Current Economic State of Oman
Oman is one of the smallest oil producers in the Gulf region, although its strategic location on the Strait of Hormuz leading into the Gulf necessitates 40 percent of the world's oil supply to cross through its waters. Based on current reserve estimates and production rates, the country's oil resources are expected to last 20-25 years. This is significant in Oman, where oil revenue in 1998 comprised 69 percent of government expenditure and 30 percent of GDP, which was $14.1 billion.
Whether this total depletion becomes reality, the Omani government is preparing for the worst by developing other revenue-generating industries, particularly in the area of gas. It is also seeking to privatize government-owned enterprises and replace the public sector with the private as the main engine of economic growth.
Since 1970 Oman has used its modest oil revenue to make impressive economic progress and to improve public access to health care, education and social services. In recent years the Omani government has sought to diversify the economy and to stimulate private investment.
As a result of the large number of foreign workers, the government is attempting a policy of “Omanization” to introduce more Omanis into the work force.
Estimates of the population growth rate vary, but most fall within the range of an increase of 4.9 percent each year. Virtually all Omanis are Muslim. Half are adherents of the Ibadhi sect, the others are Sunni with a small number of Shi'ites in the country as well. The Shi'ites are particularly prominent in commerce. Expatriates follow a variety of Indian and Western religions, and there are places of worship for their faiths in Oman.
Since 1973, the Omani government has invested its oil revenues in building a modern infrastructure. The latest major government project is a $2.4 billion liquefied natural gas (LNG) project in Sur, which will be exported LNG to Korea, India and Japan. Planning has begun on an industrial free zone to attract foreign multinationals and to develop Salalah as an air-sea cargo hub.
The most successful recent major project is Port Salalah, a $250 million container transshipment port, which opened in November 1998. Since then, the port has undergone steady growth in shipping traffic and has the potential to generate rapid industrial development in southern Oman.
There are many characteristics of the Omani economy that are enticing foreign investors, including the country's free market economy and unrestricted foreign exchange or capital flows. The country is also attractive because of its private-sector based development strategy, renewed emphasis on privatization, favorable credit ratings from overseas lenders, customs duties exemptions, and overall atmosphere of stability and moderation.
Furthermore, the country's attempt to gain membership to the World Trade Organization by 2000 means it must take measures to meet requirements in intellectual property protection, market access and customs valuation.
There are, however, some constraints to engaging trade and investing in Oman. They include the country's small, undeveloped, high value domestic consumer market as well as a business sector that is risk averse and its bureaucratic processes.
Another significant constraint is the government tender practice. Tender Board guidelines stipulate that an Omani bid receive a 10 percent price preference. Thus, a bid by an Omani company that is 10 percent higher than a bid from a foreign company will be viewed as equal.
Companies seeking to invest in Oman also need to be aware of the country's Omanization program, in which the government sets quotas regarding the number of Omani nationals each company must hire. This program is becoming increasingly important considering the country's demographic trends. Expatriates comprise roughly 25 percent of the population, which is growing at 2.5 percent annually. More than 69 percent of Omani nationals are 25 or younger, meaning that roughly 20,000 secondary school graduates are entering the job market each year, most of whom are unable to find adequate work. The country is seeking to remedy the situation by emphasizing job training and employment creation.
The government, which operates under five-year development plans, is trying to diversify its economy away from oil. To achieve this, the government has opened the country to foreign participation in the economy, particularly in the form of joint ventures and, especially, in the industrial field. Although bureaucratic processing of commercial licenses can be cumbersome and time-consuming, the government does promote a free market economy. There are no restrictions on the flow of capital, whether in terms of salaries or the repatriation of corporate profits.
Nationalization of foreign enterprises is unknown in Oman and the government is beginning to privatize some of its state-owned companies. In addition to the oil and gas sectors, the areas with the greatest commercial opportunities, there are other sectors in Oman that offer significant potential. These include water saving technologies for agriculture, equipment for the treatment of wastewater, medical equipment, telecommunications, joint ventures in light industry, training and vocational education and development of an infrastructure for increasing tourism to the Sultanate.
The major obstacle to doing business in Oman is the country's small population and resulting small domestic market. Exacerbating this problem is the lack of a modern, high value consumer market, particularly beyond the capital area. In addition, other Gulf state producers typically offer higher subsidies for industry than Oman, creating similar industries and making competition difficult. Oman's trade and investment regime reflects fiscal, social and other priorities which sometimes conflict with industrialization.
