Oman’s economic diversification efforts have only begun to reap dividends in recent years, but the growth in the sultanate’s non-oil economy is the result of many years of planning.

Since seizing power from his father in a coup in 1970, Sultan Qaboos has delivered steady economic growth through a series of five-year plans, the first of which he launched in 1976.

But it was with the launch of the Vision 2020 programme in June 1995 that the government stated its intention to “globalise the Omani economy” and radical change began in earnest.

The plan sets out the key goals of diversi-fying the sources of national income, broadening private sector participation and upgrading the skills of the Omani workforce to meet the future needs of the economy. The vision is now being realised.

While petroleum still accounts for a large chunk of gross domestic product (GDP) – 45 per cent in 2007 – non-petroleum activities grew by 18.3 per cent in 2007, powered by 14.4 per cent and 20.3 per cent growth in industrial activities and services respectively.

This economic diversification is helping the government with its ‘Omanisation’ strategy, which sets quotas on the number of locals that companies must employ, to create jobs for Omani nationals and reduce the sultanate’s reliance on foreign labour.

Reforming employment

While not always welcomed by employers, Omanisation rates of 95 per cent have been achieved in the banking sector, with similar levels being reached in education, health and government services.

This compares favour-ably with the UAE, which set itself the target of 50 per cent Emiratisation by the beginning of this year, a target that few banks have hit.

While the vast majority of Omanis are still employed in the public sector, the private sector is closing the gap.

The number of Omanis employed by private firms has almost doubled since 2002, from 65,879 to 131,775 in 2007.

In the transport, travel and tourism sectors, Omanis comprise 50 per cent of the workforce, while Omanisation has reached 63 per cent in the telecoms, oil and gas, and electricity and water sectors.

These figures are clear proof that Oman’s education reforms – which are designed to ensure that Omani students graduate with the skills needed for a diversified economy – are working.

In line with this, the government is being more selective in granting licences to private higher-education institutions, favouring those that offer vocational programmes.

The Higher Education Ministry is in the process of vetting several applications for universities.

Meanwhile, several established private higher-education institutions are offering more vocational courses or degrees in fast-growing areas such as international business, tourism, IT, port management and marine science.

They will also offer courses in specialist areas of engineering related to the growth of Oman’s industrial sector.

“The number of students entering higher education increases each year as the number of school leavers increases and the system of higher education expands,” says Higher Education Minister Rawya Saud al-Busaidiyah.

Students enrolled in higher education institutions in the 2007-08 academic year numbered 25,988, with Omanis accounting for 24,941, or 96 per cent.

A key growth engine of Oman’s diversification has been the liberalisation of foreign ownership policies.

Oman’s Foreign Capital Investment Law permits 70 per cent foreign participation in companies automatically, and this can be increased to 100 per cent foreign capital for projects of national importance.

The introduction of freehold laws allowing foreign nationals to buy property in Oman is also helping to bring in foreign investment.

“As the winds of liberalisation spread across Oman, this bodes well for continual and enhanced international investor interest,” says Commerce & Industry Minister Maqbool bin Ali Sultan.

“One can see far greater opportunities for foreign direct investment for global operators, vendors and finance experts.”

The tourism, construction and industrial sectors have been the main beneficiaries of this foreign investment.

In particular, megaprojects such as Blue City, a $20bn residential project with 16 hotels, and The Wave, a $2bn resort with hotels and luxury villas, have convinced investors that Oman’s tourism is only just taking off.

Indeed, the government is targeting a 3 per cent contribution to GDP from this sector by 2020, up from 0.9 per cent today.

Rather than try to compete with neighbouring Dubai and the UAE, which has carved out a niche in the region for mass beach tourism, Oman is pursuing a strategy of sustainable tourism aimed at safeguarding the country’s architectural and cultural heritage.

“What makes the Sultanate of Oman unique from any other Gulf destination is our 5,000 years of history and our determination to preserve it through the controlled flow of responsible tourists,” says Salim bin Adey al-Mamari, director general of tourism promotion. “You cannot build history.”

Oman aims to attract up to 30 million foreign tourists by 2020, and is investing heavily in upgrading its infrastructure to meet inter-national standards.

Airline expansion

At the end of 2007, the government withdrew its stake from Gulf Air and elevated Oman Air to national carrier.

Armed with a $10m marketing budget, Oman Air is expanding its oper-ating network through adding new routes outside the Gulf, and is in talks to buy six Boeing 787 Dreamliner aircraft.

