Overview of Sultanate of Oman Economy

1. Introduction

This report mainly covers the years 2016 and 2017 and the latest updates from 2018. The report sheds light on some major indicators such as growth, trade, taxation, and inflation.

The Sultanate of Oman is considered one of the most peaceful and stable countries in the MENA region. It is a low densely populated country with a GDP of $72.64 Billion in 2017. As a Gulf state, the Omani economy relies heavily on the hydrocarbons industry and they contributed to 29% of GDP and 71% of government revenues in 2017.

Its economic performance could be considered good. Fluctuations in the past ten years are linked to the global market of petroleum and international economic performance as can be seen in Chart 1. Petroleum revenues were the main financer of the country. However, new policies have been undertaken regarding revenue sources and these are privatisation and taxation. The contribution of oil revenues to government revenues was as high as 84.3% in 2014 according to IMF. Although oil production was the highest back in 2016, oil accounted for only 68.2% of revenues because of low oil prices. Furthermore, the percentage of oil revenues to nominal GDP dropped from 46.4% to 27.4% in the same manner.

Notably, Oman is slightly different from its neighbours. Since it is not a member of the OPEC, it does not match the rules and quotas set by the organization and is free to extract or sell the amounts of barrels it desires. The oil industry within the country is different as well. Extraction of oil reserves is more expensive. It could be four times higher than that of Saudi Arabia since the reserves are deeper.

2. Petroleum and Non-petroleum Activities

As mentioned before, the crude oil sector is the primary driver of growth in the country. Oil production fell to 3.6% in 2017 due to the fall of the number of barrels produced per day from 1 million in 2016 to 970,000 in 2017. This was caused by following the agreement between OPEC and non-OPEC oil producers to cut oil production starting in 2017. Moreover, oil prices fell in the same period but natural gas balanced the equation partially, and the natural gas production was raised by 1.5% boosting the whole petroleum sector. Part of the GDP growth could be as a result of banking sector growth which in turn was a result of increased deposits in commercial banks. An increase of OMR 400 million brought the total to OMR 18.6 billion.

Another reason could be the increase in total capital and reserves of commercial banks to OMR 4.2 billion.
As illustrated in chart 2, Oman attempts to expand the country’s economy and boost other sectors to avert oil prices extreme effects. Infrastructure has been growing since the mid-2000s, and a number of solemn projects such as a new terminal at Muscat International Airport have been

finished. The decline in oil prices in 2014 caused public investment to fall by 26% between 2014 and 2017. This contraction also resulted in a shrinkage in the industrial sector by 1.5% due to a contraction in the building and construction sector. Despite that, it remains that crude oil is still the main component of growth in the economy. It is responsible for 38% of economic activity in 2017.

Oil price improvement had empowered the Omani economy, and nominal GDP became stable. It is very evident that the diversification is paying off in stabilising the economy. Future plans are still being formulated, but the prospects are good according to estimates.

3. Trade

Oman joined the World Trade Organization in 2000. The country has had a positive trade balance over the period in question except for the years 2015 and 2016 due to the sharp drop in crude oil prices as shown in chart 3. The top export destinations of Oman are China ($10.8B), the United Arab Emirates ($2.59B), South Korea ($2.19B), Japan ($1.59B) and India ($1.22B). On the other hand, the top importing countries are the United Arab Emirates ($10.6B), Japan ($2.59B), China ($1.57B), the United States ($1.43B) and India ($1.36B) according to The Observatory of Economic Complexity (OEC). Whereas, the largest amount of Omani exports are Crude Petroleum ($12.8B), Petroleum Gas ($2.65B), Refined Petroleum ($2.21B), Raw Aluminum ($585M) and Cyclic Hydrocarbons ($576M). In addition, the major imports are Cars ($3.17B), Refined Petroleum ($2.12B), Gold ($600M), Delivery Trucks ($529M) and Valves ($404M) according to OEC as well.

The available data in 2017 shows that the year witnessed an increase in commodity exports reaching OMR 9.1 billion for the first nine months, in comparison to 7.5 billion for the same period in 2016. Omani non-oil exports (within commodity exports) were the main driver of growth in 2017 resulting in an increase of 31.4 per cent to OMR2.3 billion, compared to about OMR1.8 billion in the same period of 2016. Oil exports recorded an increase of 28.8 per cent to OMR5.3 billion compared to OMR4.1 billion in the same period of 2016; while exports decreased from OMR1.4 billion to OMR124 million.

As for the foreign trade level, commodity exports during the first nine months of 2017 rose to OMR9.1 billion, compared to OMR7.5 billion in the corresponding period of 2016. Imports of goods increased from OMR6.5 billion to OMR7.7 billion.

Nevertheless, non-oil exports until September 2017, recorded the best growth (within commodity exports) by 31.4 per cent to OMR2.3 billion, compared to about OMR1.8 billion in the same period of 2016. Oil exports increased by 28.8 per cent to OMR5.3 billion compared to OMR4.1 billion in the same period of 2016 while exports decreased to OMR1.4 billion, recording a drop of OMR124 million.

