Spending spree: Recent government surpluses support counter-cyclical expenditure to continue expansion

At the base of the Arabian Peninsula, occupying a landmass slightly larger than Italy, Oman is the largest country in the GCC after Saudi Arabia. In recent years, the non-OPEC oil exporter’s economy has been undergoing a steady transformation, reorienting from oil toward a more diverse set of service and industry-based economic activities. So far, progress has been promising. In 2011 oil and gas accounted for 38.8% GDP. With the continuation of higher-than-expected energy prices in 2012, the government has increased economic investments accordingly. These investments, which include infrastructure, social programmes and small-business development, are aimed toward better preparing the country for its post-fossil fuel future.

Upping The Ante

Over the past 35 years, Oman’s long-term economic agenda has been outlined by a series of five-year development plans, the eighth of which was announced in January 2011 for the period covering 2011 to 2015. When released, the plan called for spending of about OR43bn ($112.1bn). Since oil windfalls continue to be the largest share of government revenues, the price of oil heavily affects budget calculations. The authorities assumed oil prices would average $75 per barrel for the 2012 budget, up from the $58 assumption used in 2011, and that daily crude production would be 915,000 barrels per day, or 2% higher than the 2011 assumption. Because so many factors go into commodity prices, predictions are highly uncertain. As reported by the Muscat Daily newspaper, in late September, an official from the ministry of finance estimated that the yearly average price for 2012 would be $108, placing the sultanate’s estimate on the conservative side of the fence. Taking this into consideration, the 2013 budget is based on a barrel price of $85 and will increasing overall spending by 10%.

Social-Minded

Since the eighth five-year plan was released, increased social spending and higher state revenues have prompted the authorities to adjust the strategy. At a press conference at the start of the year laying out the 2012 budget, Darwish bin Ismail Al Balushi, the minister responsible for financial affairs, presented amendments. Key among them was an increase in spending of OR11bn ($28.7bn), raising total expenditure to OR54bn ($140.7bn). Underlying the spending boost were decisions by the government to direct more funds to social programmes, unemployment and economic development. “It is the government’s response to the social requirements such as providing jobs, social security and unemployment benefits,” Al Balushi told Reuters in January 2012.

Under the five-year plan in 2012, the sultanate allocated $4.23bn on initiatives, which will focus on infrastructure and social programmes. These appropriations include $2.59bn for the Al Batinah Expressway and $618m for five new hospitals in Muscat, Suwaiq, Salalah, Khasab and Dhalkout, state officials announced in January 2012. Progress on these projects is now well under way. The government has offered up the tenders for the first two stages of the Al Batinah Expressway, which is aimed at boosting tourism and other sectors by better connecting the region to the rest of the country. The final two stages of the project are estimated to be completed by 2015.

Change Of The Guard

A fresh set of institutions are set to spearhead the execution of the eighth five-year plan, along with other aspects of the sultanate’s economy. Following the peaceful demonstrations that arose in Oman and the Arab Spring in 2011, the authorities reshuffled parts of government and strengthened information accessibility. Among these changes was the dissolution of the Ministry of National Economy (MoNE).

Then, in mid-2012, the government announced two new institutions to take on the former ministry’s responsibilities: the Supreme Council for Planning and the National Centre for Statistics and Data (NCSD). Created by royal decree, these agencies are set to assume many of the ministry’s previous roles. Both of these are set to be financially and administratively independent and headquartered in Muscat, according to the decree.

In addition to the Supreme Council and NCSD, other ministries are set to take on some MoNE responsibilities not under the remit of the two new entities. The Ministry of Finance will assume certain financial roles, while foreign ministry will broaden its scope to work more on international economic relations.

GDP 

In recent years Oman’s overall growth measured by GDP has shown positive signs after challenges that arose following the global financial crisis. GDP at current market prices hit OR23.35bn ($60.9bn) in 2008, but declined by about 20% to OR18.55bn ($48.3bn) during the crisis in 2009. Since then, national income has quickly bounced back. By 2010, GDP had recovered to OR22.7bn ($59.2bn), or 97% of its pre-crisis levels. By 2011, it topped its previous peak reaching OR27.94bn ($72.8bn), according to data from the Central Bank of Oman’s (CBO) 2011 annual report.

