Key fact

Oman is expected to produce about 900,000 barrels of oil in 2011

Source: MEED

When Sultan Qaboos bin Said al-Said rushed through political and social reforms to placate protesters in February and March, he satisfied their demands for the short-term at least. The longer-term impact of the measures on Oman’s economy will take sometime to emerge.

Sultan Qaboos ordered a series of changes intended to improve the living standards of Oman’s poorest citizens. This included introducing a minimum monthly wage of OR200 ($520), unemployment benefit of OR150 a month and a monthly food allowance of OR100. The moves are expected to cost the government OR90m a year.

The government will be able to continue affording this as long as the oil price remains above $80 a barrel

Abdul Razaq Ali Issa, Bank Muscat

A further OR43m is to be spent on increasing social security pensions for households, OR89m on pensions for retired civilians and military personnel and OR10m on increasing places for students in colleges and institutes. Combined, the additional state outgoings are expected to amount to OR1bn a year.

As a result of the emergency measures, the Finance Ministry says public expenditure for 2011 is expected to be OR9.1bn, compared with OR8.1bn estimated in the state budget. This means that the deficit will rise to OR1.9bn from the previously anticipated OR850m.

Oman’s oil revenues

As an oil-exporting country, Oman can afford the increased spending. The sultanate has made progress in halting production declines in recent years and is expected to produce about 900,000 barrels of oil in 2011. Oman’s budget is based on a conservative oil price of $58 a barrel. The Finance Ministry expects oil prices to average at least $75-80 a barrel this year, which should safely cover the deficit.

The danger in adopting this strategy is that oil prices are volatile and if they fall as low as in early 2009, Oman would struggle to meet its spending commitments.

The government is currently carrying out its eighth Five-Year Development Plan, which covers 2011-15. It includes spending about OR12bn on projects. Combining this with the total expected expenditure over the period, the value rises to OR42bn. “The government will be able to continue affording this as long as the oil price remains above $80 a barrel,” says Abdul Razaq Ali Issa, chief executive of Bank Muscat. “But if oil prices go down considerably, the government will have to find other sources of funding, [for example] withdrawing from reserves.”

Social measures introduced by Sultan Qaboos in response to unrest
  Estimated annual cost to the economy As percentage of GDP*
Creation of 40,714 jobs in defence, security and civil ministries OR444m 1.7
Unemployment allowance of OR150 a month; miniumum wage of OR200 a month; food allowance of OR100 a month OR90m 0.3
Increasing pensions and social security for households OR43m 0.2
Increasing pensions for retired civilians and military personnel OR89m 0.4
Payment of living allowance for employees in military and civil units OR251m 1
Increasing student places at universities and colleges OR10m 0.04
Raising fares for the rent of school buses OR15m 0.05
Increasing pensions for Omanis in the private sector OR25m 0.1
Support of sports and youth sector and information sector OR14m 0.06
*=Based on IMF forecast of $66bn/OR25.4bn for 2011. GDP=Gross domestic product. Sources: Finance Ministry; MEED

“This is risky because a country keeps reserves for emergency reasons. Or possibly it could borrow, but I know for sure that the government is not in favour of this because of its conservative policies.”

Muscat has a series of back-up options that will allow it to afford the increase in spending. The government is pumping money into its sovereign wealth fund valued at about $35bn, according to sources. The GCC has also pledged to give Oman $1bn a year for next 10 years.

“That is still under discussion between the [Omani] government and the GCC ,” says Abdulmalik Abdullah al-Hinai, adviser at the Finance Ministry.

“The priorities of spending have to be set by the government at its highest level, [but] the issue of creating jobs is a top priority for the government.”

Oman’s debt stands at about 6 per cent of gross domestic product (GDP), which is among the lowest rates worldwide. But the increased social spending has made the sultanate even more reliant on oil revenues, which runs counter to its long-held policy of diversification.

“In the short-term, the government will find the money,” says a Muscat-based source. “In the medium-term, there will be more pressure on its diversification strategy. Ultimately, the extra costs mean less time to plan for post-hydrocarbons.”

