Oman to reduce hydrocarbons' share of GDP

Oman has long been seeking to reduce its economy’s reliance on oil production. The sultanate’s long-term development strategy Vision 2020 aims to reduce oil’s share of GDP to 9% by 2020 by growing other sectors. Diversification is also one of the main elements of the government’s ninth five-year development plan, which runs from 2016 to 2020.

Under Focus

Initially diversification plans under Vision 2020 were based heavily around increased gas production and exports, as well as the use of gas as a feedstock for petrochemicals and an energy source for other forms of heavy industry. While lower-than-expected gas output has caused a change of emphasis, it remains an important part of such efforts. As the focus has shifted away from gas, progress is being made in other sectors. “There has been a great deal of government investment in areas such as tourism and industry, and Oman has enormous tourism potential in particular,” Rashad Ali Abdullah Al Musafir, acting CEO of Bank Sohar, told OBG.

Tourism is one of the most promising sectors for diversification, given factors such as the country’s varied landscape and long coastline. The sector’s share of GDP was 2.2% in 2014 and total inbound visitor numbers stood at 1.55m in 2013 (compared to 2.6m for GCC peer Qatar), suggesting there remains substantial room for growth. “Even though budgets are strained due to the economic situation, the tourism product still needs to be developed. This presents an opportunity to work on new hotels and other hospitality facilities,” Balakrishna R P, managing director of Services & Trade Company, told OBG.

Other industries widely regarded as having significant potential for development include mining and transport and logistics. The 1998 opening of a port and trans-shipment hub in Salalah was a major diversification achievement, and today the facility is the second-largest container port in the region. However, the port now has limited room for expansion, prompting the government to look at new investments elsewhere. The largest such project under way is the construction of a new special economic zone at Duqm, containing a port, airport and an oil refinery. Trans-shipment will be a key focus at the site. While it will face stiff competition from already-established hubs in the region, Duqm has the advantage over Gulf ports of being located closer to major regional shipping routes and of not requiring ships to pass through the Straits of Hormuz. The construction of a GCC railway will further boost the transport industry and complement port expansion plans.

Diversifying Trade

In a recent report on Gulf states’ diversification efforts, the IMF notes that infrastructure investments can be a double-edged sword as they provide companies with numerous attractive opportunities to service government infrastructure contracts. This reduces their incentive to produce tradable exports, which the fund argues offer better prospects for long-term productivity gains and, by extension, for sustainable diversification. Nevertheless, the sultanate’s trade profile has become increasingly diversified in recent years, with non-oil exports having risen by 68.5% between 2010 and 2014, to OR4.13bn ($10.7bn), or 20.2% of the total (including re-exports), compared to 17.4% in 2010.

SME Development

Another key element of efforts to more generally develop the economy is the government’s initiatives to bolster small and medium-sized enterprises (SMEs). May 2013 saw the creation of a new body, the Public Authority for Small and Medium Enterprises Development (PASMED), which seeks to encourage Omani nationals to launch and develop SMEs by providing them with free training and advice on their development, improving their access to finance (see Banking chapter), and the development of a culture of entrepreneurship amongst schoolchildren. As of August 2015 approximately 15,000 SMEs were registered to receive support from PASMED. The Tender Board, which awards many government contracts, aims for at least 10% of the value of such contracts to be awarded to SMEs. The Central Bank of Oman has introduced a rule requiring banks to devote at least 5% of their loan books to SMEs by the end of 2015 (see Banking chapter). PASMED offers a programme to guarantee loans of up to OR250,000 ($647,000), while another government entity, Al Raffd Fund, provides start-ups and SMEs with interest-free credit of up to OR10m ($25.9m).

Abdullah Al Jufaili, general manager of the Sharakah non-profit initiative to support the development of local SMEs, told OBG that in order for the segment to flourish, three key challenges facing it needed to be addressed. “The regulatory framework and environment for SMEs must be streamlined; in particular, new firms need to be able to finalise the initial paperwork and bureaucracy more quickly so that so they can concentrate on running their actual business,” he told OBG. “SMEs also face unfair competition from established organisations seeking to prevent new businesses entering the market, by for example cutting prices to undermine new entrants, which may require changes to the competition and monopolies law to be addressed. Finally, small business owners themselves often do not make enough efforts to improve their services and plan strategically.”

However, the government is taking measures to address some of these challenges, including the InvestEasy one-stop-shop initiative aimed at reducing the burden of registration and licensing procedures (see overview) and the efforts to allocate more tenders to the segment. Despite the existence of such challenges, Al Jufaili said that companies starting out small in the sultanate could hope to see major success. “We have examples of companies that started out at village level and now serve the entire Omani market,” he told OBG, adding that there had been a substantial increase in small-scale entrepreneurialism since 2013 and that he saw opportunities for Omani SMEs in the manufacturing sector and in support services for large infrastructure projects under way or being planned in the sultanate in particular.

Workforce Challenges

One frequently cited obstacle to diversification efforts in Oman and GCC countries more generally is that attractive employment terms in the public sector make many people reluctant to seek employment in the private sector, the development of which will be key to expanding away from oil. The IMF report on diversification efforts in the GCC argues that incentive structures in the region should be changed to encourage more nationals to seek private sector employment.

Progress towards diversification is being made despite challenges. “The results of diversification efforts have perhaps not been as fast as some people wanted; however, you can’t expect change to happen overnight, and the country has come a long way in terms of the development areas such as industry, free zones and the tourism sector,” Al Musafir told OBG.