In the first half of 2012 indicators stayed strong as Oman, like many of its fellow oil exporters in the Middle East, maintained growth despite economic tumult in Europe and elsewhere. A potent pairing of higher oil prices and stronger export volumes helped buoy positive numbers in the first half of the year. GDP based on current prices rose by 18.9% year-on-year in the first quarter to OR7.37bn ($19.2bn), up from OR6.15bn ($16bn) in 2011, according to the CBO’s September 2012 quarterly report.

Rising oil incomes underpinned this growth. The petroleum sector’s contribution to national income grew by 25.7% in the first quarter of 2012. It was not only oil that spurred expansion, however. Non-petroleum activities were up as well, with their contribution to GDP rising by 12.4%, according to CBO data. Projections for the sultanate’s overall GDP point to similar growth patterns. The IMF estimates Oman’s GDP in 2012 and 2013 will grow at about 5% and 4%, respectively. Similarly, the non-oil GDP is forecast to grow about 5% in 2012 and 2013, Moody’s Investors Service said in an August 2012 announcement.

Swelling Pockets 

Per capita national wealth has also continued to rise, even as the sultanate’s population has grown in step with the GDP. Oman’s population increased steadily from about 2.28m to 2.85m between 2001 and 2011, according to the World Bank’s World Development Indicators. Like other economic indicators, GDP per capita hit a high in 2008 at $23,000, then dipped to $17,280 in 2009 following the global financial crisis. Thanks in part to resilient businesses, increased government spending and greater oil prices, national wealth quickly recovered. By 2011, per capita income climbed to $25,220, its highest rate ever, according to the World Bank. Measured in purchasing power parity, that amount is roughly the same, at $25,770.

The makeup of the GDP has shifted in recent years with fluctuations in international oil prices. Between 2007 and 2011, petroleum activities’ share grew from 44.3% to 50.9%. Non-petroleum activities’ share, meanwhile, declined from 57.2% to 51.1% overall. Over this time, however, the growth trajectory has seen peaks and troughs outside of this range. In the wake of the global economic crisis, oil prices collapsed, causing non-petroleum activities’ share of the economy to spike. Between 2008 and 2009 the non-oil share of GDP rose from 50.2% to 62.2%, according to CBO data. Following the recovery in oil prices, petroleum revenues rose, tempering non-oil activities’ share of overall GDP.

Although their share of GDP has decreased, the size of non-oil activities in absolute terms has seen impressive growth in the past five years. Their annual contribution to GDP grew by 55% from OR9.2bn ($24bn) to OR14.3bn ($37.7bn) between 2007 and 2011. The makeup of non-oil activities is broken down into services, industry, and agriculture and fishing. Services has consistently been the largest category recently, hovering between a 30% and 40% share of overall GDP. Industry, meanwhile, makes up 15-20%, and agriculture and fishing accounts for 1-2%, according to CBO data.

Fiscal Gains 

Strong national economic output brought positive changes in the government’s fiscal situation. State revenues as a percentage of GDP rose from 34.8% to 44.7% between 2010 and 2011, a five-year high. These revenues helped fuel expansionary spending policies. In 2011 total expenditure rose from 35% to 38.4% of GDP, the highest rate since 2009, when it was 40%. Despite this rate, the government’s balance sheets came out in the black. The fiscal balance, as a percentage of GDP, rose from -0.2% to 6.3% between 2010 and 2011, according to provisional data from the former MoNE and Ministry of Finance. As a result of these factors, the government’s current account situation has improved, achieving a record surplus of OR4bn ($10.4bn). “The rise in oil revenues enabled the government to pursue expansionary fiscal policy in 2011,” the CBO said in its 2011 annual report. Indeed, oil revenues as a share of total revenues rose 8.3 percentage points year-on-year to 77.4%, another five-year high.

Extra Revenue

As for 2012, the authorities have maintained increased spending thanks to higher than expected oil revenues. The government posted a net inflow of OR1.47bn ($3.8bn) in the first four months of 2012, compared to a deficit of OR114.5m ($298.4m) during the same period in 2011. Given the government’s major spending programmes in recent years, the extra revenue is a welcome addition to government balance sheets. “This [surplus] along with a rise in other revenue all helped to offset the continued rise in current expenditure and participation and support to private sector,” Margaret Purcell, chief economist at BankMuscat, told the Muscat Daily newspaper.

