Oman - Economy

Fitch Ratings downgraded Oman’s credit rating on 17 august 2020, for the second time this year, bringing it down a notch to BB-minus from BB and keeping its outlook negative, citing the continued erosion of its fiscal and external balance sheets. One of the weakest economies in the hydrocarbon-reliant Gulf, Oman is a relatively small crude producer burdened by high levels of debt and is therefore more vulnerable to oil price swings than most of its wealthier neighbors. Fitch forecast a fiscal deficit of nearly 20 percent this year, up from 8 percent last year, saying that a 32 percent drop in revenue driven by lower oil prices and production more than offsets an 8 percent cut in spending.

Oman’s reform efforts aim at strengthening the fiscal position, enhancing private sector-led growth and job creation, and encouraging economic diversification. Deeper fiscal consolidation is important to ensure fiscal and external sustainability. In the near term, introducing VAT and measures to reduce government spending are of the essence. Continued reforms that improve the functioning of the labor market, build human capital, and enhance the business environment, productivity and competitiveness are key.

Economic activity was gradually recovering in 2019. After reaching a low of 0.5 percent in 2017, real non-hydrocarbon GDP growth is estimated to have increased to 1.5 percent last year, reflecting higher confidence driven by a rebound in oil prices and higher government spending. Oil and gas production increases brought overall real GDP growth to 2.2 percent. Non-hydrocarbon growth was projected to increase gradually over the medium term, reaching about 4 percent, assuming efforts to diversify the economy continue.

The authorities took important policy measures in 2016, including fuel price reform, to address the impact of lower oil prices on government finances, but implementing the budget proved challenging. The combination of lower oil prices and higher spending has resulted in a widening of the budget deficit to around 22 percent of GDP.

Omani economic development may be divided into three phases: a period of rapid expansion between 1970 and 1986; economic retrenchment and rationalization between 1986 and 1989 as a result of the 1985-86 oil price collapse; and a period of stabilized growth since 1990. Economic growth and structural change have proceeded rapidly in Oman during the rule of Sultan Qabus ibn Said. Oman, however, lagged behind such neighboring gulf amirates as Kuwait and the UAE as a result of the late discovery of oil, financial constraints, and political instability in the first half of the 1970s.

When Oman declined as an entrepot for arms and slaves in the mid-19th century, much of its former prosperity was lost, and the economy turned almost exclusively to agriculture, camel and goat herding, fishing, and traditional handicrafts. In 1982, the first oil refinery in Oman, Mina al-Fahal was opened, as well as the Rima oil fields. (However, it was not Sultan Qaboos’ desire to rely on oil as the major source of revenue for the country and the next Five-Year Plan brought guidelines for diversification.) Today, oil and gas fuel the economy, and revenues from petroleum products have enabled Oman's dramatic development over the past 40 years.

Oil was first discovered in the interior near Fahud in the western desert in 1964. Petroleum Development (Oman) Ltd. (PDO) began production in August 1967. The Omani Government owns 60% of PDO, and foreign interests own 40% (Royal Dutch Shell owns 34%; the remaining 6% is owned by Compagnie Francaise des Petroles [Total] and Partex). In 1976, Oman's oil production rose to 366,000 barrels per day (b/d) but declined gradually to about 285,000 b/d in late 1980 due to the depletion of recoverable reserves. From 1981 to 1986, Oman compensated for declining oil prices by increasing production levels to 600,000 b/d. With the collapse of oil prices in 1986, however, revenues dropped dramatically. Production was cut back temporarily in coordination with the Organization of Petroleum Exporting Countries (OPEC)--of which Oman is not a member--and production levels again reached 600,000 b/d by mid-1987, which helped increase revenues.

The contribution of non-oil sectors to the GDP increased from 31% (1970) to 69% (1999), while input of oil revenues in government revenues decreased from 100% to 68%. The daily oil production increased from 332,000 bpd (1970) to 904,000 bpd (1999), while oil reserves increased from 1465 million barrels to 5744 million. By 2000, production had climbed to more than 900,000 b/d; however, it declined to roughly 750,000 b/d for 2006.

Natural gas reserves, which will increasingly provide the fuel for industrial projects in Sohar and power generation and desalination plants throughout the Sultanate, stand at 24 trillion cubic feet. A liquefied natural gas (LNG) processing plant located in Sur was opened in 2000, with production capacity of 6.6 million tons per year (tons/yr), as well as unsubstantial gas liquids, including condensates. The completion of the plant's expansion in December 2005 has increased capacity to 10.3 million tons/yr.

Oman does not have the immense oil resources of some of its neighbors. Total proven reserves are about 4.8 billion barrels. Oman's complex geology makes exploration and production an expensive challenge. Recent improvements in technology, however, have enhanced recovery.

Agriculture and fishing are the traditional way of life in Oman. Dates, grown extensively in the Batinah coastal plain and the highlands, make up most of the country's agricultural exports. Coconut palms, wheat, and bananas also are grown, and cattle are raised in Dhofar. Other areas grow cereals and forage crops. Poultry production is steadily rising. Fish and shellfish exports totaled $104.7 million in 2006.

