Oman
Diversification bearing fruit

Growth in oil revenues has increased Oman’s purchasing power and provided extra, and unplanned, revenue for the government to pursue its economic overhaul plans

Over the past half a decade or so, faced with declining oil production, Oman has begun to lay the groundwork for an extensive economic overhaul. Many analysts believe that at the current rates of oil production, the country may have only decades before its reserves dry up. While new investment, technology and exploration may extend the life of the reserves for some time, the government, which depends on oil for nearly 65 per cent of its revenues, is aware that for there to be life after oil serious changes are required. Accordingly, it has undertaken a wide range of economic diversification schemes that include tourism, real estate, new port facilities and major industrial plants. Today, these are at varying stages of maturity.

Like other oil producing countries in the region, high oil prices have buoyed Oman’s economy in recent years. The country has been doubly fortunate in that the high prices have actually more than made up for its shrinking production, which had reached its peak in 2000.

In the first half of 2007, oil revenues drove nominal GDP up 8.7 per cent. This has important knock-on consequences, as Sitikantha Pattanaik, an economist at the Central Bank of Oman, explained. “Nominal growth is very important in this part of the world. It is not exactly inflation – since it is so heavily skewed by high oil prices”. Instead, the growth has increased Oman’s purchasing power and provided extra, and unplanned, revenue for the government.

This extra income is certainly welcome because the country has performed relatively poorly compared to some of its neighbours in terms of attracting foreign direct investment despite having good potential to do so, says UNCTAD’s World Investment Report 2007. Oman’s stock of FDI fell from almost 15 per cent of the GDP in 1990 to 11 per cent in 2006. This is even though over the last few years, FDI has made its way into more greenfield projects, from 14 projects in 2004 to 37 in 2006. As a result, FDI flows increased from about 5 per cent to nearly 17 per cent of gross fixed capital formation over the same period. In recent years, gross capital expenditure has hovered between 18 per cent and 20 per cent of the GDP, enough to stimulate real growth but not enough for Oman to keep pace with some of its flashy neighbours.

Real growth
The International Monetary Fund has predicted that Oman’s real GDP growth will be about 6 per cent in 2007, considerably slower than the blistering 14 per cent growth rate expected for Qatar or the 7.7 per cent for the UAE. However, Pattanaik points out that “when you have a real growth rate of 6 per cent while your oil production is declining, it does mean that the progress on the diversification front has been very satisfactory.”

In real terms in 2005 (the last year for which there are numbers), the services sector, which makes up about 60 per cent of the GDP, grew by about 7 per cent and the industrial manufacturing sector by about 8 per cent, while the petroleum sector managed just 1.8 per cent growth. Non-oil exports have been growing between 30 per cent and 40 per cent every year since 2003 and now account for nearly 15 per cent of total exports. In the first half of 2007 alone, they grew more than 70 per cent. With production picking up at several new plants in Sohar and Salalah, non-oil exports will continue to grow next year.

The export boom is partially attributed to the declining value of the Omani Riyal due to its peg with the dollar. This has given Omani exports an advantage over some competing exporters. “A depreciation (of the dollar) will very much benefit non-oil exports,” says Pattanaik. “What people are discussing is the cost of the peg. What people are not discussing is the cost of not having the peg and the cost of an alternative”. Pattanaik suggests that the terms of the debate on the peg need to be brought into sharper relief with Oman’s broader policy of driving forward its diversification objectives and non-oil exports.

There have certainly been costs also associated with the dollar’s depreciation. In 2007, Oman, like many surrounding countries, has witnessed record high inflation rates. Oman’s consumer price index touched 5.3 per cent in the year to October. The peg, which hamstrings monetary policy, has helped fuel the inflation leaving record levels of money sloshing about the economy. The money supply has repeatedly hit record levels in 2007. Year on year, it has increased by over 30 per cent, while total credit has increased by more than 25 per cent.

Inflationary pressures have also been home grown. Large-scale investments into diversification projects have increased aggregate demand. For example, the developments in and around the Port of Sohar are expected at a huge US$12billion. Pattanaik points out that “at the same time, you want to diversify faster, you can’t because you don’t have the capacity. So you need to import it.” The problem is that much of what is required, from raw materials to human resources, is in scarce supply not only within the region but globally and this is pushing up prices.

Ordinary Omanis have been hard hit by food and rent inflation, which shot up following Cyclone Gonu in June, which caused damages valued at between RO1.2-2.5 billion. Since June, the price of a basket of food for families has gone up by more than 25 per cent. Rent increases were capped at 15 per cent by the government to try to dampen the effect on low-income households.

Human resources
In an OBG survey of Oman’s corporate executives aimed at understanding the private sector’s concerns for competitiveness and growth – conducted for its forthcoming Emerging Oman 2008 – a shortage of qualified staff consistently topped bosses’ worry-lists across the country. Many companies have had to adopt innovative training schemes to train new employees. Also, several bosses expressed frustration that their new employees, particularly Omanis with IT training, were often lured by higher bidders as soon as they had completed hands-on training or with only a few months of experience. This was specially true in case of corporates trying to meet their Omanisation quotas. Staff retention and wage escalation have thus become a serious problem for human resources departments across the country.

Next on the worry-lists typically were concerns over inadequate infrastructure. Everything from Muscat’s increasingly congested roads to insufficient gas supplies need to be addressed double fast, they say. Topping the infrastructure list for many in the service sector were worries about information and communications technology. Some bosses complained that they were running billion dollar plants by mobile phones because fixed-line and internet services were simply inadequate.

Others pointed out that it is difficult to compete on a global scale when simple email attachments can be sufficient to bring down information systems due to the insufficient capacity of the country’s sole internet service provider. Many in the service and IT industries questioned how a knowledge-based society could be expected to emerge in Oman given the high costs of broadband, the monopoly on fixed-line and international gateway services.

Many pointed out that opening up the rest of the telecom industry could rapidly transform Oman’s internet landscape similar to the way the telecom landscape was reshaped a couple of years ago when Nawras was allowed to compete with Oman Mobile. However, some action is indeed taking place on this front, with Nawras launching its 3G services in December. For consumers with 3G enabled wireless modems, the cyber-bottleneck appeared to have ended. One local market watcher told OBG, “I’ve just finally been able to connect to the internet like people elsewhere in the world – without having to wait minutes to open a webpage or hours to download a file.”

Despite serious issues for the Oman’s economy in 2007, Cyclone Gonu and record inflation, it has performed exceptionally well on the back of a bull oil market. Most importantly, the country’s various diversification plans are beginning to bear fruit. Moreover, the recent announcement of a new free-trade zone near the Sohar port is likely to help reverse UNCTAD’s complaint that Oman has underperformed in attracting FDI. There is good reason to think that the government, which has shown generally excellent cooperation and coordination with the private sector in its diversification agenda, will work to relieve the economy’s new binding constraints and ease the growing pains. Policymakers will do well to remember that what is necessary for sustaining economic growth is often very different from what was required to kick it off.

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