Attracting Investment

To ensure the sustainability of economic gains in the long term, the government has honed in on private sector growth. In the region as a whole, recent years have been challenging as global economic conditions and the effects of the 2011 Arab Spring contributed to a third year of declining foreign direct investment (FDI), which decreased by 16% to $49bn. In the GCC, the lingering effects of project cancellations in the past few years have also reduced regional FDI inflows, according to the UN Conference on Trade and Development’s (UNCTAD) annual “World Investment Report 2011”. These negative effects are only set to last in the short term, the organisation said.

In the long run, UNCTAD expects a combination of hydrocarbons windfalls and demand for investment in non-oil sectors to reinvigorate FDI in the GCC. Indeed, external factors aside, the sultanate is an attractive destination. “Oman has become an attractive investment haven for many GCC operators, and increasingly for international groups looking at the region for expansion,” Ayman Mohammed Abu Al Fadel, the general manager of the Golden Group of Companies, which has holdings in a range of sectors, told OBG.

Sectors 

Oman’s net FDI inflows peaked at $3.33bn in 2007 and have tapered since, according to World Bank reports, following similar trends in the rest of the MENA region and indeed the world. Oil and gas exploration, which accounted for 49.7% of FDI in 2010, has clocked the fastest growth in recent years, increasing from OR860.3m ($2.2bn) to OR2.7bn ($7bn) between 2006 and 2011, according to the former MoNE’s “Foreign Investment 2011” report released in June 2012. After oil and gas, manufacturing accounted for the largest share of FDI in 2010, at 18.7%. Foreign investment in transport, storage and communications, while smaller than manufacturing in terms of absolute value, stood out as the only sector other than hydrocarbons to post continuous growth, even through the 2009 downturn. Foreign investment in the sector more than quadrupled between 2007 and 2010, rising from OR34.7m ($90.4m) to OR163.5m to ($426.1m) with an average annual growth rate of just over 32%. Transport and logistics has been a high-priority sector for the sultanate, as it continues to leverage its strategic location to expand its role in international shipping routes.

“One of the biggest areas of growth and opportunity in the next few years will be the transport sector. The proposed rail network will be a real game changer for Oman, and the government needs to act quickly and employ our financial resources to connect the industrial and commercial regions of this vast country,” Rashad Al Zubair, the chairman of Omani conglomerate Zubair Corporation, told OBG.

Sources

By country, the sultanate maintains diverse sources of FDI. In 2010 the UK accounted for the largest share at 35.7%, or OR1.95bn ($5.1bn). It was also the fastest-growing share of FDI. After the UK, the US and the UAE make up the next-largest shares, with 16.3%, or OR889m ($2.3bn), and 14.6%, or OR797.6m ($2.1bn), respectively. Investments coming in from the UK and US have been focused on oil and gas exploration, though other countries are also investing in non-oil sectors of the economy. Indeed, non-oil FDI grew to a slight majority of the total in 2010, accounting for a 50.3% share, according to the latest data from the “Foreign Investment 2011” report. The lion’s share of UAE investments, for example, were concentrated in manufacturing and financial services, at OR381.9m ($995.3m) and OR222.2m ($579.1m), respectively. Fellow GCC-member Qatar has also been the source of major financial services FDI, which came to OR121.9m ($317.7m). Another GCC-member, Bahrain, was the stand-out investor for the transport, storage and communications sector, with FDI reaching OR101m ($263.2m) in 2010.

The government is pushing to continue attracting FDI. In addition to boosting investment, encouraging economic diversification and creating jobs, FDI facilitates the transfer of technology and know-how to local companies, as international firms bring technologies and skills pertinent to their fields. In this way, more FDI could translate to continued gains for private sector competitiveness. With ongoing incentives for foreign investors, including designated free zones, a business-friendly tax policy and major infrastructure investment, the government is encouraging higher FDI inflows.

Foreign Trade 

Like FDI, foreign trade has also been expanding. Due to a number of factors, the sultanate has maintained a positive trade balance. Exports outnumbered imports for the past five years, doubling from OR9.5bn ($24.8bn) to OR18.1bn ($47.2bn) to between 2007 and 2011, according to the CBO’s 2011 annual report. Imports grew at a more modest 50%, from OR6.1bn ($15.9bn) to OR9.2bn to ($24bn) during the same period. While crude oil, refined oil and LNG combined make up the largest portion of the sultanate’s exports, the fastest growth rates were recorded in non-oil sectors and re-exports, which grew by 135% and 124%, respectively. Their rapid growth could indicate that economic diversification efforts are successful.

