There is precious little time for rest this summer in Omani economic policymaking circles. The government approved a $5.2 billion investment fund, the Oman Future Fund, to support diversified economic growth. Moreover, the government announced plans for a new development project, Sultan Haitham City, on the outskirts of Muscat, where as many as 100,000 low-income citizens are expected to receive housing and other essential services. This dual announcement neatly encapsulates the current position of Omani economic policymakers: growing confidence alongside a recognition of genuine constraints.

Oman is getting its economic house in order, creating a stronger fiscal position, establishing greater resilience to energy price volatility, and building a more attractive investment destination over the near term. Sound economic policymaking and reform progress deserve praise but do not necessarily put Oman on the path to becoming a regional economic superstar. The sultanate’s economy faces macroeconomic headwinds, structural challenges, and rising regional competition. Thus, the longer-term outlook for Oman’s economy remains uncertain.

Enjoying Tailwinds

For now, there are plenty of reasons for optimism. Sultan Haitham bin Tariq al-Said inherited a state in urgent need of reform amid a coronavirus-induced economic downturn. The cumulative effect of year-on-year fiscal deficits, high government debt levels, uncertain demand for sovereign bonds, and a bloated public sector created a tenuous economic situation. Yet Sultan Haitham’s government established a roadmap for and prioritization of economic reforms – and it has delivered.

The Medium Term Fiscal Plan for 2020-24 offers a clear path toward greater fiscal sustainability. Oman’s overall fiscal deficit averaged 12.8% of gross domestic product from 2015-20, while the budget deficit reached approximately 3.6% in 2021. Oman enjoyed a budget surplus of approximately 5% of GDP in 2022 – the country’s first surplus since 2013 – and is expected to post a minor surplus in 2023. Although the fiscal breakeven price of oil stood at an estimated $77 per barrel in 2022, officials see that figure declining to $67 by 2025 in light of ongoing fiscal consolidation measures.

New taxes have increased non-oil revenue streams. Oman rolled out its value-added tax in April 2021 – later than the United Arab Emirates, Saudi Arabia, and Bahrain but before Qatar and Kuwait, which have still yet to do so. Media reports suggest that Oman is “on the cusp” of introducing a personal income tax, but such a tax will likely apply only to the country’s wealthiest citizens and residents, if it eventually materializes.

Oman’s general government gross debt to GDP ratio – which skyrocketed from 4% in 2014 to around 70% in 2020 – dropped to 40% in 2022, down from 61% in 2021. Rapid GDP growth owing to high energy prices explains some of the movement in these figures, but reducing government debt is now a policy priority. The Oman Investment Authority has worked systematically to consolidate the country’s state-owned entity sector, which is a major contributor to the country’s overall government debt burden, and reduce inefficiencies and waste.

Demonstrable progress on sustainable spending, diversifying public sector revenue sources, and reducing government debt have made Oman a “darling of debt markets,” according to one Middle East-focused financial analyst who spoke off the record. In April, both Fitch Ratings and S&P Global Ratings revised Oman’s outlook to positive. Oman issued development bonds – the instruments that finance development projects in the country’s five-year development plans – earlier in the year, raising approximately $195 million.

Of course, higher energy prices played an important role in these positive economic indicators. The price of Brent crude oil jumped from $70.89 per barrel in 2021 to $100.94/bbl in 2022, and the U.S. Energy Information Administration forecasts that prices will settle around $78.65/bbl in 2023 and $74.47/bbl in 2024. And, with that, Oman’s real GDP growth rate will slow from 4.3% in 2022 to below 2% in 2023. This growth trajectory tracks with oil price movements because government finances and – to a lesser degree – the broader economy remain closely linked to the oil and gas sector. Nevertheless, Oman’s government officials are serving as responsible stewards of the most recent windfall from energy exports.

Despite a deceleration of growth in 2023, the International Monetary Fund expects growth to tick upward to 5.2% in 2024, following significant investments in hydrogen and renewables. Oman’s aspiration to “become one of the largest green hydrogen producers and exporters globally,” has generated substantial interest from international energy companies and investors. The Omani hydrogen company Hydrom, a subsidiary of Energy Development Oman, has signed agreements with developers for large-scale, integrated green hydrogen projects valued at tens of billions of dollars over the next several years. Meanwhile, the Oman Water and Power Procurement Company is pushing ahead with major solar power and wind projects.

