Non-oil sector sets the pace for Oman's economy

Oman’s economy is performing well due to increased government spending, but the sultanate is often overshadowed by its more dynamic Gulf neighbours. Published in MEED, 22 June 2014

Last year, Oman outpaced most of its peers in terms of economic growth. The country’s GDP expanded by 5.1 per cent in 2013, compared with 4.1 per cent for the GCC as a whole and just 2.2 per cent for the wider Middle East and North Africa (Mena) region, according to the Washington-based IMF.

Slower growth

This year it looks like it will be a slightly different story. Oman is expected to fall back to a growth level of 3.4 per cent, slipping behind the average of 4.2 per cent for the six-country GCC bloc, although still slightly ahead of the Mena average of 3.2 per cent.

The country’s economic performance is being firmly led by the non-oil economy these days. While oil GDP is expected to decline this year and next, by 0.7 per cent and 1.1 per cent respectively, the non-oil economy is expected to grow by a solid 5.4 per cent in both years. Beyond 2015, the prospects also look relatively good, not least because of government spending.

“The public investment programme is expected to help maintain non-hydrocarbon growth [at] around 5 per cent over the medium term,” said the IMF in a statement released on 12 May after a two-day meeting with the Central Bank of Oman.

Smaller economy

One long-term problem the country faces is competing for overseas investment to augment spending from the public purse.

Oman’s economy is a relatively small one, accounting for 4.5 per cent of the total GCC economy and just 2.6 per cent of the entire Mena economy. The sultanate is often content to see itself as distinct from the rest of the GCC, but this can work both ways and it is often overshadowed by more dynamic markets elsewhere in the Gulf.

“Oman does have decent growth rates,” says one Gulf banker. “It is doing reasonably well, but I think Qatar and the UAE are the top two in terms of growth potential.”

Life may yet be about to get a little tougher for policy makers in Muscat, in part because of its slowing hydrocarbons sector. After a period of growth in recent years, particularly in terms of natural gas production, oil and gas output is expected to stabilise or even slightly decline in the coming years.

State spending

That is likely to lead to a drop in government revenues, particularly if global oil prices decline as expected. At the same time, government spending is set to rise. Expenditure has tended to fluctuate in recent years, falling in 2010 before rising in 2011 and 2012 and then falling again in 2013. This year and next, however, the government is expected to spend more rather than less.

This tight fiscal position means that the country’s breakeven oil price continues to rise. In 2009, it was just over $61 a barrel, according to the IMF, but by next year it is expected to reach $107.50 a barrel.

London-based Capital Economics says overall economic growth in Oman should hold up on the back of the government’s fiscal policy, and a rise in civil service wages should support further growth in consumer spending this year.

Even so, the research firm points out that the fiscal position is likely to get worse not better, and the government could slip into a small deficit in 2015.

The fiscal position is echoed in the current account, with the value of imports continuing their upward surge even as exports stabilise and even decline slightly. As a result, Oman’s trade surplus has been steadily declining in recent years, from $21.1bn in 2011 to an anticipated $14.5bn in 2015 – a drop of 31 per cent in four years.

Inflation was low last year at just 1.3 per cent, in large part due to lower imported food prices. Oman and Saudi Arabia had the biggest falls in inflation in the Gulf. However, food prices have been rising again this year, suggesting that inflation will pick up over the course of 2014 and could grow further in 2015. For now, inflation does not look like it will rise to problematic levels, but it is something the authorities will keep an eye on.

Spending cuts

Meanwhile, the tight budget outlook may yet prompt the government to cut its spending. Masood Ahmed, director of the IMF’s Middle East and Central Asia department, suggests that Oman and other countries in similarly tight fiscal positions should consider reducing government spending.

“Across the region now, with growing private sector activity, [there is the] opportunity to pull back on some of the fiscal stimulus that a number of countries have been undertaking over the last few years,” he said at an event in Washington on 11 April.

If this happens, the government will need to do it with some caution, given the importance that state spending has had for overall growth rates in recent years.