Oman, with a small population of 2.5 million and a large area of 300,000 sq kms, is classified as an upper medium income developing country, with a per capita annual income averaging $7,000. The provision of public services (healthcare and education) and the physical infrastructure are among the best in the developing world.

During the past three decades, competent governance, optimal utilisation of hydrocarbons resources, sustained political stability, and greater inputs of external capital and technological transfers, as well as increasing public and private investments in the non-oil economy, have underpinned the nation’s robust development.

The economy, mainly fuelled by substantial increases in crude oil and more recently gas production, has expanded by over three-fold since 1980. Real Gross Domestic Product (GDP) growth has averaged seven per cent annually for over two decades, or a respectable 5.2 per cent a year between 1990 to 1999, among the highest in the Middle East and North Africa (MENA) region.

The main goals of the Central Bank of Oman (CBO) are preserving a strong currency and low inflation. Consumer price inflation averaged just 1.6 per cent a year over 1990-99, according to the International Monetary Fund (IMF) figures. Since January 1986 the Omani rial (OR) has been pegged to the US dollar, at a central rate of OR 0.385: $1; consequently, currency stability contains imported inflation, whilst price stability is conducive to investment and growth. The IMF has praised the country’s prudent economic policies.

Despite the pursuit of an extensive diversification programme since the early 1990s, trends in world oil markets exert powerful effects on the Sultanate’s development.

The petroleum industry remains the backbone of Oman’s economy, constituting an average of 70 to 80 per cent of government revenues; 75 per cent of total exports and 35 per cent of GDP. The new five-year plan (2001-2006) objectives will be to reduce Oman’s long-term vulnerabilities to oil, by further diversifying the nation’s income sources.

The new century brought with it a sense of optimism across the Gulf Cooperation Council (GCC) region. Business confidence remains bullish and domestic demand is robust across the Gulf. In Oman, firmer oil prices are boosting official finances, leading to increases in public sector consumption and investment, which in turn, provide fiscal stimulus for the non-oil economy. The state contracts are still an important source of economic growth, especially in the new industrial areas. Thus, a revival in fixed investment, mostly in hydrocarbons and downstream industries and a higher private consumption should underpin real GDP growth of four to five per cent this year and in 2001.

In contrast with large budget deficits in 1998 and 1999, equivalent to almost seven per cent of GDP, the fiscal position will show marked improvements this year and next. The government will under shoot its 2000 budget deficit forecast of OR349 million (based last January on a cautious oil price of $14.5 a barrel) since actual revenues will exceed initial projections of OR2,091 million. According to the National Economy Ministry, the deficit should decline by 30 per cent, or OR105 million. The government may achieve a balanced budget in 2001, providing oil revenues remain high.

The authorities are maintaining fiscal prudence despite the oil windfall since late-1999. Above-budgetary revenues, when oil prices exceed $15 a barrel, are deposited into a ?stabilisation reserve fund.’ Windfalls are also being used to develop new industrial infrastructure, and to repay the state’s outstanding debt to private contractors, rather than boosting re-current expenditure.

This year, a large trade surplus of $3.78 billion is anticipated, thanks to record oil exports projected to earn $7 billion, an increase of $2 billion over 1999. Consequently, the balance of payments should post its first surplus, estimated at $1.28 billion, since 1996. Non-oil exports comprising mainly liquefied natural gas and re-exports to the GCC region and markets of the former Soviet Union are also higher. Recent expansion in the re-export business is underpinned by the development of Port Salalah, which now ranks among the world’s top 20 container ports.

In contrast to other GCC countries, Oman’s international liquidity position remains weak. Last June, the CBO’s foreign exchange reserves were reported at a low of $592 million. However, higher oil revenues will help to rebuild depleted offshore assets, including the State General Reserves Fund and foreign reserves.

Foreign debt at $4.7 billion is manageable, representing 27 per cent of GDP. The bulk of external liabilities, some $3.87 billion are owed to international banks. Oman boasts an excellent debt-service record and foreign bankers are comfortable with Omani risk. The US credit-ratings agency, Standard & Poor’s (S&P) noted that: ?Debt burden remains manageable within the context of Oman’s natural resource endowment.?

