-o-y increase. Oil prices averaged $94 per barrel for the first nine months of the year which, alongside increased domestic oil production, saw net oil revenue reach OM5.3bn ($13.8bn), up 37% y-o-y. Total hydrocarbons revenue rose by 51.9% y-o-y to OM8.1bn ($21.1bn) during the same timeframe.
Surplus
These indicators prompted both the government and economists to forecast that Oman would record its first fiscal surplus for a decade in 2022. Indeed, the sustained slowdown that followed the 2014 oil price crash saw debt levels rise substantially and the sultanate post twin deficits. In 2013 public and external debt stood at 5% and 14% of GDP, respectively; by 2020 this had risen to 70% and 113%. Public debt was brought down to 62.9% of GDP in 2021 and, given the positive economic performance in 2022, was expected to drop to 44% of GDP by the close of 2022. External debt, meanwhile, was expected to move back below the 90% mark. Oman’s fiscal and current accounts are forecast to register surpluses in excess of 5% for the same year. “We have long been witnessing expenditure aimed at boosting human capital and facilitating wealth redistribution. This should provide an opportunity to diversify,” Faisal Mohamed Al Yousef, chairman of Muscat Finance Company, told OBG. “The key is now to make use of Oman’s resources effectively and efficiently in order to create a resilient economy.”
Indeed, the banking sector has proven resilient in the face of the stresses of the past decade, with solid financial buffers and prudent governance from the Central Bank of Oman helping it to weather successive crises, while the rial-to-US dollar currency peg has consistently ensured low and stable rates of inflation.
Trade
Oman is a net exporter, recording trade surpluses of OM4.2bn ($10.9bn) in 2018, OM5bn ($13bn) in 2019, OM3.5bn ($9.1bn) in 2020 and OM5.4bn ($14bn) in 2021 in constant prices. Total export value had been on an upward trajectory before the pandemic, rising by 4.9% from OM17.3bn ($45bn) to OM18.2bn ($47.3bn) between 2017 and 2019. The figure then dropped to OM15.5bn ($40.3bn) in 2020 as global transport and logistics networks were disrupted, before climbing to around OM17.7bn ($46bn) in 2021.
Non-oil exports rose by 54.5% to OM4.4bn ($11.4bn) in January-July 2022. Non-oil exports to the US surged by 96% during that period, totalling OM540.6m ($1.4bn), compared to OM275.3m ($715.5m) during the corresponding period of 2021, making the US the top destination for Omani non-oil exports. The total import value in 2021 was OM12.3bn ($32bn) – a 20.7% decline from a 10-year peak of OM15.5bn ($40.3bn) in 2013 – suggesting that Oman’s efforts to diversify its economy and manufacturing base are bearing fruit.
“Vision 2040 highlights the value of financing entities as enablers of international trade and exports, making it easier for local companies to sell their products abroad and reduce their risks in the process. In this context, the government is heavily involved in raising Oman’s international profile to boost FDI and exports, and creating platforms for buyers and sellers to communicate more efficiently,” Sheikh Khalil bin Ahmed Al Harthy, CEO of Credit Oman, told OBG. “Oman is rapidly becoming much more commercially oriented at the international level.”
The country’s key trade partners are China, India, South Korea, Saudi Arabia, the UAE and the US, with double- and even triple-digit export growth experienced across those markets during 2021 and the first half of 2022. Multiple product lines underwent significant growth during those same periods. For example, in the first seven months of 2022 the export of mineral products rose by 165% y-o-y to OM1.3bn ($3.4bn); chemical products exports climbed by 40% to OM841m ($2.2bn); increased productivity across Oman’s other downstream industries saw exports of plastics, rubber and their derivatives valued at OM716m ($1.9bn), up 57% y-o-y; and exports of base metals such as chromite, lead, nickel and zinc, and associated products increase by 32% to achieve a value of OM914.5m ($2.4bn).
In addition, the MCIIP’s new digital Importer Directory Service connects Oman-based exporters with import entities from across 180 global economies.
However, the government’s plan to position Oman as a centre for re-exports has seen some recent setbacks, with re-exports down 22.5% and 13.7% in 2021 and the first seven months of 2022, respectively. The dropoff has been attributed to a decline in the trans-shipment of base metals, electrical and mechanical goods, and transport equipment and instruments.
Oman currently has a free trade agreement (FTA) with the US, signed in January 2009. It also benefits from the GCC-European Free Trade Association FTA, signed in June 2009, and the GCC-Singapore FTA, which went into force in January 2015. Recent years have seen moves to strengthen a number of bilateral trade relationships as the country strives to reinforce supply chains and drive exports. Oman signed memoranda of understanding with both Iran and the UAE in 2022, and, on the back of the May 2022 announcement of the India-UAE FTA, Omani delegates travelled to the subcontinent to discuss a potential India-GCC FTA while also announcing that feasibility studies would be carried out on an India-Oman limited trade deal.
Similarly, amid talks of a China-GCC FTA, Oman and China agreed to work towards reinforcing economic cooperation. Negotiations on a GCC-UK FTA began in 2022, with the first round of discussions taking place in August and September (see Country Profile chapter).
