Chronicle of the Middle East and North Africa

Declining Oil and Gas pushes Oman to build an Economy for the Future

Oman- Sultanate Oman
A catch of tuna is ready to be sold at the fishmarket on the beach of Sur in the southern Sultanate of Oman. Photo AFP

Since the Arab Spring in 2011, Oman has been trying to diversify its economy to reduce its dependence on oil and gas. And it’s urgent: the country’s oil reserves are expected to run dry in 20 years. Curtailing unemployment, which stood high at 24 percent in 2012, was another strong incentive to foster a dependable private sector.

Promoting new industries while investing in large infrastructural projects are the cornerstones to Sultan Qaboos bin Said’s economic plan, which he may not even live to see materialize (he will turn 78 in November). Qaboos came to understandd the need to diversify the economy in 2011, when gas production began  to plummet after thriving for more than a decade.

By 2015, oil prices in the Gulf had also dropped significantly (35 per cent in a year), posing a major challenge to Oman’s economy. The decline forced drilling companies to stop digging wells, while oil rig workers employed on existing wells risked losing their jobs. Saud Al Salmi, chairman of the trade union at Petroleum Development Oman, the country’s largest oil company, told the German news website DW in 2015 that the old oil contracts, which used to get automatically renewed, were finishing and that there wasn’t any prospect of new ones arriving.

The rapid decline in oil production led Oman to dig into its fiscal reserves, while cutting defense spending by a quarter and welfare spending by a half. The last move angered poor and middle-class Omanis greatly, many of whom had protested in 2011 against the country’s mounting corruption and unemployment.

Despite the challenges, Omani authorities now believe that its private sector is poised for a boom in the coming years. According to Tanfeedh a handbook from the state’s National Program for Enhancing Economic Diversification aimed at exploring ways of diversifying the economy that Oman published in July 2017, non-oil related sectors are expected to increase 4.3 percent between 2016 and 2020.

At the same time, the oil economy’s contribution to the country’s GDP is anticipated to drop from 44 percent – its steady figure between 2011 and 2015 – to 30 percent in 2020.

But how will this be done? First, Oman is trying to redefine itself as a manufacturing country so that it can develop more revenue from exporting goods. The country is also fostering manufacturing sectors, which include petrochemicals, metals, non-metals and food production. But even if these industries do grow as considerably as Oman hopes, attracting investors will be difficult unless the state adopts some reforms.

The Tanfeedh handbook recommends greater efforts from the Sultanate to promote the manufacturing sector to Omanis. It also asks for the improved transparency of the current laws and policies regulating the business sector, and for the delivery of more permits and licenses within in.

“Oman has a great deal of potential to diversify, probably in many ways more than its neighbours, especially in terms of tourism and in terms of the natural resources that Oman has available – things like access to an enormous fishery,” Marcus Chenevix, a MENA analyst with the London-based economics consultancy TS Lombard, told Al Jazeera in December 2017.

The challenge for Omanis, then, is to acquire jobs in the new manufacturing and tourism sectors. Saleh al Shaibany, a journalist who writes for the Abu Dhabi-based newspaper The National, noted that most private companies prefer migrant workers, because as foreigners, they have little power to negotiate a fair salary. This tendency leaves university educated Omanis without any job prospects in the country’s private sector.

In fact, the disparity is so great that only 10 percent of workers in the private sector are Omanis, according to the country’s ministry of manpower. The private sector reportedly consists of 1.85 million employees who are expatriates, compared to 223,000 who are Omanis.

An even more telling figure: since Oman initiated its plan to diversify the economy in 2012, 650,000 jobs were created in the private sector, yet only 16,000 Omanis were hired. Tawfiq Al Lawati, a participant in the Tanfeedh programme, told the Times of Oman that private companies should be penalized for not hiring young nationals. He described the current situation as “unfair and unacceptable” and suggested that the private sector should play a more dynamic role in Oman’s local economy.

The government already provides plenty of incentives for private companies to hire Omanis. Not only do private companies that hire Omanis receive free commercial lands and training, but they also are provided with low-interest loans. Job fairs are also organized regularly by the government. But in February 2017, Oman’s minister of Commerce and Industry Ali bin Masoud Al Sunaidi, threatened to terminate these benefits for the companies whose staff wasn’t comprised of at least 35 percent of Omani nationals.

Employers, meanwhile, accuse the government of already handing out fewer contracts to private companies due to falling oil prices. The consequence, they claim, is that they don’t have the finances to employ Omanis. They also reportedly argue that young Omanis who are fresh out of university have unrealistic expectations about the jobs they should have, and that Omanis are only focusing on some industries: the ones offering highly paid and secure jobs.

Whatever the case, unemployment remains an issue. But at least less well-off Omanis are not the ones who are being targeted the most from austerity cuts. In fact, contrary to the global trend, Oman announced last year that it would increase taxes on its wealthiest citizens to ensure that all Omanis enjoy future prosperity.

So far, it appears that Oman is gradually recovering thanks in large part to the increase in oil and gas prices this year. As the largest Middle Eastern exporter of oil and gas outside of the Organization of the Petroleum Exporting Countries (OPEC), Oman was predicted to benefit from economic growth in 2018 and 2019, according to research conducted by Business Monitor International (BMI).

But not everyone is optimistic. Just last April, the International Monetary Fund (IMF) sent a clear message to Oman after adviser Stéphane Roudet and his team visited Muscat for 13 days visit. The team concluded that Oman is a long way from boasting an economy that can one day be self-sustainable without the luxury of oil and gas, and would need to make “substantial” reforms to do so.

Part of the reason for Oman’s low grade was that the country accepted, in joining an agreement led by OPEC and Russia, to scale back oil exports in hopes of increasing its value. Forbes’ business journalist Dominic Dudley noted that though oil prices did rise, it didn’t increase enough to compensate for Oman’s low output.

Nevertheless, Omani tycoons seem to be on board with Sultan Qaboos’ plan. The businessman Salim Said Bahid al-Mashikhi, who has interests in many of the country’s industries including construction, power and restauration, told Aljazeera that he is optimistic about the country’s future regardless of the current budget constraints.

“It is very important for the country to try to get another income, not to depend only on oil and gas,” he said. “What’s happening from the crisis of low oil prices should be a warning to go for other solutions.”

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