Both Moody’s Investors Service and S&P have affirmed Oman’s investment-grade status as (Baa2) and (BBB-), on par with South Korea, an Organisation for Economic Cooperation and Development country. Moody’s noted that its rating ?balances oil dependency with an impressive track record of economic and social gains? whilst S&P say: ?general government financial assets exceed gross debt, budgetary performance has stabilised and hydrocarbons sector is competitive and well managed.?

PDO has implemented a $6 billion exploration and development programme. The Sultanate is pinning its future status as an energy producer on extensive utilisation of natural gas reserves

Oman is a medium-sized non-OPEC producer, with output averaging 816,000 barrels per day (b/d) over 1990-1999. Total production, of which over 90 per cent is exported, has steadily risen over the past decade, from 685,000 b/d in 1990 to current levels exceeding 910,000 b/d. The major producer is Petroleum Development Oman (PDO), which accounts for over 90 per cent of total output. Established in 1974, PDO is 60 per cent owned by the state, 34 per cent Royal Dutch Shell, four per cent by TotalFinaElf of France and two per cent by Partex of Portugal. The company has a target of 850,000 b/d by end-2000, compared to an average of 832,000 b/d in 1999.

There are over 95, mainly small, oilfields both onshore and offshore. Major fields are Yibal, Nimr, Fahud/Lekhwair, and Bahja/Rima, which together produced 75 per cent of the Sultanate’s oil in 1999.

Oil for export is transported by a pipeline to the port of Mina Al-Fahl, strategically situated outside the Strait of Hormuz.

The lifespan of proven oil reserves (assessed at 5.5 billion barrels), is limited to sustaining output for only 18 to 20 years. However the PDO has implemented a $6 billion exploration and development (E&D) programme, aimed at increasing recoverable reserves to 10 billion barrels over the long term, through the application of enhanced recovery techniques.

The quality of Omani light crude is eminently suitable for refining. But average production costs, at about $3.5 a barrel, are high by Middle Eastern standards, because of harsh geological conditions. Much oil is extracted from depths of 5,000 metres.

The Sultanate is pinning its future status as an energy producer on extensive utilisation of natural gas reserves. But so far actual proven reserves stand at only 18.15 trillion cubic feet (tcf), which remain insufficient to meet projected increases in industrial demand over the medium term. The PDO aims to boost total recoverable reserves to 29tcf over the next two to three years and rising to 40tcf by 2015.

The $2.5 billion Oman Liquefied Natural Gas (LNG) facility in Qalhat near Sur came on stream last April and its annual output capacity in 2001 will be 6.6 million tonnes of LNG. The plant is among the most technologically advanced in the Middle East and is 51 per cent owned by PDO, 30 per cent Royal Dutch Shell owned with the remainder held by other foreign energy companies, including TotalFinaElf, Korea LNG, Partex, Mitsubishi and Mitsui. Long-term contracts have been signed with Asian utilities. Korea Gas Corp will import 4.1 million tonnes (mn/t) annually over the next 25 years; Dabhol Power Company of India will import 1.6 mn/t for 20 years from late 2001 and Japan’s Osaka Gas will import 0.7 mn/t for 25 years. Gas is supplied by the PDO via a new 360 kilometre pipeline from Saih Rawl in the central region to Qalhat. LNG sales will increase non-oil exports by additional $1 billion a year from 2001.

The government hopes to utilise gas resources and infrastructure for laying the foundations for future industrial development. And increases in gas production will reduce domestic oil consumption in industry, thus allowing for higher volumes of oil exports.

Economic reforms aimed at promoting private-sector participation and a greater degree of diversification were implemented during the early 1990s, the results of which are slowly being felt. The private-sector now constitutes 40 per cent of GDP, and total contribution of private capital to gross domestic investment is projected at 53 per cent by end-2000. Non-oil sectors achieved a nominal growth of around six per cent a year between 1997-99. Further robust growth is projected for this year and for 2001. Successful completion of the LNG project (launched in 1994) has enhanced Oman’s credibility in the international energy markets.

