Balancing the Books: A Deep Dive into Fiscal Policy and Diversification in Oman

Financial diversification in Oman takes two varieties: funding diversification by decreasing the function of the state whereas creating extra room for the personal sector, and sectoral diversification whereby tourism, logistics, and manufacturing surpass oil and fuel as key productive sectors.

Basic to each these objectives is bettering Oman’s funding setting. Whereas the nation’s overseas direct funding (FDI) numbers rank fairly excessive on a per-capita foundation, a better look unsurprisingly reveals that the overwhelming majority of FDI is concentrated in oil and fuel exploration, with all different sectors comprising barely a 3rd of the entire. The MTFP has highlighted that one in every of its core aims “is to enhance the enterprise setting and stimulate investments.” The centerpiece of those initiatives is the International Capital Funding Legislation, efficient since January 2020. It drastically eases registration and licensing procedures for overseas traders — for instance, eliminating the requirement for a proper presence in Oman, both by a department workplace or native agent.

Essentially the most fascinating and essential components of the legislation are articles 18, 20, and 27. The latter permits 100% overseas possession in most sectors, although the Ministry of Commerce and Trade has a listing of exceptions for which overseas funding is totally prohibited. None of those sectors are of curiosity to the nation’s diversification drive, and are usually related to the federal government’s management over gasoline costs (e.g., liquefied petroleum fuel filling stations) or sustaining Omani traditions (e.g., the making of Omani sweets). Article 20 states {that a} undertaking could also be exempt from taxes, customs duties, and non-customs duties for an agreed-upon interval. It additionally states that there are “different advantages which may be granted to the funding tasks” based mostly on the approval of the Council of Ministers. In observe, which means that firms may be quickly exempted from (land) rental charges, Omanization necessities, and quite a lot of different obligations. Judging by Article 18 of the legislation (the Council of Ministers can grant extra “advantages to overseas funding tasks … within the least developed areas within the Sultanate”), it’s doubtless that these exemptions might be most prevalent in areas away from the extremely populated Muscat and al-Batinah governorates. This could complement steps taken by the Oman Housing Financial institution to extend its lending actions in areas exterior of Muscat, in addition to the Implementation Assist and Observe-Up Unit, a authorities entity with quite a few tasks to enhance electrical energy entry in rural areas.

Subsequent to those broad adjustments, a number of smaller-scale inducements have stimulated private-sector progress. Corporations starting operations between January 2021 and December 2022 in sectors which might be targets for diversification obtain a five-year exemption from earnings and dividend taxes as a part of the Financial Stimulus Plan. This comes on high of a discount in license charges and land rents in industrial areas. Small and medium-sized enterprises (SMEs) — the holy grail for Gulf diversification plans — loved a two-year discount in earnings taxes and an equally lengthy mortgage deferment program. With SMEs comprising lower than 5% of financial institution mortgage portfolios (Financial institution Muscat’s SME lending peaked in 2018), extra work is required to make them severe actors in diversification initiatives. Lastly, actual property funding trusts (REITs) had been launched in 2018 with the aim of retaining extra capital within the nation. REITs permit each overseas traders and Oman-based expats to put money into housing, as soon as solely attainable for Omanis. The second-order advantage of a subset of REITs is that not less than 40% of their fairness should be out there to the general public, which ends up in their itemizing on the inventory change and boosts general inventory market exercise.

Facilitating funding is one half of the Omani financial strategy. The opposite half is diversification. Whereas the hydrocarbon sector contains 35-40% of GDP, it performs a 4.5 occasions bigger function in GDP progress than the non-hydrocarbon sector. In the meantime, GDP progress numbers for the non-petroleum sector don’t expertise the intense fluctuations of the petroleum sector, and are due to this fact exponentially extra predictable. An financial system that rises and falls based mostly on the vagaries of the worldwide market is detrimental to constant progress. Thus, diversification is essential to Oman’s long-term stability.

