Economy and Finance
As Oman’s position as a transit port for arms and slaves went into decline 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.
Today, however, oil and gas fuel the economy, and revenues from petroleum products have enabled Oman to witness a remarkable development over the past four decades. Realizing that Oman is highly dependent on the hydrocarbon sector, and oil and gas will run out in the future, the Omani government in recent years has been focusing on the development of industry, trade and tourism.
The Sultanate of Oman saw decelerating economic growth in 2016, as a result of lower investment in the oil sector and generally lower public spending. Despite fiscal consolidation efforts to reduce the deficit, this remains high, in part due to low oil prices. Consequently, Oman continues to resort to its reserves and to borrowing. The predicted increase in oil prices and the expansion of the non-oil economy will improve the macroeconomic outlook.
Gross domestic product (GDP) in 2015 was $69.83 billion, compared with $81.03 billion in 2014 and $78.93 billion in 2013. According to the International Monetary Fund (IMF), GDP per capita in 2015 was $16,699. GDP growth in 2017 is expected to be 2.6 per cent, compared with 1.6 per cent in 2016. Inflation in 2017 is expected to be 3.1 per cent, compared with 1.1 per cent in 2016 and 0.1 per cent in 2015.
The World Bank highlights the necessity for gradual and continuous reform to preserve Oman’s financial and external sustainability. In addition, the government’s ability to monitor the emerging risks that may impact its financial sector needs to be enhanced. Oman may need to rely on policies that reduce the impact of falling oil revenues on the population. Among the main risks facing the economy are oil price shocks and a potential increase in interest rates.
The implementation of the economic diversification policy is being prioritized in order to bolster growth and secure work opportunities.
Oman ranked 66th in the Global Competitiveness Report 2016-2017, dropping four places from 2015-2016.
Although difficult to assess, the significance of the informal sector seems relatively limited. Handicrafts and traditional industries, produced by women, and trading networks are considerable. Production and trading by migrants largely from Pakistan and India, is another segment of the economy insufficiently documented statistically. Most of the expatriates employed in the commercial sector run retail businesses, as well as farms, more or less independently. Little is known about the actual size and turnover of these businesses.
Traditional subsistence activities are pastoralism (camels, goats, and sheep), agriculture (dates and other fruits and vegetables), fisheries, and trading and crafts. Over 66 percent of Oman’s population is involved in herding and agriculture. The estimated area of irrigated, cultivable land is 2.2 million hectare or 7 percent of the total area. Agricultural holdings account for 5.7 percent of cultivable land. 46,075 hectare is currently under permanent crop cultivation (Source: FAO), producing around 1,57 million tons of crops (2010, Source: Ministry of Agriculture and Fisheries). These are destined for local markets and export. Irrigation channels, partly subterranean, and pumped water provide for the necessary irrigation.
The development of agricultural activities is hampered by difficult conditions, such as limited water resources. The sector is also characterized by smallholdings (on average one and a half hectare) and fragmented ownership. Many owners are absentee and work elsewhere for a higher income, leaving the labor to migrant workers. These conditions prevent development into a self-sustaining sector which produces sufficient food or income for locals. As a result, the agricultural sector receives financial, technical and educational incentives.
A sustained development of agriculture and herding is a prerequisite for continued life in the desert and oasis settlements. There are experiments with organic farming. Most of the crafts are also based on agricultural resources, in particular from date palm trees, such as leaves, fronds, bark, branches and fibre. Local clay is used for pottery. Incense, herbs and other fragrant materials are used for the production of incense (bukhur), which is made and/or available in every household.
Fisheries form a relatively important income-generating sector. Some 15,000 fishermen are involved in this sector, which provides a source of living to about 100,000 people. Fisheries play a dominant role in the economy of the coastal regions, which occupy a 2,092 kilometer coastline. Most of the fish is caught through traditional fisheries (133,000 tons out of 148,000 tons in 2007) in 2011, production was 158,723 tons (Source: FAO). Although an estimated 4.3 million tons are available for fishing, studies indicate that harvesting should not exceed 175,000 tons annually in order to sustain future catch. The Marine Science Centre located in Muscat conducts this type of research in fisheries. Industrial fisheries are located in the area around the capital.
Already at an early stage, the government promoted agriculture and fisheries to reduce Oman’s reliance on food imports. Nevertheless, despite the investments and the apt response of the private sector, their relative contribution to the economy has declined with the expanding oil industry. In the last Five-Year Plan further development of fisheries was pursued through supporting modernization of the fleet and upgrading of infrastructure related to export.
