Oman's economic prospects have brightened considerably, thanks to the sharp recovery in oil prices since last spring. Private sector confidence is beginning to pick up and the fiscal and external accounts have improved dramatically. However, the longer-termoutlook depends on the successful implementation of large-scale industrial projects and other initiatives to reduce the dependence on oil.

Growth With oil accounting for about35 per cent of gross domestic product (GDP), Oman's economic fortunes are closely tied to fluctuations in petroleum prices. In 1998, the 36 per cent decline in the price of Omani crude led to a 10 per cent fall in GDP. The 46 per cent recovery in oil prices in 1999 put the economy back on an upward trend. Figures for January-September show a 5 per cent increase in GDP against the same period in 1998 on the back of a 22 per cent rise in oil income; production remained stable at about 904,700 barrels a day (b/d).

Elsewhere in the economy, growth was subdued due to depressed government spending and weak business confidence. Total non-petroleum output in the first nine months of the year was down 2.5 per cent in nominal terms. Construction activity slumped 24 per cent and income from service sector trade, which accounts for nearly 14 per cent of total GDP, dropped 10 per cent.

Manufacturing sector output (excluding refined petroleum products) increased 3 per cent, but still accounted for just 4 per cent of total national income.

Budget Oman has been working to consolidate its fiscal position since the mid-1990s. Until the oil price decline, considerable progress was being made. The deficit declined from 10 per cent of GDP in 1995 to 0.7 per cent in 1997. However, the decline in petroleum prices in 1998 pushed the deficit back up to 6.9 per cent of GDP - unsurprising as oil accounts for between70-80 per cent of total government revenues.

Last year, the fiscal balance improved with the recovery of petroleum prices, although this is not immediately apparent from official figures. Statistics detailing public finances for the first 11 months of 1999 show a 17 per cent decline in net oil revenues and an 82 per cent rise in the deficit. This is because oil income is stated net of transfers to the State General Reserve Fund (SGRF), which is used to finance the budget deficit. The government in 1999 transferred all oil revenues in excess of the budgeted oil price of $9 a barrel to the reserve to replenish depleted funds. Before these transfers, the figures would have shown the budget in balance for the first time in the decade. Non-oil income was boosted by a series of revenue-raising measures including a rise in customs duties, a hike in corporate taxes to 12 per cent and a controversial rise in tax on luxury goods to 10-15 per cent from 5 per cent. Total spending, which was to be reduced by7 per cent, rose marginally.

Current account The external position improved in 1999 due to oil, which accounts for 75 per cent of national export earnings. Figures for January-October show a 34 per cent rise in revenues from oil exports and a surplus on the trade account compared with a first-time deficit of $318 million in 1998; non-oil exports, mainly re-exports, declined as a result of the Russian crisis and softer GCC demand. The import bill fell13.6 per cent due to increased customs duties, restrictions on consumer loans and tight dollar liquidity. The largest component, electrical machinery and mechanical equipment, declined 37 per cent. Despite the surplus in merchandise trade, the current account remained in deficit due to expenditures for freight and business services as well as outflows of remittances of about $500 million-600 million from the large expatriate workforce. Nevertheless, the gap narrowed to an estimated RO 600 million ($1,588 million) from RO 1,134 million ($2,945 million) in 1998.

Outlook Prospects for the economy this year look promising. Robust oil prices are expected to deliver the first balance of payments surplus since 1997. Business confidence is reviving as higher oil revenues feed into the economy. The government will continue its policy of replenishing the SGRF, but will also increase spending for 2000 by 13.6 per cent to stimulate domestic demand. The local stock market is likely to remain under pressure, however, due to its heavy exposure to the banking sector whose earnings have been hit by restrictions on personal loans. Real GDP growth forecasts range between 1.5-4 per cent.

The challenge for Oman is to reduce its dependence on oil. The government has outlined ambitious plans to diversify the production base. Its Vision 2020 plan announced in the mid-1990s aims to reduce the oil sector's contribution to GDP to below 20 per cent.

At the heart of its plans are Oman's considerable gas reserves. Downstream projects include a liquefied natural gas (LNG) facility under construction at Sur which will come on stream in the second quarter of this year. The first export sales of LNG and condensate this year will add an extra $500 million to total export earnings. Full export capacity will be reached in 2001.

Other projects in the pipeline include a $2,500 million aluminium smelter in Sohar with planned capacity of 530,000 tonnes a year; a second local oil refinery with capacity of 75,000 b/d, also in Sohar; and a$1,100 million fertiliser plant, in joint venture with Indian partners. These plans took a major step forward in March with the award of contracts to build two pipelines that will supply gas to the proposed industrial developments (see Oman). Not only are the pipelines vital to Omans diversification plans, they are also key to several future development proposals. Their construction is seen as essential if Oman is to achieve its objective of a broader-based economy.