Oman is on the up but not out of the woods

Unsplash/Journaway Rundreisen

As recently as 2020, Oman seemed to be teetering on the edge.

The main credit rating agencies had downgraded the Sultanate’s debt and bond yields were rising. Bridging loans were needed and the government was discussing bailouts with its neighbours. 

Nowadays, credit ratings have been upgraded with the expectation of more to come and policymaking is more orientated to supporting growth and diversification.

A medium-term fiscal consolidation plan is a critical element of Oman’s reform strategy. Government expenditures have been cut and new revenue measures such as VAT have been introduced. 

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Higher energy prices have helped. Oman is expected to achieve a broadly balanced budget in the coming years, having been in deficit to the tune of 15 percent of GDP in 2020.

Moreover, the energy windfall has been used to pay down debt, which now stands at 40 percent of GDP compared to 65 percent in 2020.

This leaves Oman less vulnerable to shifts in global liquidity and sentiment.

The fiscal strategy is guided by medium-term targets, including one of achieving a $68 per barrel break-even oil price target, which on current trends looks achievable.

Earlier this year, the IMF put Oman’s break-even oil price — the price of a barrel of oil at which government spending is covered – at $72.2 per barrel, lowering it by $3 from its previous projection. 

Building Oman’s future 

Fiscal rectitude has enabled the Oman government to pivot from crisis management to implementing plans to support the economy.

This includes establishing a OMR2 billion ($5.2 billion) Oman Future Fund to boost investment in the economy.

The government has also announced a new city on the outskirts of Muscat and three mega projects in Dhofar, South Al Batinah and Musandam.

Oman does not have the financial clout of its GCC neighbours. However, smart policies and initiatives can help Oman capitalise on growth and diversification plans in these countries.

The UAE’s Etihad Rail, for example, is planned to connect Oman with the UAE and Saudi Arabia.

Oman has also recently agreed an infrastructure project for Al-Dhahirah Special Economic Zone with the Saudi Development Fund.

Spillovers from Saudi Vision 2030 will be a net positive for Oman as the kingdom is an important destination for Oman’s non-oil exports.

The policy focus now is on long-term planning and advancement of a diversification strategy (Tanfeedh).

Tourism, which has recovered strongly post-pandemic, is an essential pillar of the plan and a target area for investment.

Nationals of 103 countries are now able to enter Oman visa-free, as the authorities hope to boost the sector’s contribution to growth to 2.75 to 3 percent of GDP by 2025.

Unsplash/Journaway Rundreisen

Oman is also advancing renewable energy projects in wind and solar with the aim of raising the share of renewable energy to 30 percent by 2030.

The government has signed agreements valued at $20 billion to develop green hydrogen, as well as biofuels.

And it has embarked on creating a sustainable finance framework, aimed at funding initiatives supporting energy efficiency.

As important as infrastructure spending, the authorities have taken steps to attract foreign investment, such as allowing full foreign ownership of local companies, more flexible property purchase rules, and support for small and medium-sized enterprises. 

Oman has traditionally been relatively attractive to foreign investors – foreign direct investments reached OMR 18.14 billion ($47 billion) up to the third quarter of 2022, an increase of 10.4 percent year-on-year, according to the ministry of commerce, industry and investment promotion

Yet, as competition for FDI in the Gulf heats up, Oman will need to push on with business-friendly reforms.

Turned a corner

The news coming from Oman is predominantly positive and a recent IMF mission highlighted progress.

But it is too early to build a “phoenix from the flames” narrative. Fiscal stress has certainly eased and the economy is expected to enjoy sustained growth in the region of 2.5 percent.

However, Oman has only just turned a corner. It has not reached its destination, and challenges lie ahead.

The country remains almost as reliant as ever on commodity exports, both to manage its public finances and trade, even if the composition of energy trade has shifted in favour of gas as more projects have come online.

This still leaves the economy vulnerable to a collapse in commodity prices.

The government therefore needs to push ahead with reforms to broaden the tax base and encourage diversification.

It is often easier to implement such reforms out of necessity during times of crisis rather than in a period of economic stability.

We have already seen delays to some non-oil revenue generating reforms, including the launch of an income tax, as fiscal pressures have subsided. 

The outlook for Oman has become more promising, even if not as bright or dynamic as other parts of the Gulf.

However, in order to carve out niches in the regional economy and capitalise on the growth and diversification across the Arabian Peninsula, Oman must maintain its own reform momentum.

Scott Livermore is chief economist at Oxford Economics Middle East