Economic Figures (in RO millions, unless otherwise indicated)
1998 1997 1996
GDP at current prices (OR bn) 5.46 6.08* 5.87
Total Government Revenue (OR bln)1.85 2.27 1.99
Oil & Gas as % of Government Revenue 70.6 79.6 76.8
Total Government Expenditure (OR bn) 2.22 2.31 2.25
Current Account Balance (OR mn)-1,134* -22 131
Average Daily Production of Oil (1,000s of barrels) 899 904 885
Average Oil Price ($ per barrel) 11.92 18.62 19.42
Total Exports (OR bn) 2.12 2.93 2.82
Non-Oil Exports (OR bn) 0.19 0.20 0.17
Trade Balance (OR mn) -122 938 1,004
Oman's economic dependency on oil means that its economic health fluctuates with oil prices. In 1998, depressed oil prices reduced the country's GDP by 10.2 percent, cutting oil revenue by 29 percent that year. Despite this, oil revenue comprised 69 percent of government revenue and 30 percent of overall GDP.
The affect of oil price fluctuation can also be seen in per capita GDP. In 1996 this figure stood at $6,486 rising to $6,848 in 1997 and dropping to $6,163 in 1998.
Furthermore, the price fall caused the Sultanate to experience its first trade deficit of $174.3 million since 1970. The value of its major export, crude oil, dropped by 37 percent that year to $3.6 billion. Non-oil exports decreased by 2 percent to 517.7 million.
On a brighter side, non-petroleum activities increased by 4.6 percent in 1998 with an 11.2 percent increase in transport activities, attributed mostly to Port Salalah.
To recover some of the lost revenue, the government announced a host of spending cuts and tax increases for FY 1999. The government announced that overall government spending would be reduced 7 percent. The budgets of most ministries, including defense, were cut between 5-10 percent, except the ministries of education and health, which were increased slightly. Salaries – which total roughly 68 percent of government spending – were untouched. Other revenue-generating measures included raising net corporate tax on Omani companies from 7.5 to 12 percent, increasing customs duties on imported cars with engines above 2500 cc from 5 to 10 percent and from 5 to 15 percent for cars with engines above 2500cc. The government also increased duties on imported luxury goods from 5 to 15 percent and duties on imported alcohol and pork products increased from 100 to 200 percent.
These measures achieved their intended goal. Despite a 13 percent increase in aggregate expenditures, Oman forecasts a sharply reduced fiscal deficit of $906 million.
Oil & Gas Sector
With the possibility looming that the country's oil supply will be depleted within the next 25 years, the Sultanate is looking to its 25 trillion cubic feet of proven gas reserves as its future economic savior. The government believes that number will rise to 40 trillion during the next few years.
As of mid-1999, the $2.4 billion liquefied natural gas project was nearly finished. The project, which includes pipelines, a plant and collector facility, is expected to yield 6.6 million tons a year. This output has already been sold to Korea, India and Japan. The first deliveries are scheduled for March 2000.
Earnings from the LNG project are set to fundamentally change the structure of Oman's revenues from the exploitation of its natural resources. Yet, oil will continue to be the driving force of the economy and every effort is being made to maximize the potential of Oman's oil resources.
The country's main producer, Petroleum Development Oman (PDO), is 60 percent owned by the state and 34 percent by Shell Petroleum Company. Other producers in Oman are Occidental of Oman, Japan Petroleum Exploration Company (Jape), Elf Petroleum Oman and International Petroleum Bukha.
The government plans to increase production to 1 million bpd by the year 2000 was thwarted with the oil price crisis. To help raise prices, oil exporters agreed to cut production. Production dropped slightly in 1998 to 896,000 bpd from 1997 levels.
The fifth five-year plan (1996-2000) concentrates on creating a stable economic framework and human resource development. With plans to raise the contribution of the industrial sector to the domestic product from 5.2 percent (the current percentage) to 15 percent by the year 2020, the Sultanate looks to the next century with great confidence and determination.
Non-oil activities increased 4.6 percent in 1998, including an 11.2 percent increase in transport activities, primarily occurring in Port Salalah.
The port is 40 percent owned by Omani investors, 30 percent by the government, 15 percent by U.S. Sea-Land and 15 percent by Maersk. It is located 150 km from major east-west shipping lanes, and is already handling more than 60 vessels a month. It has become a leading container port on the Indian Ocean Rim.
The government announced plans in June 1999 to establish a industrial free zone at the port, which can potentially attract multi-national manufacturing and processing operations, as well as becoming a major air-sea cargo hub.
Additionally, the Oman is looking to develop a lucrative tourism industry. The government wants tourism's contribution to GDP to increase from 0.05 percent now to 5 percent by 2020. First, the country needs to develop a tourism infrastructure, including roads and hotels. Hotels are beginning to open, including a $23 million Hyatt Regency, which opened in 1998. Tour groups are also coming, particularly from Germany, Austria and Scandinavia. Still, most of the country's estimated 35,000 tourists in 1998 were there on business.
© 2000 Mena Report (www.menareport.com)