Oman Is on Its Way to a New Growth Model

Web Posted on : Sun, 01 Jun 2014


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Oman is on its way to a new growth model. Figures released last month showed a nominal GDP growth of 2.8%, while real GDP will be available only later this year. Underlying the headline figure, the non-hydrocarbon sector saw a nominal growth rate of 7.6% while the hydrocarbon sector declined by about 1%. These numbers summarize well the economic dynamics in Oman in recent years, where the non-hydrocarbon sector has been driving economic growth. This has been underpinned by a large expansion in government expenditure, mainly financed by higher oil revenues. The reliance of this growth model on high oil prices though suggests the need for further reforms in order to achieve higher sustainable growth and employment. As a result, we forecast real GDP growth to slow to 3.0% in 2014, from an estimated 3.8% in 2013.

Contribution to Real GDP Growth (%, 2002-14)

Sources: Ministry of the National Economy and QNB Group analysis, estimates and forecast

Growth in recent years has been mainly driven by the non-hydrocarbon sector as oil production has plateaued. The key growth sectors—construction, transport, public administration and defense—have benefited from a large expansion in government spending. As a result, government expenditure has jumped from 33% of GDP in 2010 to 43% of GDP in 2012. As non-oil revenues continues to account for less than 20% of government revenue in Oman, the government financed the spending spree through higher hydrocarbon revenue, taking advantage of high international oil prices. Consequently, the break-even fiscal price of oil (the price at which the government budget is in balance) has risen from USD62 per barrel in 2008 to USD80 in 2012, and is expected to increase further to USD120 by 2018 according to the International Monetary Fund’s (IMF) forecasts. This is well above QNB Group’s forecast of USD102 per barrel in 2018, suggesting the government faces a significant risk of running a sizable fiscal deficit by then. Indeed, the latest IMF forecast shows the fiscal deficit exceeding 10% of GDP in 2018.

A growth model resting on high oil price assumptions is likely to be unsustainable. The government needs to contain its current expenditure bill, whose size has ballooned by 50% since 2010 as the government created 100,000 new jobs in civil service and defense sectors during 2011-13. In addition, the fiscal authorities need to diversify their income by increasing the share of non-oil revenue through the introduction of new taxes and customs.

In this respect, Oman can draw useful lessons from Dubai’s diversification experience over the last three decades. In the 1990s, Dubai was also facing dwindling hydrocarbon resources, like Oman today. In response, the Dubai government opened up the economy to private investments and slashed business regulations, making its economy the most competitive in the region. These reforms successfully diversified the economy, enhancing the role of the private sector and making it the driving force of its growth model.

Omani policymakers are taking steps in the same direction as the Dubai model to enhance growth and maintain fiscal sustainability. The government has announced that its spending would rise by about 5% in the 2014 budget, compared with 29% in 2012. This leaves room for the private sector to take part in the financing of big investment projects. It has also recently indicated that it is looking closely at the possibility cutting fuel subsidies.

This is a good start. Oman needs to achieve strong and sustainable growth to ensure steady job creation while maintaining medium-term fiscal sustainability and reducing its dependence on oil. Key to this is fostering the private sector to carry the burden of growth while the government adjusts its fiscal imbalances. The policies of recent years, which have increased public sector wages relative to the private sector go against this objective and may need to be reversed if Oman wants to achieve a stronger model of economic growth.

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