The Omani official driving his SUV along the beach road of the Shatti al-Qurm district of Muscat shakes his head. “The roads never used to be like this,” he says. Today, a Wednesday evening – the beginning of the weekend in Oman – the single lane of traffic is practically at a standstill. Shiny new American sports cars and SUVs have clogged the roads in one of the most popular areas for young wealthy Omanis in Muscat to socialise.

Cafes along the beach are bustling and the city’s many shopping centres are packed. “It is because the government gave everyone jobs,” the official says. “Now, everyone has gone out to get himself a new car. Perhaps in a few years the roads will be quiet again.”

If Muscat has anything to do with it, this will not be the case. The Omani government announced in August that it would spend $1bn in 2012 and 2013 creating new jobs for its citizens. But this, says an economist at a major Omani bank, is missing the point: the sultanate is becoming increasingly dependent on oil revenues to create growth.

Oman crisis aftermath

“What drives growth currently is higher oil prices and government spending,” says Fabio Scacciavillani, another economist, at Oman Investment Fund, the sultanate’s sovereign investment arm. “Which means more salaries, and therefore more consumption, sales of cars. It all filters down.”

The sultanate’s economy has never really grabbed headlines. During the boom years of the 2000s, while Saudi Arabia, Qatar, Kuwait and Abu Dhabi were reaping the rewards of rapidly rising energy prices, Oman muddled along with its moderate oil output and an innate conservatism. This meant it was unlikely to develop a real estate boom like Dubai or become a financial services centre like Bahrain.

What drives growth is higher oil prices and [state] spending, which means more salaries and more consumption

Fabio Scacciavillani, Oman Investment Fund

When the global economic crisis came in 2008-09, belts were tightened in Oman, but it did not suffer the kind of economic meltdown seen in Dubai. Nor did its companies struggle with tightening credit lines in the way many big Gulf firms did. The economy grew by 1 per cent in 2009, while gross domestic product (GDP) increased by 4 per cent and 6 per cent in 2010 and 2011 respectively. Overall, growth in Oman averaged just a shade under 5 per cent per year between 2001 and 2011.

For decades this has been the Omani way, slow and steady. But that is not to say there have not been any significant economic advances. Ten years ago, neither Sohar nor Salalah ports existed in any meaningful way. Sohar is now a major industrial hub, while Salalah is among the biggest trans-shipment hubs in the world.

Oil production, responsible on average for 80 per cent of annual growth, this year returned to near-record highs with Oman generating more than 930,000 barrels a day (b/d) of oil after a significant period of work with international oil firms. Output fell to 714,300 b/d in 2007 from a high of 963,800 b/d in 2001. Government officials in Muscat talk with determination of producing 1 million b/d in the near future, capitalising on oil prices averaging $100 barrel.

Older Omanis, meanwhile, still hold their leader, Sultan Qaboos bin Saeed al-Saeed, in high esteem, largely because of the economic changes they have witnessed since he took power in a bloodless palace coup in 1970. His father, Said bin Tamur, an authoritarian isolationist who spent much of his reign fighting to unite the country and put down rebels in the west, did not pay much attention to economic development, and levels of poverty and illiteracy were high in the early 1970s.

Slowed pace of change in Oman

Today, the beach road, dotted with Western coffee shops and bookended by two major international hotels, is just one example of the changes Oman has experienced. It has good roads, utilities and public services of a standard not far off those of its Gulf neighbours, despite lower oil revenues.

In 2010, the UN Development Programme said Oman had seen the greatest improvement in its human development indicators in the world over the previous four decades, the exact span of Sultan Qaboos’ time in power.

But the pace of change has slowed, and younger Omanis do not have the same perspective as their parents. When protesters took to the streets across Oman in February and March 2011, more people were calling for economic reform than political change.

Like many of their regional peers, the country’s young people have expectations of receiving the education required to secure good, reasonably paid jobs, and they have the weight of numbers on their side. Almost half the country’s population is aged 20 or younger, and 85 per cent of Omanis were born after Sultan Qaboos came to power, meaning they do not have the same level of reverence for the sultan and his government as their parents. This demographic shift is a huge part of the economic challenges Oman will face over the coming decade.