One key program geared toward reaching that is Tanfeedh, a authorities initiative to diversify focused sectors, together with manufacturing, tourism, transport and logistics, mining, and fisheries. Finance is taken into account an “enabling sector” on this endeavor. What’s fascinating about Tanfeedh is that it incorporates the opinions of sector stakeholders to make sure that reforms goal wants, slightly than being steered by edicts handed down from on excessive.

Oman hopes to modernize its manufacturing sector in order that it may possibly take in younger Omanis getting into the job market and diversify the financial system away from hydrocarbons. A notable initiative is Mazoon Dairy. The corporate will enhance the dimensions of its cattle herd from the present ~4,000 to 25,000 by 2026, goals to make Oman a internet milk exporter by 2040, and make use of a considerable variety of employees. In keeping with a need to make Oman a inexperienced funding vacation spot, the Sebacic Oman Refinery is the world’s largest refinery producing chemical compounds and polymers from inexperienced (castor) oil. The expansion of castor removes carbon from the environment, making Sebacic a carbon-negative firm. In Salalah (southwestern Oman), an ammonia plant is beneath development that might be fueled by photo voltaic power, going hand in hand with Oman’s budding inexperienced power sector. Rising the renewable power sector must be a excessive precedence, as 97% of Oman’s electrical energy presently comes from gas-fired energy vegetation. Since fuel manufacturing won’t meet rising home demand for family consumption, feedstock, or industrial power, benefiting from the nation’s renewable power potential is crucial. Failing to take action would undermine the expansion potential of Oman’s extra energy-intensive diversification sectors.

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Subsequent to manufacturing, Oman hopes to leverage its geographical location to grow to be a logistics hub. Duqm refinery, a three way partnership between the Omani OQ group and Kuwait Petroleum Worldwide, states that “one of many refinery’s key aggressive benefits is its location exterior the Strait of Hormuz” — removed from potential instability — and its strategic place on worldwide delivery lanes within the Indian Ocean. Additional south, the Port of Salalah has undergone an growth to double its cargo capability, along with modernization to facilitate the aforementioned ammonia plant. Between 2012 and 2018, cargo quantity greater than doubled. The Oman Nationwide Railway Undertaking plans to assemble a 2,100-km community that can finally lengthen into the UAE and Yemen, constructing upon current worldwide transport networks. Additional, the Air Cargo Village in Muscat goals to make Oman a regional hub for air logistics. The way it will compete, nonetheless, with Dubai’s Emirates SkyCargo and Qatar Airways Cargo, each among the many largest cargo carriers on the planet, stays unclear.

A constant theme in Oman’s self-advertising campaigns is the constructive give attention to the nation’s stability and rule of legislation. The royal household has not been embroiled in controversy — as is the case in Saudi Arabia and Jordan — nor has there been widespread social unrest like in Lebanon and Iraq. This relative calm spurred regular progress in tourism (from 2.6 million guests in 2015 to three.5 million in 2019) till the pandemic. In contrast to the UAE and Qatar, Oman has an area inhabitants that comfortably outnumbers the expats, guaranteeing the seen presence of Omani tradition. Nor does it undergo the adverse connotations related to Saudi Arabia. A attainable motive for that’s Oman’s relative obscurity. A serious problem for its tourism trade is encapsulated by article titles comparable to, “Oman: The Paradise You By no means Knew Existed.”

To ameliorate that downside, Royal Decree 91/2020 modified the identify of Oman’s Ministry of Heritage and Tradition to the Ministry of Heritage and Tourism, highlighting the nation’s need to leverage its wealthy and well-preserved heritage to bolster tourism. Since 2013, Oman has proposed six websites for the World Heritage Listing, with a number of different places beneath restoration as nicely. Tourism was anticipated to develop by 5% yearly, and whereas the pandemic has undermined this aim, pre-pandemic numbers had been extremely encouraging.