Stronger Ties 

The destinations of non-oil exports are varied, with no one country taking a majority. In 2011, the UAE held a plurality at 14.8%, or OR450.1m ($1.2bn). India and China received the next-largest shares, with OR413.1m ($1.1bn), or 13.6% and OR331.8m ($864.7m), or 11%, respectively. These trade ties are underpinned by Muscat’s growing ties with New Delhi and Beijing. Trade with India and China grew by 88.3% and 108%, respectively, over the past three years (see analysis). While non-oil exports to Indonesia and Malaysia have clocked faster growth rates – rising over three-fold and five-fold, respectively – trade volumes with these countries are calculated from relatively low baselines.

Positive indicators from both FDI and trade are supported by Muscat’s business-friendly policies. Between the 2007-08 and 2012-13 recording periods, Oman rose 10 places from 42nd to 32nd of 144 countries in the World Economic Forum’s Global Competitiveness Index (GCI). The GCI compiles economic indicators to measure broader trends like transparency and infrastructure quality, which it uses to rank the countries examined. Oman also climbed four ranks from 53rd to 49th in the Doing Business index, a system for rating business policies in 183 economies co-published by the World Bank and International Finance Corporation. Oman improved in three of the Index’s 10 categories, one of 30 surveyed economies to do so in 2012. The report detailed improvements in business start-up procedures, credit attainment and paying taxes. To make starting a business easier, officials have ordered the creation of an online service for company registration, reducing the time required to register with the government. As for credit attainment, a new Bank Credit and Statistical Bureau Statistical System gathers individual and company loan information in one place, helping lenders make more-informed decisions thus enabling new firms to attain credit faster. Paying taxes, has also become easier due to tweaks to income tax law.

“We must introduce incentives that are adequate enough for what investors are looking for, and this has always been what Oman has striven for and improved upon,” Sayyid Faisal bin Turki Al Said, director-general of marketing and media at Public Authority for Investment Promotion & Export Development (PAIPED), told OBG. “To an investor, World Bank and IMF reports on competitiveness and doing business are extremely important, which is why PAIPED has established a directorate that will work extensively on research and with any governing bodies that put together global research and statistics studies. We need to understand what still needs to be done and how to do it.”

In The Zone 

A growing set of free trade zones (FTZs) and other special commercial areas are also helping to fuel investment and trade by offering prospective investors a low-regulation, low-cost business environment. Oman was a relative newcomer to the region’s FTZ segment but has since grown quickly. The sultanate now operates several FTZs, including those in Salalah, Sohar and Al Mazyona. In addition, Knowledge Oasis Muscat, a technology-oriented free zone, operates just outside of the capital. These zones offer special perks to investors, including 100% foreign ownership, free repatriation of profits, certain exemptions from import duties and decreased requirements for local employment. Oman’s Public Establishment for Industrial Estates runs a number of industrial areas around the country that offer similar incentives for businesses.

Added Support 

The government has also created the Export Credit Guarantee Agency of Oman (ECGA).

The state-affiliated organisation supports non-oil exporters by offering insurance on buyer and country risks. These include insolvency of the buyer, the buyer’s refusal to pay, public disorder, natural disasters and other factors outside of the exporter’s control. The idea is to shoulder some of the risks for non-oil exporters in order to encourage more entrepreneurs to begin selling their wares abroad. Like other export credit agencies in the world, Oman’s ECGA covers about 5-10% of non-oil goods leaving the country, said Nasir Issa Al Ismaily, the organisation’s general manager. “These services allow sales to take place that may not have happened because of risk aversion,” Al Ismaily told OBG. These services are quite useful for smaller enterprises that might be looking to expand but are unable to take on the risks involved with doing business abroad. So far the services have also proved sustainable. “When we were formed back in 1991 the government gave us a grant to start up,” said Al Ismaily. “So far we have not needed any additional assistance.”

The Labour Market 

Although the government’s ongoing job creation efforts have seen some success, the sultanate continues to face the challenge of boosting employment among Omanis.

One reason for the continuing demand for jobs is the country’s relatively young population. As of August 2012, about 600,000 Omanis, or one-third of 1.8m citizens, were in educational institutions. Within the decade, a large portion of these students will likely be looking for work. As a result, the government has been working to expand job opportunities for nationals. By 2015, the sultanate aims to create between 200,000 and 275,000 jobs for citizens.