Trade is now the motor of the economy and its diversification. Re-export is the focal point. 60 percent of the goods arrive by sea. Thus trade has regained its traditional significance. Maritime activities used to supply the Omani population with a supplementary source of income. Oman’s location on the south-eastern corner of the Arabian Peninsula, bordering the Gulf and the Arabian Sea, enabled its people to participate in long-distance trade networks. Its ports, located favourably as regards the monsoon winds and strategically placed between the African and Asian continents, functioned as warehouses. In addition, Omani products such as incense and dates used to find their way to the intercontinental markets. At present, oil, gas and a growing number of other commodities have taken their place.
The trade and commerce sector, including construction and contracting, is consistently expanding through the consumption linkage with the oil industry. Consumer goods boost the import and distributive trade. For example, an intricate and efficient distribution network has developed between Dubai, the capital area of Muscat and regional markets. In recent years, tourism has increased and with 1.8 million visitors (NCSI 2012) contributed to around 3 percent of Oman’s GDP (World Travel & Tourism Council 2013).
Oman’s economy is classed as an upper middle-income economy based on hydrocarbons. Oil was first exported in 1967. Since then the economy has rapidly expanded, relinquishing its traditional activities of agriculture and fisheries. As it is estimated that oil resources will run out by the middle of this century, diversification of the economy is being pursued, with a focus on trade, manufacturing, tourism and information technology. Expansion is supported by government investments in infrastructure, education, and fiscal incentives. Participation of Omanis in the economy is a serious concern and has been actively promoted since the 1990s.
Oil and gas together provide for 75 percent of the country’s export earnings. Gas represents a quarter of hydrocarbon revenues. Petroleum activities (crude petroleum and natural gas) account for 45 percent of Oman’s GDP. Non-petroleum activities are dominated by the services sector (38.5 percent). The manufacturing industry accounts for 16.6 percent and agriculture and fisheries for 1.3 percent.
High oil prices have contributed to Oman’s economic growth (GDP’s growth rate was 7 percent in the 6th Five-Year Planning period from 2000-2006). In 2007, the average oil price was set at 65.15 USD per barrel. In the industrial sector in particular, oil or gas related industries such as gas liquefaction, petrochemicals or aluminum production have increased GDP. Non-oil pillars are transport and communications with a growth of 25.4 percent in 2006, wholesale and retail trade and other services (health and education). The value of total exports, including re-exports, increased with 15.5 percent in 2006.
Oman’s economy is however vulnerable. Revenues will decline if the oil prices drop or oil production decreases, whereas expenditures will remain the same or increase. In this situation planning is particularly important. Since 1976, Oman has drawn on a series of five-year plans, which set objectives for all government sectors. The 7th Five-Year Plan ran from 2006 to 2010. In 1995, in view of the depletion of oil, the government formulated a vision of the economy for the year 2020. The document Vision 2020 constitutes the macroeconomic framework on which the country bases its national development plans.
Oil dollars offer Oman a relative independence from international financial institutions. Oman does not borrow from the International Monetary Fund or the World Bank. On the other hand, because of its relatively high-income status, Oman is not ranked as a developing country, although in many respects it is in a developmental phase.
Oman is paving the way forward for sustained development beyond the finite oil-based economy. Diversification aims at widening the economic base and securing jobs for its population. It has been an objective in subsequent five-year programs. The sectors aimed at are the manufacturing industries, tourism and trade. Traditional sectors such as agriculture and fisheries also receive investments and other incentives.
Manufacturing is a focal point in the diversification strategy. The current Plan aims at enhancing the growth of non-oil sectors at an annual rate of 7.8 percent on average. The gas based industries, the tourism sector and non-oil merchandise exports of Omani origin are set to realize an annual growth rate of 10 percent or more. The industrial sector is to contribute some 15 percent to the country’s GDP by 2020. Billions of dollars are being invested in gas-based industries such as Sohar Aluminum Smelter and the Polyethylene and Oman Aromatics projects. Capital intensive industries such as Oman Oil Refinery and Oman LNG receive large investments, even though these industries offer restricted employment opportunities.
However, diversification is proving difficult to realize for a number of reasons. The oil industry is basically an enclave activity with few backward and forward linkages to other manufacturing industries. This was especially so when crude oil was predominantly exported from Oman. This trend has reversed with the development of the petrochemical industries. The oil sector tends to draw capital and labor from lagging sectors such as other manufacturing industries, agriculture and fisheries, although the oil price volatility makes planning difficult.
The government sees an important role for the private sector, which traditionally plays a keen role in economic development, to attain the above-mentioned goals. According to Vision 2020, the private sector is effective, self-reliant, and competitive, the main vehicle for national income generation, and the moving force behind job creation, assuming its social and environmental responsibility. Electricity, water, and other commodities are being privatized. Proclaiming a capitalist approach yet recognizing the fragility of the economy, Oman seeks to benefit from the protective provisions laid down in the World Trade Organization agreements.
