As countries across the GCC faced revenue pressures due a lower oil price environment, Oman balanced reduced public spending with economic diversification efforts to keep growth on a positive trajectory.
In its October “World Economic Outlook” the IMF estimated Oman’s GDP would expand by 2.1% in 2016, with growth set to pick up slightly to 2.68% this year and to 3.8% in 2018. This upward momentum is expected to come from a modest recovery in oil prices, combined with the effects of ongoing reform efforts and strategies aimed at enhancing non-oil activity.
One of these is Tanfeedh, a national programme launched in mid-September that aims to raise the profile of five key industries: transport and logistics, industry and manufacturing, tourism, mining, and fisheries.
With pressure on state finances also limiting growth in the public payroll, another ambition of the strategy is to generate 12,000-13,000 private sector positions in 2017, similar to the number created in 2016. These roles should be supported by 121 projects and initiatives proposed by the programme, which are expected to create 30,000 jobs and contribute OR1.7bn ($4.4bn) to the economy.
Tanfeedh is also part of the sultanate’s overarching ninth five-year plan, which runs from 2016 to 2020 and aims to reduce oil’s contribution to GDP from 44% in 2016 to 26% by 2020. Though fiscal consolidation efforts may have helped bring non-oil growth down by around three percentage points to 4% in 2016, according to World Bank figures, the Ministry of Finance (MoF) expects expansion to rebound to 4.7% this year.
Oman was able to decrease public spending by around 8% to OR12.65bn ($32.9bn) in 2016, according to end-of-year estimates from the MoF. However, state outlays still overshot the target figure by 6%. With the average price of Omani crude hitting $39 per barrel in 2016 – 13% below budget estimates – the sultanate also experienced lower-than-expected revenues.
The result was in an initial deficit of OR5.3bn ($13.8bn) – 60% higher than the targeted shortfall and 38% more than in 2015.
In response, the government is looking to new sources of financing. In mid-June, for the first time in nearly 20 years, Oman tapped overseas bond markets for $2.5bn, offering five- and 10-year notes. In 2017, it plans to raise OR2.1bn ($5.5bn) on international markets and another OR600m ($1.6bn) locally.
Oman moved into the new year with a budget that continues to focus on reducing expenditure and that outlines moves to broaden the tax base. This includes changes to the income tax law, which will hike corporation tax by three percentage points to 15%, and introduce new tariffs on goods such as tobacco and alcohol.
While there may be a delay in realising these extra revenues, they should help narrow the deficit to about OR3bn ($7.8bn), according to estimates from the 2017 budget.
Courting the private sector
With pressure on state budgets likely to persist, in 2016 authorities took steps to make Oman a more attractive investment destination by rolling out the InvestEasy portal as a one-stop shop for investors, bringing together 76 various government services into a single e-platform.
The initiative has already had an impact, helping Oman rise three places in the World Bank’s “Doing Business 2017” report, to 66th. The sultanate also jumped 127 places in the “starting a business” category to a rank of 32, the highest in the MENA region. Oman made starting a business easier by streamlining the process of registering employees and lifting minimum capital requirement restrictions at incorporation.
Looking ahead, a new public-private partnership (PPP) law is expected this year, with the aim of speeding up delivery on projects and encouraging more private sector participation. The government has already explored expanding the use of PPPs in a number of sectors, most recently health care, and in June last year it was reportedly considering a PPP model for the Medical City project, an OR300m ($779m) health centre.
In February the Ministry of Health signed a memorandum of understanding with the Higher Council for Planning and the Oman Investment Fund to execute the project, which is to be located on 5m sq metres in Barka and include a cluster of hospitals, a medical college, and research and development facilities.
Continued moves to enhance the private sector's economic contribution will be welcome as Oman looks to create more private sector jobs and improve productivity. Achieving these goals in non-oil sectors will also be important on the path to establishing a sustainable, diversified economy for when oil revenues start to dwindle.