Economic vision for Oman

Oman’s Vision 2020 is a long-term development strategy that envisages a much smaller role for government and a bigger role for the private sector. But progress in implementing this strategy has been mixed.

“The private sector is dominated by the big holding companies that are closely connected to the government and the banks,” says Kevin Carey, senior country economist for the GCC at the Washington-headquartered World Bank.

“It was this public unease at politicians at holding companies that contributed to the cabinet reshuffle by the sultan.”

The government was reorganised several times in a bid to bring an end to protests in early 2011. The third and final reshuffle in March saw 12 ministers sacked.

The most dramatic change was the departure of the national economy minister, Ahmed Macki, who in addition ran the finance ministry. Macki is also chairman of state-owned Oman Shipping Company.

Al-Hinai says the dissolution of the National Economy Ministry signals “a new era for economic planning”.

Despite the increased expenditure, the authorities still expect Oman to enjoy healthy growth rates.

“We are expecting 4-5 per cent GDP growth in 2011 and 6 per cent during the development plan to 2015,” says Al-Hinai. “Those who doing the downgrades are basing their decision on perceptions, not on facts. I think the Omani economy will grow faster now because there is money in the market. These increments to employees will increase purchasing power so they will spend more, consume more and the economy will grow faster. It also creates jobs, so families are able to spend more on their daily lives and basic needs.”

Resilient economy

US ratings agency Standard & Poor’s said Oman’s A-rated currency ratings outlook remained negative in July, reflecting the likelihood of a downgrade if political tensions increased due to renewed protests or delays in addressing populist demands.

I think the Omani economy will grow faster now because there is money in the market

Abdulmalik Abdullah al-Hinai, adviser at Finance Ministry

Overall, however, Oman’s economy is in good shape. The banking sector has performed well so far this year. Credit growth remained buoyant during the first four months of the year, reflecting rising demand due to sustained economic growth. Total assets of the commercial banks rose 6.8 per cent to OR15.8bn in April, compared with OR14.8bn in April 2010.

Total outstanding credit grew by 10.2 per cent to OR11bn in April.

“Liquidity in Oman is quite comfortable. Loan-to-deposit ratios are at about 96-97 per cent. The government is pumping money into the system, so it is quite comfortable. Banks are very profitable, more so than in previous years,” says Ali Issa.

The Muscat stock exchange has not fared so well, but the prospects for the rest of the year are much brighter.

“We lost about 10 per cent since the start of the year,” says Ahmed al-Hoti, director of information at Muscat Securities Exchange.

“Today we are the biggest loser in the region. We ask the pension funds and other funds to invest in the market to put some liquidity back in,” says Al-Hoti. Currently, there are about three or four initial public offerings (IPOs) in the offing, but these are unlikely to be floated before the latter end of the year.

Two firms scheduled to list are Oman’s first Islamic bank, Bank Nizwa and Oman Arab Bank. Other companies in the areas of investment, construction and electricity have also expressed interest in going public and further IPOs might be floated in 2012.

Positive economic signs

There are also positive signs elsewhere in the economy. Tourism is continuing to develop and progress is being made in exploring new gas reserves, needed to expand the industrial base.

“There are opportunities for Oman. I believe one of the promising areas is tourism, given the stability of Oman compared to other places in the region. This is an opportunity to develop the tourism sector,” says Al-Hani.

“We also need new gas reserves. These will be confirmed by 2013, meaning we will know exactly the quantity and at what cost. The government will then decide how to use those reserves– whether to export it or to use it for industrial purposes. The UK’s BP is working on exploration now.”

The government is providing incentives to businesses such as exemption of custom duties for industrial imports, lower electricity tariffs, taxation of 12 years with a grace period of five years, extended to another five years, to encourage diversification of the economy.

The dark cloud on the horizon is that in addition to the possibility of a collapse in oil prices, Omanis, buoyed by their success in getting wage increases by popular demand, could pull a similar stunt next year.

As one senior banker in Muscat says: “My concern is that people will expect more next year. To be greedy is human nature.”