Oman has a policy of spreading development evenly throughout the country. However, with the dominance of the capital area, other regions tend to lag behind. In its 4th Five-Year Plan (1991-1995), the government allocated 60 percent of development expenditures to balance regional disparities and to prevent depopulation of the countryside. It upgraded the regional infrastructure, services and finance, in combination with development of various sectors. Seven industrial estates have been established throughout the country. Dhofar received investments for a bulk harbor in combination with industries. Oman NLG was established in al-Sharqiya.
The most recent and largest estate is Port Sohar in al-Batina, where most of the country’s heavy and petrochemical industries will be located. This huge project, with investments approaching 14 billion USD, is a fifty-fifty partnership between Oman’s government and the Port of Rotterdam, The Netherlands. In the Wusta region a smaller fishing port and docking area are planned. These and other development projects are meant to become regional growth poles, inducing other economic activities and securing employment.
The exploitation of oil in the Arabian Peninsula, which began in the 1920s but increased considerably after World War II, induced a national and international movement of labour in the Middle East. In the early 1980s, more than 5 million people were involved, by the early 21st century, this number had almost doubled. Quantitative and qualitative demand far outstripped the national labour supply in oil-endowed states.
Initially characterized by an inter-Arab exchange of labour, the labour force soon turned international, being dominated by Asian immigrants from the Indian subcontinent. They were keen to participate in the economic boom relatively close to home in exchange for lucrative salaries (wages for unskilled labourers from Bangladesh in the early 1980s, were five to six times higher in the Gulf countries than at home). The gradual shift from construction to services increased the proportion of labour from Far East Asian countries such as Korea, Taiwan, the Philippines and Thailand.
At first, no restrictions applied to labour immigrants, apart from the sponsor system. However, with the onset of ‘Omanization‘, a more restricted approach was introduced. Nowadays, all expatriates coming to Oman need a work permit supplied by a national company, which is issued on a yearly basis. The sponsor is responsible for the payment and the physical well-being of the sponsored person. If a problem arises both migrant and sponsor have the right to obtain judicial advice from authorities or plea a court case. Restrictive regulations concern the number of foreign workers permitted per company. Certain sectors have become closed for non-nationals, such as the taxi business and public transportation. This policy has been expanded to various sectors, with varying success. For example, the ban on foreign hairdressers was soon lifted when it became apparent that few Omanis were willing to enter this sector. Foreign ownership of companies is limited to a maximum of 49 percent.
Oman established a Labour Law in 1973, which regulates amongst other things industrial relations and employee affairs, employment contracts, work descriptions, and working hours. In 1991, the Social Insurance Law was enacted. Companies with more than 50 employees need to establish representative bodies for trilateral representation. The labour inspection at the Ministry of Labour monitors adherence to the rules. It settles disputes and observes the grievance procedure. The Ministry of Manpower received 297 grievances from labourers in 2008. New royal decrees in 2003 and 2006 brought the Labour Laws into further accordance with international labour standards. Improvements included procedures for union activity, collective bargaining, and strikes. A Court of Justice caters for government employees’ grievances. In 2003, in letters to the six states of the Gulf Cooperation Council, Human Rights Watch strongly urged their leaders to endorse the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families.
Environmental issues in Oman concern the delicate balance between water resources, agricultural needs and economic development through industrialization and population pressure. For example, modern farming and irrigation practices lead to salinization of the soil, intrusion of seawater into wells and overexploitation of land. Marine and coastal area pollution and erosion of coastal ecosystems are also due to property development, construction of recharge dams, increased tourism and population pressure. Tourism and the protection of the environment sometimes serve opposing interests.
However, Oman is beginning to acknowledge the nexus between economic growth and environmental conservation on the one hand, and human development and the ability to sustain it well into the future on the other. A series of royal decrees on these issues and on the protection of nature reserves and wild life are to ensure maximum protection.
Since 2008, the Ministry of Environment and Climate Affairs (MECA) is responsible for the environment and sustainable development. The ministry proclaims a policy of conservation of renewable natural resources, marine environment and fish resources, grazing lands, forests, and wildlife. Projects include the development of 18 recharge dams, 35 storage dams, census of wells and of the traditional irrigation system (falaj) to make better use of water resources. Marine environment and fisheries projects concern fishing research, improvement of statistics and mangrove planting. Agricultural environment conservation projects are improving irrigation techniques and proclamation of natural reserves. Sustainable development indicators monitor the process.