IN recent years Oman has acquired a reputation as the GCC state with a keen eye on the future. Muscat was quick to recognise that oil-derived capital surpluses will not last for ever and is actively planning for a future without them. It has brought about the rapid development of recently discovered gas reserves and done much to promote the private sector. The country can boast the only independent power plant in the Middle East that is already up and running and a stock market which, in the Gulf region, is second only to Kuwait in terms of activity.
The drive to promote new industry and foreign investment has turned Muscat into hive of activity in recent months. Agreements have been signed for the liquefied natural gas (LNG) project, a series of new industries and a new port at Salalah. Business-friendly tax changes have come into effect. The government has also opened the Omani Centre for Investment Promotion & Export Development, as a service to expedite investment. By contrast, there has been a distinct lack of movement on further private infrastructure plans.
The drive to diversify government revenues has helped push the LNG project along. By the end of the year Oman LNG should seal all the agreements to build the liquefaction plant and sell the LNG, while Petroleum Development Oman (PDO) expects to award the major contracts for the upstream development. Plans to produce aluminium, petrochemicals and fertilisers, insistently talked about for the past four years, are coming up fast behind. All have made progress this year, but bankers say the projects, which are designed to complement each other, will need to make serious strides in 1997 if momentum is to be maintained (see page 40).
‘The planned schemes exhibit a certain synergy,’ says a consultant working on one of the industrial projects. If the fertiliser project is located at Sur, close to the LNG plant, the two schemes can share the same gas supply lines and even use the same power station. Lean gas and residual gas will be used, respectively, by the aluminium smelter and petrochemicals complex, which are to be located further south at Sohar. These two projects would be able to ship product from the new port at Salalah. A masterplan for the port envisages the development of 10 berths and a dry dock. The port has heavyweight backing from US transport group Sealand, but will have to compete with Jebel Ali and Aden as a regional transhipment hub.
Alternative to oil
The aim of all these projects is to generate income and employment as oil production peaks and then starts to decline in the decades ahead. At current rates of extraction, Oman’s oil reserves, which are constantly being revised upwards, should last at least 17 years.
Recent economic growth has been stronger than expected. Gross domestic product (GDP) grew by about 4.6 per cent at constant prices in 1995, according to the Central Bank of Oman. The budget deficit is also set to fall below the government target of RO 218 million, which is less than 4 per cent of expected GDP in 1996. Analysts say the government can achieve its aim of eliminating the budget deficit by the end of 2000.
The balance of payments deficit continues to drain money from the State General Reserve Fund (SGRF), which was used to cover most of the RO 361 million official financing requirement in 1995. Strong oil prices this year will see the SGRF topped up, as any extra revenue that results from oil going over $15 a barrel, up to a maximum of $17 a barrel, is allocated to reserves. This could amount to about RO 225 million. Any additional oil revenue will go into extra government spending, the Development Ministry says.
The scale of the investment that is envisaged will test the capacity of the local economy, local bankers say. It has already obliged Oman to revamp its tax code to reduce discrimination against foreign entities. In October, Sultan Qaboos issued a decree endorsing amendments to the corporate taxation system, which are to be backdated to the start of the year. These have reduced rates all round and are intended to encourage companies to broaden their share ownership. Omani companies will now be able to take in foreign investors without jeopardising their tax status and their profits.
Mahmoud al-Jarwani, executive president of the Muscat Securities Market (MSM), says he anticipates that many of the 86 listed companies that are wholly GCC owned will revise their articles of association to admit foreign shareholders. Companies with foreign shareholders which are already floated on the MSM will see an immediate boost to their income; those that are not listed will be encouraged to do so.
Just as the tax reform has cleared the investment climate, so the recent publication of a constitution has clarified the political outlook. A noteworthy feature of the constitution is that it spells out a procedure for appointing a successor to Qaboos who is not married and has no male heir.
Oman has another busy year ahead of it. Work has already begun on the LNG project, and local contractors are expecting some valuable subcontracts. The MSM anticipates an upturn in activity and, if all goes well, details of the major industrial projects with foreign investment should be hammered out. Local businesses hope that private power projects will make progress in time to avoid possible shortfalls in supply. ‘There needs to be a sense of urgency in the government’s [power] privatisation plans in 1997,’ says a local consultant. Private infrastructure initiatives are notoriously complicated and the delays in this area contrast with the strong signs of progress on virtually every other front.
Exchange rate: $1 = RO 0.385