Regardless of Oman’s severe monetary points, the nation has managed to make essential adjustments to its financial system at a time of world upheaval. Outlooks which have been overwhelmingly adverse for the final six years at the moment are steady, although Omicron-induced unpredictability would possibly nonetheless erode a number of the nation’s hard-won progress. I opened by saying that Oman’s financial issues are a warning for different GCC states (and rentier states extra broadly) to not postpone their diversification efforts. But Oman can be an instance of how aggressive price chopping, whether or not by forcing resignations or decreasing subsidies, mixed with a notable enhance in taxes, can obtain fiscal stability within the medium time period with out posing existential threats to the ruling elite. Whereas excessive oil costs play an simple function in reaching fiscal stability, the MTFP predicted a funds surplus by 2024, with a pre-cited oil value of $45/barrel; on the time of writing it’s greater than twice that. There are, nonetheless, some areas that require additional consideration.

I) Activating the business banking sector

SME lending in Oman is woeful at solely 5% of financial institution lending portfolios. It’s because solely 56% of Omanis used banks as of 2016, in comparison with 72% of Saudis. Many cite spiritual causes for not having a checking account, a core motive why Islamic banks’ market share is ready to succeed in 20% by 2025 after belongings have grown by virtually 30% yearly for the reason that nation’s first Islamic financial institution was based in 2012. Nonetheless, the expansion in Islamic banking and monetary applied sciences’ potential to succeed in the unbanked is inadequate to extend SME lending to acceptable ranges. Oman ought to revitalize and enhance the capital of its Public Authority for SME Improvement (PASD). The Authority presently has capital of simply RO7 million — insufficient to attain the specified progress within the SME sector. A clearer division of labor between or, extra fairly, a merger of the equally named however separate PASD, SME growth fund, and the Oman Improvement Financial institution must be a short-term aim. All three have the goal of financing SMEs, although PASD has specialised applications to supply companies and loans for rural girls. Past that, variations between them are onerous to establish and justifying the continued existence of all three is troublesome. Then, transferring ahead, guaranteeing these funding our bodies cooperate slightly than compete with business banks is crucial.

II) Keeping track of the true property market

Round half 1,000,000 expatriates have left Oman for the reason that begin of 2020. This might result in a housing glut and subsequent market contraction, particularly with rising unemployment and suppressed shopping for energy because of inflation. The rising development of Omanis shopping for residences slightly than villas will create much less demand for housing, and each the IMF and the CBO have expressed worries about banks’ massive publicity to real-estate lending. Nonetheless, as a result of most mortgages in Oman are recourse loans — with debt repayments deducted straight from wages — the ripple results of sluggish or adverse progress within the real-estate market won’t create systemic dangers for the monetary sector. Each the well being of the real-estate market and the development sector, nonetheless, might be good indicators for the continued success of the diversification program.

III) Reassessing navy expenditures

The elephant within the room when discussing Omani spending and price saving is the protection funds. Oman is the world’s largest spender on its navy as a proportion of GDP, spending as a lot on its navy as the entire funds of the Oman Funding Authority. Protection spending in 2021 (RO2.9 billion) has already fallen drastically from 2020 (RO3.5 billion). That development has not been carried over into 2022, when protection spending remained on the 2021 degree. Whereas the underlying political financial system of this spending can’t be ignored (it’s, in impact, one other large social program), the chance price of a 3rd of the state’s funds being spent on ~200,000 energetic and reserve personnel is big. Reinvesting simply 10% of the annual protection funds into renewable power tasks would liberate sufficient money to fund Oman’s largest photo voltaic photovoltaic undertaking twice over.

Piotr Schulkes is a non-resident scholar on the Center East Institute (MEI). His analysis considerations the political financial system of the Gulf, specializing in the area’s monetary sectors. Earlier than MEI, Piotr labored in Egypt and Jordan and obtained his graduate diploma from the College of Oxford. The views expressed on this temporary are his personal.

Picture by HAITHAM ALSHUKAIRI/AFP by way of Getty Photographs.