Oman’s 10th five-year development plan, which runs from 2021 to 2025, aims to accelerate economic diversification, foster private sector development and strengthen fiscal stability. The strategy is anchored on the strategic priorities of the long-term Oman Vision 2040 development agenda and builds on the ninth fiveyear plan spanning 2016-20, which aimed to promote human capital development, diversified economic activity, fiscal sustainability and balanced growth across the sultanate’s 11 governorates. Centred on inclusive economic growth, the programme prioritised employment generation, correcting historical inequalities through rural development, and support to SMEs and rural industries such as agriculture. Many of these objectives, however, were unmet as the country’s economy and finances proved vulnerable to the instability of global markets and the slump in oil prices, which began in 2014, compromising the sultanate’s ability to deliver on key social and employment programmes.
Despite these challenges, which were exacerbated by the Covid-19 pandemic, the ninth five-year development plan provided solid foundations for building the 10th plan, which is expected to generate 135,000 new job opportunities, or an average of 27,000 open positions yearly over the course of the plan. Elsewhere, the 10th five-year development plan seeks to decrease the fiscal deficit to 1.7% of GDP by 2024 and achieve a surplus of OR65m ($168.9m) by 2025. The creation of a business-friendly environment for both local and international investors is expected to support the realisation of its key objectives.
Balancing Act
To counter prolonged financial headwinds, the sultanate has focused on achieving a balance that enables economic growth and supports Omani employment while maintaining stable inflation rates to preserve household spending power. An important exogenous shock came in mid-2014, when global oil prices faced their most prolonged decline in modern history, ending below $40 per barrel in 2015, the lowest level since early 2009. As an oil-reliant economy, the annual budget has therefore been in deficit since 2014, which the sultanate has covered through borrowing, generating debt that has grown from OM1.5bn ($3.9bn) in 2015, or roughly 15% of GDP, to around 81% of GDP in 2020. As a result, the top-three international credit ratings agencies, Moody’s, Standard & Poor’s (S&P) and Fitch Ratings, all progressively downgraded Oman’s credit rating from 2014 until October 2020, reflecting the rising level of indebtedness. The progressive downgrades continue to have an impact on the Sultanate’s credit profile, making it more expensive for the country to borrow from the international market but also encouraging more aggressive fiscal reforms to raise revenue and rationalise spending.
The adverse effects of the pandemic, which caused widespread global lockdowns that temporarily but dramatically reduced oil consumption and prices, put the spotlight on Oman’s fiscal situation, leading to the government’s development of a medium-term fiscal plan for 2020-24. The plan rests on three priorities: maintaining steady expenditure, reducing the national debt and increasing non-oil revenue, all of which should contribute to lowering the fiscal deficit from 15.8% of GDP in 2020 to 1.7% of GDP by 2024. Anticipating the socio-economic impact of the fiscal plan within a challenging and unpredictable post-pandemic recovery period, the government has reconciled prioritising fiscal sustainability with the delivery of basic social services, primarily health and education, which comprise 70% of total spending, followed by housing and social security.
Positive Signs
Although structural shortcomings remain in the form of a large public sector and reliance on oil and gas revenue for 70% of the annual budget, progress has been encouraging, cushioned by rising oil prices. Whereas in previous years Oman’s fiscal situation had been largely dependent on global oil price recoveries and increased production achievements by Petroleum Development Oman, there has more recently been a shift towards diversified growth and increased accountability. According to Fitch Ratings, public debt in the first quarter of 2022 amounted to roughly $48bn, compared to $54bn in the first quarter of the previous year, bringing the public debt-to-GDP ratio down from 67.3% to 47.5% year-on-year.
To fulfil its ambition to record a budget surplus by the year 2025, Oman has embarked on a series of measures to increase government revenue, including the introduction of a 50% excise tax on sweetened beverages in October 2020 and a value-added tax (VAT) in April 2021. Despite the VAT being a modest 5%, the Sultanate raised $780m from this tax in 2021 and was projected to generate $1.3bn in 2022. These measures are being complemented by a gradual removal of the government’s subsidies to key industries including petroleum, electricity and water utilities.
Revenue
In particular, Oman has concentrated energy-related expenses in Energy Development Oman, incorporated in 2020, and instructed it to pursue new growth opportunities and additional sources of revenue, not only through continuing fossil fuel exploration, but also through clean energy development, notably in green hydrogen and solar. In turn, the new revenue sources continue to add to the stabilisation efforts of the national budget, with the Sultanate experiencing a $2bn budget surplus in the first half of 2022.
Oman’s fiscal deficit-reduction efforts rest not only on reducing costs and expanding revenue, but also on a sharpened focus on efficiency. Since Sultan Haitham bin Tarik Al Said assumed the throne in January 2020, efficiency has been at the forefront of economic policy, both in spending and managerial oversight. For instance, the Council of Ministers was reduced from 26 ministries to 19, while government officials are being held accountable for the results of the five-year development plan implementation. These combined efforts have resulted in a steady rise in government revenue, which grew by 43.4% in the first nine months of 2022.
Enabling Environment
In tandem with fiscal balance, accelerating economic diversification has remained a critical priority under the new Omani leadership, with newly issued laws targeting the creation of a more vibrant private sector and a more attractive environment for foreign investment, while also protecting the interests of domestic investors. In particular, three laws originally promulgated through Royal Decree No. 52 of 2019 came to fruition at the onset of the pandemic to protect and encourage private businesses.
In January 2020 the new Foreign Capital Investment law came into force. This was a landmark reform for inbound investment as it removed most legal restrictions on the foreign ownership of Oman-based companies, allowing foreign investors to establish a presence without a local partner and own real estate, thereby reducing their operating costs. The law similarly looks to encourage foreign participation in strategic sectors and projects by awarding non-Omanis incentives such as tax breaks, land grants and access to infrastructure. Targeted sectors include industry, agriculture, mining and tourism – which would not only benefit from best practices and know-how from foreign investors, but would also contribute to less developed regions.
In the same vein, a new bankruptcy law came into effect in July 2020, introducing a legal framework for businesses covering preventive composition, restructuring and bankruptcy proceedings. The law creates a framework for insolvency, facilitates restructuring and encourages entrepreneurship by countering the stigma of business failure. Lastly, the Executive Regulations of the public-private partnership law came into force on April 2020, enabling government bodies to enter arrangements with the private sector, both local and foreign, to develop projects of critical economic or social importance to the sultanate.
To encourage foreign investment and more meaningful private sector participation in the local economy, in 2022 Oman introduced changes to employment regulations, with the aim of balancing the need to create employment and training opportunities for Omani citizens with the desire to attract and retain international talent. The regulations also introduced new visa-free entry rules for all residents of GCC countries.
Ultimately, Oman’s plans seek to promote private sector development as an engine to accelerate economic diversification, which in turn generates opportunities for Omani employment. The initiatives under Oman’s 10th five-year development plan seem to be paying off; the sultanate witnessed a 19% increase in foreign direct investment in the first quarter of 2022.
Similarly, the Omani government expects a 10% increase in total public revenue for the 2023 national budget and a deficit-to-GDP ratio of 3%. Such projections are supported by the IMF, which expected Oman to post fiscal and external surpluses in 2022 and over the medium term due to higher oil revenue, greater fiscal discipline and the introduction of VAT. Further, in November 2022 S&P upgraded its credit rating from “BB-” to “BB”, acknowledging the sultanate’s improved fiscal performance and lower level of public debt.
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