0643 GMT February 25, 2020
The transition of power in Oman from the deceased Sultan Qaboos to his nephew and the country’s new ruler, Sultan Haitham bin Tariq, has been smooth and quick, but the new sultan will soon find that he has a task in shoring up the country’s economic position.
Above all, the fiscal and debt profile of the country requires careful management. Fiscal discipline was rare for Oman even during the oil price spike of the 2000s. Although oil prices only collapsed in 2014, Oman has been registering a fiscal deficit since 2010, reaching a 20.6 percent high in 2016. As long as fiscal deficits remain elevated, so will Oman’s need to finance those deficits, predominately by borrowing in the local and international market.
Oman’s Debt-to-GDP ratio has been rising at a worrying pace, from 4.9 percent in 2014 to an IMF-estimated 59.8 percent in 2019. By 2024, the IMF is forecasting the ratio to reach nearly 77 percent. A study by the World Bank found that if the debt-to-GDP ratio in emerging markets exceeds 64 percent for an extended period, it slows economic growth by as much as two percent each year.
Investors are willing to lend to Oman, but the sultanate is paying for it in terms of higher spreads due to the underlying risk markets are placing on the rising debt profile of the country. For instance, Oman has a higher sovereign debt rating than Bahrain yet markets perceive it to be of higher risk, making it costlier to borrow. Failure to address the fiscal and debt situation also risks creating pressure on the country’s pegged currency.
If oil revenues remain low, Sultan Haitham will have to craft a daring strategy of diversification and private sector growth. He is well placed for this: Sultan Haitham headed Oman’s Vision 2040, which set out the country’s future development plans and aspirations, the first Persian Gulf country to embark on such an assessment.
In the age of climate change, renewable energy is a serious economic opportunity, which Oman has to keep pursuing. If cheap electricity is generated, it could also be exported to other Persian Gulf states and to south Asia. In Oman, the share of renewables in total electricity capacity was around 0.5 percent in 2018; the ambition is to reach 10 percent by 2025.
However, in order to reach this target, Oman would have to take additional measures such as enhancing its regulatory framework, introducing a transparent and gradual energy market pricing policy and integrating all stakeholders, including the private sector, into a wider national strategy.
Mining could provide another economic opportunity for Oman’s diversification efforts, with help from a more robust mining law passed last year. The country has large deposits of metals and industrial minerals and its mountains could have gold, palladium, zinc, rare earths and manganese.
Oman’s strategic location connecting the Persian Gulf and Indian Ocean with East Africa and the Red Sea could also boost the country’s economy. The Duqm special economic zone, which is among the largest in the world, could become the commercial thread between Oman, south Asia and China’s ‘Belt and Road Initiative.’
Oman has taken important steps to make its economy more competitive and conducive to foreign direct investment. Incentives include a five-year renewable tax holiday, subsidized plant facilities and utilities, and custom duties relief on equipment and raw materials for the first 10 years of a firm’s operation in Oman.
A private sector economic model that embraces small- and medium-sized enterprises as well as greater competition and entrepreneurship would help increase opportunities in Oman. Like all other Persian Gulf economies, future employment in Oman will have to be driven be the private sector, as there is little space left to grow the public sector.
Privatization needs to continue. Last year’s successful sale of 49 percent of the Electricity Transmission Company to China’s State Grid is a very positive step. The Electricity Distribution Company as well as Oman Oil are next in line for some form of partial privatization.
The next decade will require Oman to be even more adept in its competitiveness as the region itself tries to find its new bearings. Take tourism for instance; Oman hopes to double its contribution to GDP from around three percent today to six percent by 2040 and the industry is expected to generate half a million jobs by then. Over the next 20 years, Oman will most likely be facing stiff competition in this area not only by the UAE but by Saudi Arabia as well.
The new sultan has an opportunity to embark on deeper economic reforms that could bring higher growth, employment opportunities and a sustainable future. But he has a big task.
*John Sfakianakis is director of economic research at the Gulf Research Center.
The article was published in chathamhouse.org.