Workforce dilemma for Omanis

About 30,000 people enter the country’s workforce every year, with more than 80 per cent of Omanis under the age of 24 likely to have a high school education, and 98 per cent of that group at least basically literate. A fifth of Omanis go on to university. But when these relatively educated young people seek employment, there are few opportunities available and those on offer are likely to be with the state.

Omanis account for about 84 per cent of the public sector workforce, which totals 160,000 people, but occupy just 18 per cent of jobs in the private sector, of which there are about 960,000.

There has been a drive in recent years to encourage the private sector to take on more Omani nationals, but businesses say many are either unwilling to do the jobs they are offered or lack the skills for more sophisticated technical work. “Our major problem is not creating jobs,” says Mohamed al-Harthy, a prominent Omani economist and businessman and chairman of the Omani Economic Association. “It is creating jobs that meet our requirements.”

In 2008, the state said it could maintain spending for one more year before it had problems. Now, spending is … higher

Oman-based economist

Al-Harthy says that although the size of the Omani workforce has expanded significantly in the past decade, most new jobs have been for low-skilled and unskilled labour. Omanis are more likely than their Gulf counterparts to take on jobs such as driving taxis or working in stores, but they draw the line at manual labour.

The country’s Omanisation programme has worked to an extent, but coupled with a 43 per cent increase in the minimum wage announced in 2012 and the prospect of another mandatory wage increase later in the year, it has made some smaller businesses wary about expanding their operations. Businesses also say it has become increasingly difficult to tempt the best educated and most talented candidates away from the public sector, which offers higher wages than many small companies can match, job security and a lighter workload.

A senior economist at a major private bank worries that the level of employment in the public sector is reaching unsustainable levels.

In 2011, to quell growing unrest, the sultan announced the creation of 50,000 new jobs. Of the RO10bn ($26bn) in government expenditure planned for 2012, OR6.4bn, or $16.6bn, will be spent on wages and overheads, with another RO845m on private-sector subsidies.

Muscat simply cannot continue to increase the number of public sector jobs for its Omani national population, the economist says. First, with current high levels of spending, the government is becoming more dependent on oil revenues, which currently account for 81.8 per cent of Oman’s income.

Although the volume of oil being produced in the sultanate has risen in recent years, it has become increasingly expensive to do so, with the marginal cost of production in Oman reputedly standing at about $20 a barrel, compared with $3-5 a barrel elsewhere in the region. That figure is likely to rise in the future, so any new increments in production will not mean as big an increase in profits as seen in the past.

Given that economic growth is strongly dependent on oil income – oil accounts for about 80 per cent of any increase in output, according to several economists – the sultanate needs to create industries that are independent of oil and gas.

“In the Vision 2020 strategy for Oman, we said that oil would be worth 9 per cent of GDP by 2020,” says a source at Oman Central Bank. “But given that it currently accounts for nearly half of GDP, I don’t think we will reach that target. We don’t have the kind of room for manoeuvre that Kuwait or Saudi Arabia have in terms of their currency reserves.”

Difficult position for Oman

Oman will have to look for other sources of revenue if it wants to pay its spiralling wage bill – and this will be difficult. Although foreign investment into the country has run into the tens of billions of dollars over the past decade, most of that money has gone into projects offering incentives such as low corporate taxation and the ability to repatriate profits without being taxed.

Ahmed al-Esry, a partner at US accountancy firm Ernst & Young, says it will be hard to levy personal income or sales taxes on Omanis in the near future.

“If you consider what happened last year, the government is in a difficult position,” he says. “Oman was the first country to tax its own companies in the GCC, and in the rest of the region there is no personal tax so it would be difficult to sell to Omanis. What can the government do? Many local companies are lobbying the government to reduce taxes, saying that along with the wage increase, they can’t cope.”

Scacciavillani believes that it will be a long time before Oman struggles significantly. “Oman has been very resilient, the most resilient economy in the Gulf,” he says. “This kind of steady, resilient growth can be maintained, even if the oil price falls. Oman has enough money.”

But others are less optimistic: “In 2008, the government said it could maintain spending levels for maybe one more year before it had problems,” says the economist at the big Omani bank. “Now, spending is much higher. If oil prices stay high, they will be OK, but there needs to be a shift in the way things are done, otherwise they will not have any choice.”