Oman's economy is based on oil which has funded the rapid modernisation of the country. But Oman's reserves are limited and there is a pressing need to prepare for the advent of a post-oil era, which may arrive as soon as the third decade of the next century. This need underpins the strategy for developing reserves of gas for export and as feedstock for downstream industries in Oman. To increase diversity, investment is being directed towards export-oriented industries, agriculture and fisheries.

The continued reliance on oil income leaves Oman vulnerable to oil prices, which are falling in real terms. This has obliged the government to ration spending on capital projects to contain the budget deficit and continue to fund its recurrent commitments. By reducing direct state spending on infrastructure and utilities and containing the cost of personnel the government hopes to eliminate the budget deficit over the next five years. The main of the economy are:

OIL & GAS Reserves have been regularly revised to maintain a consistent ratio of reserves to production. Reserves now stand at 5,200 million barrels of oil and production should average 850,000 barrels a day (b/d) this year. This implies oil production at current rates for another 17 years. With future upward revisions likely, the actual production period will be much longer. There are ambitions to push output to 1 million b/d. These are constrained for the time being by weak oil prices, high extraction costs, tight capital budgets at Petroleum Development Oman (PDO) and a reluctance to add to world capacity when markets are so delicately balanced. Most of the additions to reserves have come from re-evaluating earlier discoveries rather than new finds. New technology has boosted recovery rates. Some of the most interesting new discoveries from frontier drilling are uneconomic to extract at today's prices. Gas discoveries are being developed to feed into a variety of new projects (see page 12).

TRADE BALANCE The trade surplus is shrinking due to low oil prices and a continued appetite for imports. Oil typically accounts for about 80 per cent of exports and about 60 per cent of the export volume goes to the Far East. Non-oil exports are mostly re-exports of products from other countries - 72 per cent in 1993 when non-oil exports of Omani origin accounted for 5.9 per cent of total exports. Fish was the leading Omani non-oil export, followed by base metals and textiles. The import bill has grown by 10-20 per cent a year since the late 1980s.

BUDGET DEFICIT Unpredictable oil prices complicate planning, but deficits are a consistent feature of Oman's budgets. Current expenditure accounts for 78 per cent of total spending. Military and national security spending takes 34 per cent of the total. This is exceptionally high, but is partly explained by the extended role of the armed forces in providing social services in remote rural areas. It is also policy to use service in the military as a means of generating employment in areas where other opportunities are scarce or non-existent. Civilian current expenditure consumes a similar sum or about 35 per cent of the budget. Deficits have been covered by regular issues of development bonds and substantial withdrawals from the State General Reserve Fund (SGRF). In a newspaper interview in March, development affairs minister Mohammed bin Musa al-Yusef said that the SGRF had shrunk to RO 700 million ($1,800 million) due to heavy drawdowns over the previous three years. He said that cuts in current spending would be imposed over the next five years to balance the budget by 2000. The government wants to end the habit of dipping into the SGRF as a contingency fund and to use it as a vehicle for boosting savings and rebuilding reserves.

GDP GROWTH The growth in gross domestic product (GDP) has slowed sharply since the dramatic 9.1 per cent increase in 1992 on the back of booming oil prices. Growth was just 0.3 per cent in 1994, according to ministry of development figures. It was flat in 1993. The oil sector accounts for about 38 per cent of GDP while the non-oil sector relies on the government spending of oil earnings. The services sector accounts for nearly 48 per cent of GDP: industry, including water, electricity and construction adds about 10 per cent and primary goods production, which embraces agriculture, fishing, mining and quarrying, make up about 4 per cent of GDP.

Efforts to correct the imbalances that have emerged in recent years have resulted in a range of economic reform measures and the plans to balance the budget over time. Savings were achieved in 1994 by putting pressure on the budgets at PDO and civilian ministries - defence spending was cut by 17 per cent. The budget for this year, the last under the current development plan, projected increases in income, spending and the deficit.

In the longer term economies are to be achieved by reducing the reliance on expensive expatriates, speeding up the Omanisation process wherever possible, encouraging early retirement from government service and slowing official recruitment.

On the revenue side, companies started paying graduated taxes on earnings of RO 30,000 and above in 1994. There is ample scope for avoidance, but the principle of corporate taxation has been established and accepted.

As yet there is no official talk of sales taxes or taxes on luxury imports, as advocated privately by some business figures, so as to dampen excessive consumption. Another potential source of revenue is a levy that could be imposed on businesses that employ large numbers of expatriates or fail to meet Omanisation targets. Privatisation could be another one-off source of revenue.

The privatisation programme was frozen after three blocks of shares were sold in 1993 to clear the field for other share issues, but government hotel interests could be offered in 1996. Commerce & Industry Minister Maqbool Ali Sultan says that the Holiday Inn in Salalah, and the Novotel and Intercontinental hotels in Muscat are to be sold next year. Handing the construction of infrastructure to the private sector is the other major innovation that should relieve pressure on the state budget.

The successful Manah power project is being followed by two other plants at Barqa and Salalah and private wastewater schemes for Muscat and Salalah (see page 15).

Diversification is the great hope for the coming period. The industrial park at Rusayl is reckoned to be a success with about 65 companies established and similar initiatives are planned in the future. The most substantial projects in the pipeline are based on the exploitation of gas reserves and there are major investments scheduled to start in 1996.