Battling Headwinds

It will not all be smooth sailing over the coming years. Addressing employment-related concerns remains a persistent challenge for the Omani government. Precise unemployment data is difficult to attain: The World Bank estimates total unemployment in the country at 2.3% in 2022, while another World Bank figure from 2019 cites Omani youth unemployment at 49%. A more accurate rate for countrywide Omani youth unemployment likely rests somewhere around 15% to 17%, according to various estimates, and is probably much higher in less-developed regions outside of Muscat. Employment-related protests – especially in Sohar – have turned violent in recent years.

In theory, the Omani state possesses various options for substantially increasing non-oil revenue streams through aggressive electricity and water subsidy reductions or hiking taxes and fees. In practice, the government will adopt a very cautious approach to any reform effort that directly impacts the economic well-being of citizens and businesses. In March 2022, for example, Sultan Haitham directed government authorities to reduce the costs of foreign worker permit fees for businesses by as much as 85%.

Beyond cutting permitting and licensing fees, demographics constrain the Omani government’s ability to offer attractive incentives to private firms and investors. Small ratios of national citizens to total residents in the UAE and Qatar enable the creation of comparatively flexible labor policies. Yet Omanis still constitute a majority of the country’s population, requiring stricter workforce nationalization policies to safeguard job opportunities for citizens. Oman did launch five- and 10-year renewable visas and began allowing expatriate residents to own residential real estate. However, these policies also exist in neighboring states and therefore are not important differentiators for the Omani economic landscape.

Oman does not enjoy massive sovereign wealth holdings, which regional governments have used effectively to help insulate citizens from reforms, stimulate their domestic economies, and form high-profile investment partnerships on the global stage. The Oman Investment Authority oversees approximately $41 billion in assets under management. This pool of sovereign wealth is significantly smaller than that of sovereign wealth funds in neighboring countries: $650 billion in the Saudi Public Investment Fund, $750 billion in the Kuwait Investment Authority, and more than $1.2 trillion in the Abu Dhabi Investment Authority, Mubadala, and ADQ in the UAE.

A Small Fish in the Gulf

Oman is ultimately a small market, and the government possesses limited fiscal capacities. This makes it difficult to envision rapid growth in existing and nascent economic areas of focus. Oman continues to serve as a largely niche tourism destination, and the country’s state-led technology initiatives are slow moving. The Omani logistics sector has promise, given geographic advantages for maritime commerce and an impressive roster of anchor clients operating in economic zones and ports. However, the sector has a history of unfulfilled investment commitments, especially from Chinese and Iranian firms. Omani officials are leveraging their economic zones to enhance linkages to larger regional economies like that of Saudi Arabia – part of a broader strategy to make Oman a more attractive trade and investment destination.

Yet neighboring Saudi Arabia, the UAE, and Qatar are operating on a different level. Saudi Arabia is pushing its state-led development agenda ahead full throttle, spending billions of dollars seemingly in every conceivable direction. Saudi Arabia’s Public Investment Fund acquired controlling stakes in four leading Saudi football, or soccer, clubs, including where Cristiano Ronaldo plays, and the PGA Tour agreed to merge with Public Investment Fund-backed LIV Golf. The UAE is racing to push the developmental envelope ever further, partially to mitigate against growing global interest in the evolving Saudi economy. Expo 2020 was held in Dubai, and the emirate will also host COP28 at the end of 2023. Qatar has invested heavily in niche economic domains, like emerging technologies, as well as major sporting events, such as the 2022 FIFA World Cup. By comparison, Oman appears to be playing in an entirely different league.

Oman cannot compete with most neighboring Gulf states in terms of economic heft, financial resources, or international prominence. But the country can differentiate itself from regional counterparts by adopting a measured, consistent approach to economic policymaking as well as accepting modest progress. While this trajectory may not transform Oman into a premier global business hub, it may reveal that profligate spending is not necessarily the best foundation for a sustainable economic future.