Creating Jobs 

To reach this goal, the authorities are boosting the number of public sector positions available while investing in the private sector, especially in small and medium-sized enterprises (SMEs). In early 2011 the government promised to create another 50,000 jobs in the public sector, the military and government-related companies. By the end of the year, it exceeded its goal, as the number of new employment opportunities rose to 94,000. In 2012 the government posted a surplus of OR1.47bn ($3.8bn), a portion of which is to be invested in the economy to encourage jobs growth. In the private sector, SMEs have been a high priority because of their capacity to create jobs. Small businesses account for about 16% of Oman’s GDP. This relatively low ratio indicates strong growth potential for the segment, which the government is trying to tap. The authorities have rolled out a series of grants, loan programmes and business-mentoring schemes to support SME development, as well as introducing education programmes to promote entrepreneurship among students who will soon enter the workforce (see analysis). “Public and private sector organisations alike talk about support of SMEs and entrepreneurs, but what we need is more action. We need to identify the skills required for locals to run their own enterprises and work on developing them,” Abdullah Al Jufaili, the general manager of the Sharakah Fund for Development of Youth Projects, told OBG.

In 2010, the most recent year for which complete data is available, a total of 318,059 Omanis were employed, up from 256,153 in 2007, according to the CBO’s 2011 annual report. Private sector workers made up the majority (55.9%), followed by those in civil service (35.9%), the Royal Court (3.8%), public corporations (2.4%) and the Diwan of the Royal Court (2%).

The overall labour picture is marked by clear divisions between the public and private sectors. According to the CBO, in 2010 Omanis made up 85% of public sector workers and expatriates made up 84.3% of private sector workers. Trends in recent years, however, have pointed toward shifts in these divisions. Omani employment in the private sector increased by an average of 10.5% between 2007 and 2010. In 2011, however, private employment among Omanis dipped by 1.9%, despite an overall 14.2% growth of private sector jobs, from 1.13m to 1.29m. This slight decrease could be the result of a number of factors. Nationals tend to prefer public sector employment for the generally higher wages, increased job security and benefits it offers. As the government’s job creation drive creates more public positions, some privately employed Omanis may opt to leave the private sector for the public sector.

Inflation 

In addition to job creation, keeping inflation under control has been a top priority. In August 2011 the consumer price index (CPI) rose to 5.3%, the highest rate in over two years. Since then, those numbers have eased significantly. In the first half of 2012, the average rate of inflation fell to 3.1% from 4% during the same period in 2011, according to the CBO’s 2012 half-year report. Oman’s low inflation rates for the first half of 2012 were part of a regional trend. Oil-exporters across the MENA region experienced inflation rates of less than 5%, according to the IMF’s April 2012 “MENA Regional Update”.

Food accounts for 30% of the basket of goods the CBO uses to calculate Oman’s CPI. The high rate of food spending makes inflation very sensitive food price fluctuations. Between May and June 2012, fish and produce prices drove a slight rise in inflation from 2.2% to 2.7% (see analysis). To combat higher prices, the Public Authority for Consumer Protection (PACP) introduced regulations in August 2011 to ensure price fluctuations were tied to market trends.

“It is compulsory for all markets to provide a genuine reason for price increases and get approval from the authority,” Omar bin Faisal Al Jahadmi, director-general of consumer services and marketing control at PACP, told Muscat Daily in February 2012.

“This action has helped keep prices under check as retailers cannot increase prices unless they get approval,” added Al Jahadmi.

Outlook

Thanks to higher-than-expected energy prices, the sultanate has maintained accommodative fiscal policies to insulate the country from economic tumult elsewhere and encourage growth while other countries are working to avoid recession. The budget revisions presented at the beginning of 2012 were a first step to accelerating progress on the government’s economic vision.

While economic risks – like fallout from the eurozone debt crisis or changes in global oil prices – do exist, Oman’s low-exposure to European debt, diverse set of trade partners and strong fiscal record put the country in a healthy economic position. At least for the short and medium terms, the state can reinvest oil and gas windfalls to raise the quality of infrastructure, broaden social services and encourage economic diversification – all actions the authorities are taking to ensure the sustainability of economic gains into the long term.