The government is actively encouraging private investment, both domestic and foreign, in order to mobilise new resources for job creation programmes and upgrading basic infrastructure, especially public utilities. Even if world oil prices remain strong for the next three years, public expenditure alone cannot sustain robust GDP growth. An expanding indigenous population is exerting pressures on job creation and services. Power demand is projected to rise from 1,863 megawatt (mw) in 2000 to 2,761mw by 2010.

A comprehensive privatisation strategy will be among the principal objectives of the new 2001-06 development plan. Muscat is pursuing an innovative programme, covering public utilities, power, water, telecoms and airports.

The government advised by Merrill Lynch is expected to divest a 65 per cent stake in the Oman Telecommunications Company, the sole national operator by the end of the year.

Muscat has recently approved a proposal to hive-off the power sector, recommended by ABN-Amro. New independent power projects (IPPs), on a private build-own-operate (BOO) basis are planned and 100 per cent foreign ownership will be permitted, with a condition to sell 35 per cent stakes to Omani nationals within an agreed time-frame. Private investment in the power sector can save the state OR750 million over a decade and the funds could be devoted to improving public services.

Also in the pipeline for future sell-offs are the National Transport Company, Oman Cement Company, Oman Flours Mills and Oman Mining

In the air transport sector, Seeb International Airport, Oman Aviation Services and the government’s shares in Gulf Air will be privatised. Advised by Credit Suisse First Boston, a strategic investor for Seeb Airport (Muscat) will be selected. As part of the deal the successful bidder must build a new terminal costing OR96 million by 2005 to ensure that the airport (which in 1999 handled 2.8 million passengers) meets international ?B’ level standards.

Also in the pipeline for future sell-offs are the National Transport Company, Oman Cement Company, Oman Flours Mills and Oman Mining.

Oman has fulfilled the World Trade Organisation’s (WTO) membership criteria and will become a full member in November. Since the mid-1990s the Sultanate has deregulated its economy, reduced external tariffs, abolished import fees and relaxed controls on foreign investment. It is now obliged to liberalise its banking, energy and telecoms sectors within an agreed time frame.

Accession to the WTO will integrate Oman into a globalised trading system, offer new markets for non-oil exports, and modernise local service industries, as well as encourage foreign direct investment (FDI). But competitive pressures on local industries will increase because of further cuts in import duties.

Oman’s FDI regime is now the most liberal in the Gulf. A new code will allow 70 per cent foreign ownership of local businesses (compared to previous limits of 49 per cent). And in some cases, 100 per cent foreign equity will be permitted. Restrictions on foreign portfolio investment were abolished back in 1995. Corporate tax laws will be revised, with the aim of offering ?equal treatments’ to national and foreign companies. Alongside its sound macroeconomic fundamentals, Oman boasts one of the most stable business environments in the MENA region.

Oman is on course for achieving the main objectives of its long-term development plans. VISION 2020 seeks far-reaching changes to existing industrial structures, thereby fostering a vibrant diversified economy, capable of competing in global markets during the post-oil-era.

The prime aims of diversification strategy are:

• Reducing oil’s dominant share of GDP to below 20 per cent, while boosting the respective share of gas to 10 per, cent through aggressive exploration and production of LNG, by 2020.



• Increasing the manufacturing and mining sector contributions to 15 per cent and two per cent of GDP respectively by 2020. The industries targeted for development are petrochemicals, oil refining, aluminium smelting, fertilisers, light engineering and food processing. The mining industry has untapped potential, as Oman possesses mineral resources, such as coal, chromite, copper, lead, iron, zinc, nickel, and even gold and silver.
  
  
• Encouraging private-sector investments, through more deregulations and privatisation.
  
  
• Promoting greater ?Omanisation’ of the labour force through enhancing skills in engineering/technical fields, hence improving the nation’s competitiveness. Job creation in the private sector is a major challenge, since 50 per cent of the indigenous population is below the age of 20.
  
  

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