Oman sits in a dangerous neighborhood: Two petrochemical tankers were attacked in the Gulf of Oman in June, following attacks on four tankers in May. Meanwhile, the war in neighboring Yemen seems to be sparking tribal divisions and popular discontent in Mahra governorate, long considered to be squarely in Oman’s sphere of influence. Amid such potential instability, Oman has historically maintained positive relations with a wide range of regional players, allowing it to play a unique role as an intermediary and arbiter in the broader Middle East.
Oman’s unique position could take on added importance in de-escalating tensions, but the country faces significant and potentially urgent problems that could affect this role. Oman is confronting steeply mounting debt and a series of deficits that could force it to consider looking to its neighbors for an economic aid package. Despite the depiction of Oman as a calm Middle Eastern Switzerland, regional tensions pose genuine security threats. The aging Sultan Qaboos bin Said – the popular leader who carefully navigates controversial relations with Iran, Qatar, and Israel and has inspired decades of political confidence at home – has not publicly designated a successor. As fiscal constraints increase, tensions in the Gulf rise, and uncertainties surrounding political transition loom, Oman’s role in the Gulf Arab region could come under pressure, and any change could shape the contours of regional dynamics in the coming years.
Oman is encountering numerous fiscal challenges. The International Monetary Fund lowered Oman’s 2019 economic growth forecast from a modest 1.1 percent to just 0.3 percent. In April, Standard & Poor’s Global Ratings cut its outlook on Oman from stable to negative, owing to a lack of substantial fiscal measures to curtail government deficits. Oman expects the 2019 budget deficit to reach $7.27 billion – approximately 9 percent of gross domestic product. Gross general government debt increased from below 5 percent of GDP in 2014 to nearly 50 percent in 2018; estimates suggest this debt could reach as high as 64 percent by 2022. Year-on-year fiscal deficits and reduced government revenue due to a period of lower oil prices have made the country increasingly reliant upon external financing.
Economic aid and development funding are important levers of external influence for the wealthiest Gulf Arab states. In 2018, Saudi Arabia, the United Arab Emirates, and Kuwait pledged $10 billion to Bahrain. Qatar pledged $15 billion to shore up Turkey’s beleaguered banking industry, although it is unclear how much, if any, of this funding has materialized. Bahrain also received a $10 billion development aid package from GCC states after the 2011 protests, but Oman refused most of the funding from a similar support package. With the new financial constraints Oman is facing, the sultanate may need to consider accepting a similar economic package in the future, although that would depend on what kind of strings might be attached to the offer.
Oman is trying to avoid financial dependence, but its fiscal maneuverability is limited. The Central Bank of Oman possesses approximately $17.4 billion in gross international reserves, a rather small sum given the country’s consistent budget deficits, and an estimated $18 billion worth of assets are in the country’s State General Reserve Fund. The Omani government also hired a group of international banks for a debt sale – the first international issuance of 2019 – that could reach $2 billion. Although Oman has not yet imposed a value-added tax, which all GCC states have committed to implement, the country introduced an excise tax on tobacco, alcohol, carbonated and energy drinks, and pork in June to help balance the budget. However, the expected revenue of $260 million per year will barely make a dent in the deficit. In addition to local and foreign borrowing, the government can resort to asset sales, but these one-off initiatives represent a fiscal Band-Aid more than a sustainable solution. On July 1, Qaboos issued four royal decrees – including a Foreign Capital Investment Law – to attract new investors.
The region’s security issues may hamper efforts to make Oman a more attractive investment hub. The May attacks on oil tankers off the coast of Fujairah and the June attacks in the Gulf of Oman occurred in the sultanate’s backyard. These maritime security concerns threaten substantial state and private investments in port and free zone projects in Sohar and – to a lesser degree – Duqm. In late June, the Sohar Port and Freezone, which is just 55 miles south of Fujairah, announced plans to construct four new hydrocarbon and petrochemical plants, which aim to attract approximately $2.5 billion in investments.
Oman’s governorate of Musandam offers premier access to one of the world’s most vital commercial waterways, but the territory remains an area of concern for Omanis. The small exclave is surrounded by UAE territory and juts into the Strait of Hormuz, permitting not only influence over commercial affairs in the strait but also providing a strategic base for military operations. Allegations that Gulf Arab neighbors have attempted to purchase influence in Musandam and other strategic Omani locations through real estate transactions are long standing. A 2017 incident wherein the Louvre museum in Abu Dhabi displayed a map of Musandam as a UAE territory rekindled fears over Emirati territorial ambitions. In 2018, Qaboos passed a royal decree prohibiting foreigners from owning land in Musandam and other strategic locations in the country.
Oman’s southern region also confronts security threats. A fragile equilibrium governs interactions along the border between the Omani governorate of Dhofar and the Yemeni governorate of Mahra. Indirect competition between Saudi Arabia, the UAE, and Oman has led to tribal divisions and popular discontent on the Yemeni side of the border. The increasing tension between armed tribal groups in Mahra heightens the risks that regional rivalries may spill into Oman.
Follow the Leader
In stark contrast to other Gulf Arab states, there is no clear succession plan in Oman. Qaboos is believed to have placed sealed envelopes designating his successor in royal palaces in Muscat and Salalah, but many observers expect that a council of Qaboos’ relatives will ultimately determine the next sultan. And the stakes are high. On the domestic front, Oman has struggled to address persistent unemployment challenges: The rate of youth unemployment is 49 percent, according to the World Bank. While the government under Qaboos has long utilized hydrocarbon revenue to minimize socioeconomic conflict and develop expansive infrastructure, the country’s Vision 2040 reflects an acknowledgment that future economic growth must come from non-oil sectors. The next leader confronts the complicated task of building a diversified economy that provides more jobs for Omani citizens and remains globally competitive.
The new sultan will also be thrust into a fractured GCC, with young and ambitious leaders in Saudi Arabia, the UAE, and Qatar driving regional agendas. These individuals would welcome a long-term ally to support their respective visions for the region. How Oman’s leadership navigates the reconfiguration of regional alliances will determine the viability of Oman’s distinct status within the GCC.
The Future of the GCC
Oman follows a singular regional approach, of which its warm relations with Iran constitute a visible pillar. For example, Oman and Iran signed a defense cooperation agreement in 2010 and, following six days of joint military commission meetings and naval exercises in April 2019, the two countries signed a memorandum of understanding to further boost military cooperation. Saudi Arabia and the UAE have long permitted Oman to remain a generally responsive if independent-minded member of the GCC. Such an approach permitted Oman to serve what its neighbors often saw as a useful role as a hub for regional mediation and outreach, as has been the case with the Yemen conflict.
Overt attempts to bring Oman more squarely within the fold of the Saudi-Emirati bloc may create additional alignment on foreign policy and economic integration. However, a definite move would reduce the flexibility afforded by Oman’s style of negotiation and its reputation as a neutral arbitrator in the Gulf. In the estimation of Oman’s neighbors, immediate fiscal, security, and political concerns surrounding Oman’s position within the broader Gulf region may outweigh the longer-term benefits of maintaining Oman’s outward-looking, mediatory status quo. How Oman addresses these challenges in the coming years will serve as an informative bellwether of regional dynamics and relations among Gulf Arab actors.