Foreign Investment
FDI in Oman rose by 7.7% in 2021, to more than OM17bn ($44.2bn). The UK accounted for the highest amount, with OM7.9bn ($20.5bn), followed by the US and the UAE, with OM2.2bn ($5.7bn) and just over OM1bn ($2.6bn), respectively. The UK has accounted for approximately 50% of all FDI in Oman in recent years. Oman-UK trade talks in July 2022 brought about the signing of a sovereign investment partnership to boost private investment in both countries. UK investment in Oman is spread across sustainable mining, clean fuels and advanced technology-related projects, among others.
To further drive diversification, government strategies seek to establish strong green economy and circular economy credentials and practices. The MCIIP announced in January 2022 that it had identified over 50 opportunities worth around £400m across targeted sectors suitable for UK investment, and in April 2022 it highlighted a further 18 investment opportunities related to tourism and circular economy initiatives for the broader international business community.
Doing Business
Complicated regulations and procedures have historically been a deterrent for international investors seeking to do business in Oman. Among some of the obstacles cited include difficulty obtaining work permits and visas, time-consuming business registration procedures, problems arising from a lack of public-private cohesion, land-ownership restrictions, and inconsistent and cumbersome enforcement of quotas regarding local representation in the workforce. Since the oil price crash of 2014 and the subsequent recognition of the need for economic diversification, Oman has been working to improve its investment legislation. The government has credited the increase in FDI to these efforts, and the international business community has acknowledged Oman’s progress, particularly pertaining to laws governing public-private partnerships and foreign investment.
Due to the government’s ongoing Digital Transformation Programme, 90% of MCIIP services have been digitised, streamlining investment procedures (see ICT chapter). Other updates include permission for 100% foreign ownership of businesses, repatriation of profits and capital, and authorisation for foreign ownership of land up to 5000 sq metres in area. The government has also launched the Investors Residency Programme (IRP), which offers both five- and 10-year renewable visas to international entrepreneurs who meet specific criteria. The IRP reflects the government’s interest in attracting top international talent to shore up Oman’s innovation, creativity and technological prowess.
In order to reduce the deficit, the government had planned to implement a number of taxes starting in 2023, including a VAT hike beyond 5%, and levying personal income tax on foreign residents earning over $100,000 annually, as well as on Omani nationals whose net global worth exceeds $1m. However, given the profits from rising oil prices, the minister of finance decided against these steps in December 2022.
Economic Zones
Oman has three free zones: one in Sohar, one in Salalah and one in Al Mazunah. The sultanate is also home to the Duqm Special Economic Zone and the Knowledge Oasis Muscat ICT zone, as well as 10 industrial estates located throughout the country. OPAZ and Madayn, which is under the control of OPAZ, are in charge of managing the zones and estates, which are used to encourage both private and foreign investment. Incentives for investment in the zones include, among others, corporate tax holidays of up to 25 years; long-term tax exemptions on profits and dividends; and relaxed Omanisation quotas and low capital requirements. Incentives are specific to each zone, with definitive lists available on the OPAZ website. Duty-free transport of goods is observed across the GCC, and the zones are served by robust digital and physical infrastructure. Indeed, Sohar, Salalah and Duqm contain three of the country’s five seaports.
Support Measures
As of August 2022 Oman was home to 81,460 SMEs, representing a 46.8% y-o-y increase. Disruptions from the pandemic had a significant impact on the SME ecosystem, leading the Small and Medium Enterprises Development Authority to implement support measures. These programmes included more lenient loan-repayment terms, payment waivers, specialised incubators for creative enterprises, and numerous training courses and consultation facilities. Support for SMEs has been increasing in recent years. The government’s in-country value (ICV) programme, established in 2013, directs the country’s hydrocarbons operators and major contractors to localise a portion of their procurement and contract expenditure, with a focus on SME and local community contractor recruitment. Between 2018 and 2020 the proportion of total expenditure channelled into those areas through the scheme rose from 18% to around 29%, with a total value of OM2bn ($5.2bn). Globally, ICV initiatives are believed to account for between 40% and 80% of total job creation. Omani hydrocarbons companies have created thousands of local jobs since 2018, while rolling out an array of training centres and development opportunities, making the initiative a vital component in the government’s Omanisation drive.
“Employment is a key aspect of Oman’s economic development. A culture change is required and more needs to be done to raise awareness among the local population regarding job opportunities in sectors beyond finance and the government. This will ensure our youth acquire the necessary knowledge and skills to excel in the labour market, raising our overall economic competitiveness in turn,” Fathi Al Balushi, CEO of Oman Brunei Investment Company, told OBG.
Outlook
Oman stands to benefit from identifying innovative ways to accelerate its diversification drive, which in turn can be leveraged through further improvements to its investment and regulatory frameworks. At the same time, striking a balance in the government’s application of 2021-22 oil revenue to both stabilise public finances and invest in its development agenda will be critical. Meanwhile, continued efforts to improve liquidity management, along with an expansion in private sector lending and engagement, is expected to help shore up an economy still susceptible to oil price volatility. The fact that its strong post-pandemic performance has prompted multiple international ratings agencies to upgrade Oman’s financial outlook should further boost investor confidence, while a broadening portfolio of trade partnerships adds promise to the sultanate’s medium-term growth and recovery prospects.
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