By: Meir Javedanfar
The Omani economy is one of the lesser known success stories of the Persian Gulf region and the Arab world. Although Oman does not enjoy the same levels of oil and total economic wealth as its neighbours Saudi Arabia and UAE, nevertheless the progress made by the Omani economy against challenges and relative lack of resources (compared to its neighbours) is still very impressive.
The first part of this meepas analysis will address the background progress and growth engines of the economy of Oman. The second part of this analysis will forecast the challenges and advancement of the Omani economy.
The foundation of Oman's modern economy were built in 1970 after the rise of the country's current ruler Sultan Qabus to power. Facing relative poverty at home and stiff economic competition from its richer Gulf neighbour, the Sultan embarked on a reform plan to improve Oman's economic status.
The growth engine of the reform plan was mainly based on export of oil, followed by agriculture and trade. However after its initial start the Sultan's economic plans faced immediate challenges the biggest of which was the military insurgency campaign by rebels in the Dhofar region of southern Oman near the Yemeni border. This conflict used up a sizable part of Oman's scarce economic resources and eat into the country's small foreign exchange reserves. Furthermore it also reduced much needed foreign investment in the Omani economy whilst reducing income from tourism. Therefore it wasn't until the termination of the conflict in 1975 when the Omani economy started to grow on a gradual basis.
As of 1975 the Omani economy's fortune was mostly dependent on the price of oil in the international market. Regional events also had an impact on the Omani economy. Thirty years later in 2005 oil still plays a major part in Oman's economy, however its overall impact is changing. This is due to the fact that according to a number of estimates Oman's oil resources will be depleted by the year 2022. As a result the Omani government has embarked on its “vision 2020” plan which aims to diversify the economy away to a level whereby the year 2020 the share of the oil sector on the country's GDP will only be 9%. In this case increase in export of non oil products is expected to make up for absence of income from oil.
So far the results have been promising. Recent figures show that Oman's non oil exports grew by 38% in value in the year 2003-04.
The fact that Oman does not have the same amount of oil resources as its neighbours, whilst the extraction costs for its oil are higher (due to complex extraction processes) means that its economic achievements deserve more recommendation due to the challenges which they have faced. In this case the Omani government's forward planning and continued focused investment deserve much of the credit. Omani government investment in the economy includes continued investment in Oman's infrastructure, such its roads, airports and especially its sea ports. This investment has made transportation inside and outside Oman a more efficient process and has thus produced a positive impact on the level of investment, trade and economic growth in Oman. Furthermore continued investment in Oman's ports have given a boost to Oman's shipping, gas exports and goods re-export trade.
At the same time the free trade areas created in ports such as Salalah have made the goods re-export industry and the free trade sector one of the major non oil areas of growth in the Omani economy.
Major investments have also been made in the gas sector. This is due to the fact that Oman's gas resources are bigger than that of its oil resources whilst its gas exports are not subject to quotas. The abundance of this resource, plus Oman's strategic position at the foot of the Arabian sea (making it geographically closer to its far east clients) have made the export of this commodity one of the lynchpins of the government's Vision 2020 economic diversification plan. So much so that the Omani government has made hefty investments in its sea ports infrastructure in order to enable super tankers to carry its gas in a liquefied form (LNG) to its customers. An example includes the 2004 initiated project to build a $700 million LNG train in Qalhat in the Sharqiya region.
Tourism also plays a large part in the Omani government's diversification plans. As a result investment in this sector has been made by the Omani government itself, whilst outside investors have been encouraged to participate. Recent foreign participants include Egypt's Orascom Company which through a joint venture with the Omani government is about to invest close to $70 million in the development of three tourism resorts in Oman. Other investors include Dubai International Properties which has just won an $820 million project to construct a luxury integrated lifestyle resort in Oman.
The manufacturing sector is another player in the vision 2020 diversification plan. The Omani government has focused on light manufacturing and manufacture of household goods as one of the main areas of growth.
Growth of the industrial sector and industrial exports are also planned drivers of the future Omani economy. A major boost in this area came in early April 2005 when the US construction giant Bechtel won the contract for a $2bn aluminium smelter project in Oman. Oman's industrial sector has also attracted suppliers and investors from the Middle East, Europe and North American countries.
Oman's business friendly atmosphere and free trade agreements are other responsible factors for the growth of its economy. With real GDP growth figure of 3.6% projected for the year 2005 by the IMF, further good news is expected for the year 2006 when the real GDP of Oman is expected to increase by 1.7% to reach a total figure of 5.3%. The forecasted growth is also partly due to relatively low levels of corruption in Oman (ranked as 29 in Transparency International's corruption league). The freedom to do business without government intervention (Oman was classed as mostly free to do business by the International Heritage Foundation survey for 2005) adds to the attraction of the country as an investment destination. Furthermore Oman's entry into the World Trade Organisation (WTO) in the year 2000 and its Customs Union agreement with its GCC neighbours have further improved trade and investment conditions in the country. Meanwhile the privatisation of parts of the economy (eg. the Telecommunication sector) has provided more opportunities for participation and contribution of the private sector to Oman's economy.
Further economic improvements and boost in trade are expected when Oman signs Free Trade Agreements with the US and with the EU which are both expected to be in place by 2007. This is in addition to Oman's plans to join the GCC single currency and GCC single market which is expected to be formed by 2010.
The Omani economy is on the right track to growth and diversification. This is thanks to focused government planning and recent high oil prices which have contributed to the success of the Omani government's plans for investment in the non oil sector. However such success is not guaranteed forever as there are still challenges ahead. The next section of this analysis will address the expected challenges, and will asses their impact on the future of Oman's economy.
End of Analysis
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