Oman’s growth story has put it ahead of its Gulf peer group this year, with an increase in private sector activity and rising tourism income giving a positive sheen to an economy that has never enjoyed the healthy hydrocarbons reserves of its neighbours Saudi Arabia and the UAE, says an article in The Gulf, our sister publication.

This year, though, Oman’s economic growth is outpacing the Gulf Co-operation Council (GCC) herd. With a vibrant non-oil sector, the country is on course to beat the Gulf average, if the experts are right.

The International Monetary Fund (IMF) expects the GCC states to record an average 3.7 per cent real gross domestic product (GDP) growth rate this year, well down on last year’s 5.1 per cent. But Oman looks set to buck that trend, with the Fund forecasting 5.1 per cent growth in 2013, broadly in line with ratings agency S&P, which envisages a five per cent increase in output.

The latter’s forecast is based on an increase in oil production to an average of 940,000 barrels per day (b/d), up from 920,000 b/d in 2012. The non-oil economy will remain robust on high investment and public and private consumption, says S&P.

The increase in oil output is testament to state oil company Petroleum Development Oman’s (PDO) successful deployment of enhanced oil recovery techniques, which have turned a once-declining asset into a source of growth - for now at least.

According to a report on Oman’s economy from Qatar National Bank (QNB) issued earlier this year, robust growth in the oil and gas sector has brought in an additional $8.1 billion in output compared to 2008, and increased its share in nominal GDP to 52 per cent in 2012.

One big advantage is that Oman is not a member of Opec, so is not constrained by the organisation’s quota restrictions. “Oman is continuing to increase oil production, as it has for the last five years, and this means it doesn’t face a drag on growth from the oil sector,” says Paul Gamble, director of sovereigns at Fitch Ratings.

Supporting this is a robust non-oil sector with a high level of government spending, with increases in minimum wages announced in the summer that will feed into rising consumer spending.

The increase in public expenditure seen since 2011 has had a marked impact on economic activity, imbued by the buoyant oil revenues of recent years. In light of the unrest that hit the streets of Muscat that year, the authorities have made a concerted effort to target increased spend at the low-earning population segment.

The 2013 state budget included record outlays on social benefits for Omani nationals. The government has twice raised the minimum private sector salary for Omani nationals, from RO140 ($360) to RO325 a month.

Rises in public sector wages and unemployment benefits have eased the pain for many citizens, while at least 36,000 public sector jobs were created last year. The two years have delivered real gains in prosperity. As measured through per capita GDP at current prices, Oman stood at an impressive $25,152 in 2012, well above the Mena average.

The increased spending is stimulating economic activity, which in turn has given added impetus to diversification attempts and efforts to speed up the development of non-oil sectors.

According to QNB, Oman’s non-oil sector currently accounts for 48 per cent of nominal GDP and is shaping up as a key economic growth driver. In terms of real GDP, the non-oil segment increased its share from 50 per cent in 2000 to 70 per cent in 2012. And whereas real GDP grew by 6.3 per cent during the 2006-2010 period, the non-oil sector grew by a more impressive eight per cent in the same period.

Government efforts to boost non-oil industry and services have clearly had some impact, with the encouragement of investment in new ports and free trade zones such as the new port of Duqm, set to open in 2015. This is feeding through into increased activity in areas such as logistics and trade.  

The government’s public investment programme has encompassed a new rail network, alongside new money for aviation projects, ports, and education and social development initiatives.

“The interesting non-oil development is the massive new industrial zone at Duqm. That’s a few years away, but it's going to happen and will be a very big deal when it does,” says Gamble.

Despite the positive momentum behind Oman’s non-oil sector, there are concerns that its long-term growth potential is inherently limited. For one thing, the vast bulk of the country’s non-oil industries are all downstream, feeding off Oman’s energy resources in some way - thereby compromising how far they can be really be considered as non-oil.

“A lot of Oman’s non-oil sector is energy dependent. Petrochemicals, for example, is very closely related to the oil sector,” says Gamble. “Indeed, many Omani industries are either related to energy or dependent on government spending.”

Another challenge here is that Oman is facing a shortage of natural gas feedstock. Manufacturing industries are being forced to import gas, which has a negative impact on project economics.

The brightest spot in this respect is the performance of the tourism sector, which is completely insulated from hydrocarbons. A 12 per cent rise in tourism receipts in the first eight months of 2013 is a boon for the Omani economy, as it is an area that provides employment opportunities for a growing number of nationals.

Tourism’s contribution to the Oman economy was estimated at $5.2 billion in 2012, and is expected to rise by eight per cent this year, according to the World Travel and Tourism Council.

The public spending-driven government strategy will provide continued uplift for the economy in the next couple of years, but there are signs that the current rate of spending may be unsustainable.

Says Gamble, the rise in government spending in Oman has put a lot of pressure on the budget: “If you look at expenditure this year it is virtually flat, but nonetheless there are challenges ahead. Last year Brent crude averaged $112 per barrel yet Oman only managed to eke out a very small fiscal surplus.”

According to an IMF assessment of Oman’s economy released in mid-year 2013, recent spending initiatives, including the government job creation programme, have increased expenditures by 70 per cent between 2010 and 2012, and reduced the policy space to respond to shocks. A sustained fall in oil prices could exhaust available buffers and necessitate borrowing to maintain the projected capital spending.

It is not just the amount of state expenditure that is causing consternation, but the form it is taking with increased outlays on subsidies and public sector wages. Such increases in current expenditure also pose an economic risk, warns Moody’s, in that it could crowd out capital expenditure in the event of a sharper oil price correction.

The message seems to have been brought home to policymakers. Al Balushi’s call for fiscal conservatism in early April was taken as a clear sign that the authorities are serious about reversing the expansionary trend of the past couple of years. Speaking on the sidelines of a meeting of Arab finance ministers in Dubai, the finance minister noted that in contrast to last year, Oman did not expect this year to spend more than it had originally budgeted. Plans for an overhaul of energy subsidies were intimated in talks with IMF officials over the summer.

Despite the concerns over state finances, Omani policymakers still have reason for optimism. Unlike Bahrain, Muscat has not felt the need to disburse the GCC financial aid committed to the country in 2011. If economic conditions were to worsen materially, this support would be likely to be forthcoming.

In the circumstances, Oman has had a good couple of years. Its development of non-oil industries should yield results in future years, so long as the gas supply constraints can be resolved.

A bigger challenge is how to cope when the EOR programmes in the oil sector have run their course. There are limits to Oman’s capacity to eke out gains in oil production in its onshore fields. For now though, the priority is to keep economic activity ticking over while bringing down government expenditure - a tough balancing act at the best of times.

* The above article appears in the November issue of The Gulf, our sister publication