4. Tax Reforms

The Sultanate’s government saw the importance of tax revenues and took steps for increasing them. It started in February 2017 where the corporate tax increased from 12% to 15%. Nonetheless, it is still much lower than the global average of 25% to keep the competitiveness of the Omani economy and investment returns. In addition to a 3% tax increase on certain types of small businesses.

Cancellation of tax-exempted activities includes mining, exporting some local industrial goods, and tourism activities such as hotels and resort villages. Agricultural products and the fishing industry are also included. In its attempt to broaden the tax base, Oman cancelled the tax exemption on colleges, educational and vocational institutes, private schools and private healthcare institutes.

The sultanate is to start implementing value-added tax in September 2019 at a rate of 5%. It has decided that some goods will not be subject to VAT such as foodstuffs, real estate and public transportation. VAT could cause inflation. Jennifer O’Sullivan, director of tax advisory services at EY, stated that if implemented correctly, it would not be a tax cost. Thus, Changes in fiscal policy in 2017 has lowered the deficit from 21% of GDP in 2016 to only 12.8% in 2017.

5. Inflation

Inflation in Oman is both imported and locally induced. Oil prices ascended in 2017 due to lower supply and increased demand in some commodities including crude oil, making inflation higher in 2017 than 2016. These include both domestic and global conditions. Trade openness in Oman is elevating; therefore, imported inflation is the primary part of inflation. CPI rose from 0.1% on average in 2015 to 1.1% in 2016 to 1.6% in 2017. However, inflation has not affected consumption, trade or investment in the country alarmingly. Other reasons include US dollar depreciation, reduction in government spending including subsidies on electricity according to the Omani central bank. Higher crude oil prices empowered domestic demand where improvements in non-oil sectors and their exports empowered external demand. Back in 2015, inflationary pressures were much lower.

Whereas the average inflation was 2.5% in the previous year suggesting that 2015 witnessed no growth and it could be considered the setback in this decade so far.

6. Latest Results of 2018

Omani GDP grew by 6.5% from the first quarter of 2017 to the first quarter of 2018.for the first half, in comparison between the second quarter of 2017, 2018 witnessed an increase from OMR 12.8 billion to OMR14.7 that is a 15.1% growth at current prices. The main reason behind such expansion is oil prices jumping to $63.9 per barrel in the second quarter of 2018 from US$51.8 per barrel in the second quarter of 2017. In details; and for the same reason, government revenues grew by 23.5%, they increased to OMR4.9 billion from OMR4 billion. Moreover, the trade balance more than doubled in the same period. This is attributed to commodity exports expansion to 28.5%. Whereas commodity imports increase by 10.4% from the second quarter in 2017 to 2018. All other indicators grew including loans value (by 6.1%) and private sector deposits (by 4.7%).

On a larger scale, NCSI reports that the first 6 months of 2018 witnessed an increase in petroleum GDP by 37% and non-petroleum GDP increased by 5.7% from the same period in 2017.

On a much larger scale, the first nine months of 2018 witnessed a very slight increase of 0.3% in total crude oil production -including Gas- from 264.61 million barrels to 265.46 million barrels daily. Withstanding, the price increase from $50.6 to $67.2 is the reason behind the increased petroleum cut of GDP.

7. Outlook

The 2020 “Tanfeedh” plan is set to boost the Omani economy further and further into a constant state of growth. Real GDP is expected to grow by 2.8% within the next two years. The IMF projects an increase in oil prices that could reach $58 per barrel in 2019. Fluctuations in oil prices come from Supply risk whereas the uncertainties’ sources in non-oil industries are demand and global condition in financial and goods markets. The agreement between OPEC and non-OPEC countries has regulated crude production and improved prices in 2018. By the extension of the deal, oil prices will rise, so as production from Khazzan gas field. Moreover, trade facilitation with GCC counties and others is contributing to the success of the 2020 plan, as well as Public-Private partnership, privatisation and taxation. As taxation is broadened, indirect taxes will cause inflation to approximate 3.2%.

The “Tanfeedh” plan concentrates on non-oil industries. The manufacturing industry contributed to 9.6% of GDP in 2017, but it is to grow to 15% in 2020. Tourism will be growing around 5.5% annually to hit a target of 3.3% of GDP in 2020. The Sultanate’s aim of increasing proficiency and efficiency is being achieved through infrastructure development’s quick pace. These include renewable energy projects.

As for logistics, Oman will be the new shipping hub for Qatar in lieu of Dubai due to recent political development among GCC countries.
The fiscal deficit is lower than previously expected as suggested by Preliminary estimates of 2018. By 2020, the World Bank forecasts the fiscal deficit to be as low as 4.9% of GDP due to higher oil prices and changes in taxation policies. However, Infrastructure acceleration will cause the government debt to be around 50.6% of GDP within the next two years. To be specific, the Sultanate will have the fastest growing economy among the GCC countries in 2019 as forecasted by the IMF.

Upon the preliminary success, this plan is turning into the 2040 vision. It aims at the development of human, social and economic aspects.
The success of the plan depends on policy management. The global oil market is a crucial factor as well as the global environment. In addition, business confidence depends on the government’s fiscal stability and reforms.

Source from: MERatings