After a few difficult years, the Omani economy appears to be heading in the right direction. GDP contracted by 0.9 per cent in 2017 and is projected to grow by a modest 1.9 per cent this year, according to the IMF, but the Washington-based organisation has pencilled in a 5 per cent expansion next year.
The fact that this rebound has tracked a recovery in oil prices suggests the government has not yet found a way to decouple the country’s fortunes from volatile energy prices. Indeed, the growth predicted for next year is fuelled by the oil sector, which the IMF expects to expand by 7.5 per cent, more than twice the rate of the non-oil economy.
Data from the Central Bank of Oman offers more reason to link the economic recovery to the energy sector. Government revenues in the first nine months of this year were up 30 per cent on the same period of 2017, but that was driven by a 44 per cent rise in oil revenues and a 26 per cent increase in natural gas income; revenues from other areas increased by just 2.5 per cent.
Whatever the causes, the authorities will be glad the fiscal pressure is now easing. The fiscal deficit has fallen from 21 per cent of GDP in 2016 to an anticipated 2 per cent this year and the IMF is even predicting a small surplus of 0.8 per cent in 2019 – although that is likely to mark a brief respite, with the deficit likely to return by 2021.
Clearly, the economy remains vulnerable. Breakeven oil prices are expected to be $79.2 a barrel over the course of 2018 according to the IMF, dropping to $70.4/b in 2019. That is far below the breakeven rates of some recent years – in 2015 and 2016 it was north of $100/b – but actual oil prices remain lower still.
In any case, the IMF may yet prove to be over-optimistic in its predictions. The three main credit ratings agencies – Fitch, Moody’s and Standard & Poor’s (S&P) – are forecasting a GDP growth rate of between 2.6 and 3.1 per cent next year, significantly below the IMF’s forecast. S&P also thinks Muscat is a long way off hitting a fiscal surplus – it predicts a fiscal deficit of 6.7 per cent of GDP in 2019, falling to 6 per cent by 2021.
Muscat continues to struggle to implement meaningful reforms which could change the macroeconomic picture. Analysts on the ground say the National Programme for Enhancing Economic Diversification (Tanfeedh) – introduced to boost private sector employment among other things – has become bogged down in bureaucracy and is producing few results. Proposed laws to reform the labour market, encourage more foreign direct investment and boost the position of small and medium-sized enterprises have languished for years.
In addition, the imposition of VAT which had been due in January 2018 is now not expected to come in until late 2019 at the earliest. Rises to excise duties have also been delayed. Both measures would help the government diversify its revenues but raising taxes is politically tricky at this stage – the memory of public protests about unemployment in early 2018 are still fresh.
Some reforms are slowly advancing though. In early October, the government set out plans to partially privatise some of its electricity transmission and distribution companies, such as Oman Electricity Transmission Company and Muscat Electricity Distribution Company. This was a long-anticipated move, although the full terms of the sell-offs may not emerge until well into 2019.
Joblessness appears to be amongst the most intractable problems facing the authorities, particularly youth unemployment which stands at around 48 per cent. The country needs to create a lot of jobs, but hasn’t yet found a way to do so. “By our estimates, over the next 20 years Oman would need to create another 240,000 jobs for nationals in order to stabilise the unemployment rate at its current rate, just under 17 per cent” says Thaddeus Best, an analyst at Moody’s.
The government response in the past has been to hire more locals in the public sector, but it cannot afford to hire everyone looking for a job. “Between 2011 to 2015, civil service and government organisations created more jobs than the private sector,” says Best. “Oman’s already swollen public payroll significantly constrains the government’s room.”
A ban on issuing new visas to expatriate workers was introduced in January covering 87 roles in ten sectors for six months and was subsequently extended for a further six months. That has reduced the country’s expatriate population but – as with the clampdown on foreign workers in Saudi Arabia – it has yet to lead to any drop in local unemployment. Nonetheless, Salim bin Nasser al-Hadhrami, director general of planning and development at the Manpower Ministry, told local media in December that the government was considering a further extension.
In the longer-term the government is hoping its diversification strategy – which includes the development of the Duqm economic zone and encouragement of sectors such as manufacturing and tourism – will deliver the results it needs. There have been some gains and Oman became the world’s largest exporter of gypsum in 2017, according to an IMF, but there is clearly far more to do if Muscat is to put its economy on a sustainable footing in the long-term.