In February this year, the government renamed Oman’s main airport (formerly Seeb) as Muscat International.

The change was made to “reflect the status of Muscat among capitals of the world”, says Mohammed bin Sakhr al-Amri, under-secretary at the Transport & Communications Ministry for Civil Aviation Affairs.

The government has unveiled an ambitious project to develop the Muscat and Salalah airports at a cost of $3bn.

The project at Muscat International will increase its capacity from 5 million passengers to 12 million by 2011, while the development of Salalah airport envisages an expansion of capacity to 1 million passengers by the same date.

It also plans to construct three new airports – two in prominent tourist areas and a third in Sohar, 240 kilometres from Muscat – and is upgrading the country’s roads, spending $1.9bn on developing the road network this year alone.

Oman is seeking to capitalise on its location at the mouth of the Gulf and is investing heavily in its two ports: Sohar and Salalah.

The sultanate has long been recognised as an important trading hub and, given the time and cost savings it can provide over rival ports in Bahrain and Dubai, many believe it has the potential to become the gateway to shipping for the Gulf.

Sohar and Salalah’s industrial estates and free zones are also proving to be a magnet for foreign investors, who have been pouring in billions of dollars.

In particular, the strong Oman-India bilateral relationship has led to a huge increase in the volume of trade between the two countries. Trade between India and Oman rose by 66 per cent to $1.5bn in 2007, from $900m in 2006.

Omani exports to India climbed by 60.5 per cent to $457m in 2007, from $323m in 2006.

This growth was fuelled mainly by exports of urea, liquefied natural gas, polypropylene, lubricating oil, dates and chromites ore.

More than 25 Omani companies are doing business in India, while nearly 100 Indian companies have a presence in Oman. India’s largest joint venture outside its homeland is Oman-India Fertiliser Company.

Today, Indians form the largest expatriate workforce in the sultanate, according to official estimates, with about 432,000 working in the private sector at the end of 2007.

The two countries share a history dating back to 1953 when they signed the Treaty of Friendship, Commerce & Navigation.

In December 2007, they signed four memorandums of understanding in the fields of energy, enterprise and higher education.

Two of these agreements seek to foster the growth of small and medium-sized enterprises (SMEs) in Oman.

This is an area of the economy that is still in its infancy, but one in which the government has started taking a more proactive, supporting role in recent years.

Government organisations such as Sultan Qaboos University and Oman Air sponsor several initiatives, which include providing training to 4,000 young Omanis, of which 1,450 are now in business.

The Commerce & Industry Ministry has recently established a separate division to help the SME sector. “Development of small and medium [sized] enterprises is top of the agenda for the ministry,” says Saleem al-Zawawi, economic adviser to the Commerce & Industry Ministry.

“SMEs will add a new dimension to the economy’s growth, generate employment and pave the way for joint ventures between foreign and local investors.”

Privatisation plans

As Oman’s economy matures, the role of the private sector will continue to grow in importance.

In 2007, the government announced plans to privatise all remaining state-owned power and water companies by 2009.

Yet despite the drive to diversify its economy, Oman has been ploughing considerable sums of money into reversing its falling oil
and gas production.

Oil production peaked at the end of the millennium when it hit 840,000 barrels a day and has been in steady decline ever since.

In April 2006, the government announced a $10bn investment in upstream oil and natural gas projects over the next five years. With the economy still heavily reliant on petroleum, the success of these schemes will have a huge bearing on Oman’s future economic prosperity.

“Despite the remarkable strides Oman has made in its endeavour to diversify its economy, oil remains the most important source of revenue, hence the need for more diversification,” says Al-Zawawi.

However, Oman’s progress towards achieving economic diversification has been impressive and, buoyed by rising crude oil prices, the economy is riding high.

“The government’s diversification strategy has been helped largely by routing gains from inflated oil prices in recent years into new areas of the economy,” says Gigi Tharian Varghese, an analyst at Egyptian investment bank EFG-Hermes, in Oman.

Oman’s progress is even more impressive given that it does not enjoy the same level of economic wealth as its oil-rich neighbours Saudi Arabia and the UAE.

With its strategy for further economic diversification, Oman is poised for a new era of growth.

“The emphasis on growth and the government’s visionary approach is set to take the economy to new heights,” says Ali Sultan.

Key fact

95%

Omanisation rate delivered in the banking sector