The government is undertaking many development projects to modernize the economy, improve the standard of living, and become a more active player in the global marketplace. Oman became a member of the World Trade Organization in October 2000, and continues to amend its financial and commercial practices to conform to international standards. Oman signed a free trade agreement with the United States in January 2006, and continues to pursue, through the Gulf Cooperation Council (GCC), free trade agreements with a number of other key trading partners, including the European Union and India.

Increases in agriculture and especially fish production are believed possible with the application of modern technology. The Muscat capital area has both an international airport at Seeb and a deepwater port at Mina Qaboos. The large-scale modern container port at Salalah, capital of the Dhofar Governorate, continues to operate at near-capacity levels. The government in early 2004 approved a project worth over $250 million to add two berths and extend the breakwater at the port. Port expansion is underway at Mina Qaboos, and a large industrial and container port is under construction in Sohar. A national road network includes a $400 million highway linking the northern and southern regions. The government also recently expanded passenger and cargo capacity at its main international airports at Seeb (Muscat) and Salalah, and will construct new airports at Sohar, Ras al-Hadd, and Duqm. In an effort to diversify the economy, in the early 1980s, the government built a $200-million copper mining and refining plant at Sohar. Other large industrial projects underway or being considered include an 80,000 b/d oil refinery, a large petrochemical complex, fertilizer and methanol plants, an aluminum smelter, and two cement factories. Industrial zones at Rusayl, Sohar, and several other locations showcase the country's modest light industries. Marble, limestone, and gypsum may prove commercially viable in the future.

The Omani Government embarked on its seventh 5-year plan in 2006. In its efforts to reduce its dependence on oil and expatriate labor, the government projects significant increases in spending on industrial and tourism-related projects to foster income diversification, job creation for Omanis in the private sector, and development of Oman's interior. Government programs offer soft loans and propose the building of new industrial estates in population centers outside the capital area. The government is giving greater emphasis to "Omanization" of the labor force, particularly in banking, hotels, and municipally sponsored shops benefiting from government subsidies. Currently, efforts are underway to liberalize investment opportunities in order to attract foreign capital.

Some of the largest budgetary outlays are in the areas of health services and basic education. The number of schools, hospitals, and clinics has risen exponentially since the accession of Sultan Qaboos in 1970.

U.S. firms face a small and highly competitive market dominated by trade with Japan and Britain and re-exports from the United Arab Emirates. The sale of U.S. products also is hampered by higher transportation costs and the lack of familiarity with Oman on the part of U.S. exporters. However, the traditional U.S. market in Oman, oil field supplies and services, should grow as the country's major oil producer continues a major expansion of fields and wells. Major new U.S. investments in oil production, industry, and tourism projects in 2005 totaled several billion dollars. Moreover, negotiations on the U.S.-Oman Free Trade Agreement (FTA) were successfully concluded in October 2005; the FTA was ratified by the U.S. Congress and signed by President George W. Bush in 2006. It entered into force on January 1, 2009, providing further impetus to bilateral trade and investment.

Oman's business landscape remains dominated by a handful of local families who work either in tandem with, or in the shadow of, government-run enterprises. As the Sultanate's economy diversifies away from petroleum into fields such as industrial production and tourism, these families have parlayed their privileged positions and government ties into developing new business opportunities. While the government publicly has called for an increase in the number and participation of small and medium-sized enterprises (SMEs), the major role of the state and omnipresence of the large trading houses will ensure these families' continued dominance as Oman's economy continues to expand.

Oman's private sector is best described as an oligopoly. After Sultan Qaboos assumed power from his father in 1970, a handful of families came to dominate the private sector. These families are similar in many respects: many come from humble beginnings, most are not directly related to the al-Said ruling family, but almost all owe their fortunes in part to ties to the Sultan or members of his government. As Oman's economy developed and evolved, these families extended their business reach to meet the growing needs of the government, Omani consumers, and, more lately, the tourism industry. As a result, they control conglomerates that operate in a wide array of sectors, from construction to cars, and from manufacturing to hotels.

In recent years, Oman's government has encouraged the development of industrial areas, most notably the northern port city of Sohar, as well as large real estate projects. These initiatives are part of a long-term effort to diversify the economy and reduce the country's dependence on hydrocarbons, which currently account for 79% of state revenues. The government's new economic priorities - industrial ventures and real estate development - have provided new opportunities for Oman's oligarchy.

Given the state's substantial role in economic planning, it is not surprising that the family with the closest relationship to the Sultan - the Zawawis - is one of the country's richest. While the Zawawi fortune remains large, it also has remained relatively unchanged over time, according to post contacts. By contrast, other private sector leaders - the Zubair and Bahwan families and the Sultan's cousin, Sayyid Haitham bin Tariq al-Said - have become more involved in new and growing sectors, raising their rank within the business community's hierarchy.