Along with most of the GCC countries, Oman was hit when oil prices began to drop significantly over the last three years. But as many of its neighboring states have also done, the country is using the period of transformation to stimulate investment in non-oil industries and create jobs for nationals for a more stable future.
Even before the recent slump in oil prices that sent shock waves reverberating across the Middle East’s economies, the sultanate of Oman was already deep into plans to diversify. Despite not being as rich in hydrocarbons as its neighboring countries, according to Deloitte in 2013 the oil and gas sector was contributing over 48% to Oman’s GDP, worth $37.8 billion. As prices continue to fluctuate, so does Oman’s dependency on oil revenues. Reports by the Oxford Business Group say that hydrocarbons contributed over 46% to GDP in 2014, which dropped to 27.1% in 2016 when oil prices were at their lowest, and then raised again to 32.5% in the first half of 2017 as prices recovered.
However, even with healthy hydrocarbon revenues, the government had long ago recognized a need to prepare for its long-term future. With a focus on building non-oil revenue, bolstering private sector contributions, and a need to empower the Omani youth and rely less on expats, Oman’s vision for 2020 was announced over 20 years ago in 1995. This was already phase two, with phase one having been carried out between 1970 and 1995.
Vision 2020 laid out detailed plans with the aim of: ensuring economic and financial stability; reshaping the role of government in the economy and broadening private sector participation; diversifying the economic base and sources of national income; globalizing the Omani economy; and upgrading the skills of the Omani workforce and developing human resources.
Anyone unsure of Oman’s commitment to its Omani workforce was left in no doubt in October 2017, when Oman’s Council of Ministers announced in a statement that it planned to provide jobs for 25,000 Omanis in both the public and private sectors, starting from December of the same year. The statement also made it clear that there would be consequences if companies did not follow suit. “There are actions to be taken against the establishments that do not cooperate with the efforts of the government to support employment and Omanization policies,” it read. In January this year the government put in place a six-month ban on hiring expats in 10 major industries: information systems, sales, marketing, administration, human resources, insurance, media, airports, engineering and technical professions.
Major infrastructure developments are also underway in key sectors. The Mina Al Sultan Qaboos project in Muscat’s historical Port Sultan Qaboos is a $1 billion hospitality and residential development spanning 64-hectares. With phase one, worth $390 million, launching in 2016, the project is set to complete in 2020, with DAMAC international signed in June 2017 as the resort’s major developer. Oman’s giant $16 billion Khazzan gas field is also entering a second phase of development thanks to further investment from BP. Phase one began production in September 2017, with an estimated 1 billion standard cubic feet of gas expected per day by the end of the same year. Phase two expects to increase that to 1.5 billion per day. BP currently owns 60% of the project, with the Oman Oil Company Exploration and Production owning the remaining 40%.
As Oman continues to move forward in its plans to stimulate growth and strengthen its economy, we spoke to Anis Sadek, Office Managing Partner, and Ahmed Al Qassabi, Partner at Deloitte Oman to find out more about the sultanate’s prospects and plans for the future.
Reports suggest that Oman’s economy is set to grow this year—how well has the country fared the oil crash and what are its future prospects?
Oman continues to recognize the need to reduce its continued dependency on oil revenues, which has been highlighted by the recent oil price reduction. This has led to tighter budgets and reductions in the cash injections by government into the economy, which in turn negatively impacted on the private sector, particularly the construction industry. Nevertheless, Oman appears to have weathered the storm and has been successful in raising funds in the international markets. Prospects are good if recent oil prices hold steady, diversification measures take root and steps to reduce the running costs of the public sector are successful.
What are the key industries Oman must now invest in to stimulate growth?
The government, through the National Program for Enhancing Economic Diversification (Tanfeeth) and the Supreme Planning Council, has identified three key focus sectors: manufacturing, transport and logistics, and tourism. Tourism has always been the go-to alternate industry to oil and gas. In addition, the country has the opportunity to leverage its strategic position between Asia and the sea routes to Europe and Africa to further exploit logistics capabilities. A comprehensive plan has been developed and needs to be well-managed, actively supported and effectively rolled out.
What will be the likely impact of VAT, due to be implemented by mid-2019?
Although the introduction of VAT may well be seen by some in the SME sector as a cumbersome further government compliance requirement, with a potential negative impact on margins, the reasons for its introduction must be remembered. Governments in the GCC region need to increase and diversify their revenue streams. The impact on funds available for government capital spending will be positive and it is not expected that VAT implementation will have anything other than an initial, temporary inflationary effect. The overall longer-term impact of VAT, as a consumption tax with ease of collection, and increase in non-oil government revenues is likely to be positive on Oman’s economy.
However, as businesses act as tax collectors for the government it is hoped that they will try and ensure that the administrative burden will be minimized and that the government will issue the law, executive regulations and guidance material in good time to allow businesses time to plan and act accordingly. Careful consideration also needs to be given to the transitional period and the rules and how they can impact business and existing contracts. It is also hoped that the Oman government and the remaining GCC states will learn from the experiences in KSA and the U.A.E., both good and bad.
Oman is coming down hard on the employment of expats—what are the short, mid and long-term effects that is this likely to have on the economy?
Given the demographic of Oman and the growing need for job creation there is no doubt that the longer-term replacement of expats with Omani nationals must be a strategic initiative taken by the government to promote the hiring of Omanis as a first option for private sector employers. However, this initiative requires careful management to avoid negatively impacting the economic growth that is also required for job creation. The Ministry of Manpower appears to recognize this and continues to issue work permits to employers that have met the Omanization requirements set and have developed clear plans to provide training and increase opportunities for Omani employment.
In the short and medium term what needs to be managed and carefully avoided is an over-reliance on Omanization quotas for the private sector that would result in thrusting inexperienced Omanis into roles for which they have not received the required training or coaching.
What are the potential pitfalls of Omanization? Is the local workforce enough to continue developing the country?
Clearly well-defined and managed Omanization initiatives are critical and must remain on the government’s agenda. Industries such as oil and gas and banking have already achieved a high level of Omanization ratio with well qualified and experienced Omanis.
Omanization policy should support the need to develop Oman as an attractive and welcoming investment destination with a growing pool of available, cost-effective and talented labor-force.