Recent high-level U.S. diplomatic activity seems aimed at addressing a sense of grievance Gulf capitals harbor.
The death of Sultan Qaboos bin Said marks the end of his 5-decade rule over Oman. Haitham bin Tariq al-Said, a cousin of Qaboos, was named as his successor in a smooth transition of power. Qaboos’ successor assumes leadership at a time of pronounced regional tension, and his country occupies a precarious position within a fractured Gulf Cooperation Council. Yet responsibility for Oman’s socioeconomic challenges falls entirely upon the shoulders of the new sultan. It is in the domestic politics and economic policy realm where the ultimate success of Haitham’s leadership will be determined.
Although the royal court announced that Qaboos was in “stable condition,” throughout December 2019, it was common to hear Omanis openly discuss the post-Qaboos era. Many Omanis and analysts believed that Haitham or one of his brothers was a front runner to succeed Qaboos, but succession remained unclear. Qaboos purposely distanced royal family members from spheres of power during his rule, depriving his successor of deep experience governing the country.
In his previous positions, the new sultan served as minister of culture and heritage and undersecretary for the Ministry of Foreign Affairs. In fact, in his first speech as sultan on January 11, Haitham promised to continue Muscat’s policy of peaceful coexistence with neighboring countries. Haitham also led the committee overseeing the Oman 2040 vision – a broad strategy that lays out the country’s national priorities over the next two decades. He has links to the country’s business elite and has demonstrated an interest in commercial affairs. This experience will be beneficial as the sultan turns to the country’s mounting economic challenges.
It’s the Economy, Haitham
Qaboos is widely credited for ushering in an unprecedented level of economic development and infrastructural connectivity in Oman. The country was severely underdeveloped during the contentious leadership of Qaboos’ father, Said bin Taimur al-Said. But in the final years of Qaboos’ reign, many Omanis privately worried that the ailing sultan was unable to implement controversial economic reforms. After decades of government-led economic diversification initiatives, the oil and gas sector still accounts for more than 70% of government revenue. When oil prices collapsed in 2014-15, this hydrocarbon dependency strained government finances.
Despite limited fiscal resources, the Omani government has continued to spend beyond its means. Year-on-year budget deficits have resulted in soaring government debt, which reached an estimated $50 billion in 2019, up from $4 billion in 2014. Gross general government debt jumped from below 5% of gross domestic product to nearly 50% in just four years; estimates suggest this debt could reach as high as 64% by 2022. Oman’s economic policymakers also face increasing pressure to preserve the country’s currency peg, according to Ziad Daoud, Bloomberg’s chief Middle East economist.
The country has drawn heavily on its sovereign wealth fund, the State General Reserve Fund, to help finance fiscal deficits. An estimated $18 billion worth of assets are in the country’s State General Reserve Fund, and the Central Bank of Oman has approximately $17.4 billion in gross international reserves, a rather small sum given the country’s consistent budget deficits. Major rating agencies have rated Omani bonds as “junk,” citing the dim prospects for fiscal consolidation. As the new sultan assumes his duties, the likelihood of long overdue fiscal consolidation remains remote, since generous cash transfers, bonuses for government employees, and the creation of government jobs tend to accompany leadership transitions in the region.
Other economic indicators paint a mixed picture. Unemployment rates remain stubbornly high, especially among young Omanis. The World Bank estimates Omani youth unemployment at 49%. Growth and foreign direct investment have not yet achieved the steady, sustained progress needed to boost investor confidence. The Omani economy contracted by 1.9% in nominal terms during the first half of 2019, owing to a decline in nonpetroleum industrial activities and the service sector. Oman’s central bank forecasted 1.1% growth in 2019, while the World Bank’s growth estimate was 0.0%. The World Bank, though, expects growth to rebound to 3.7% and 4.3% in 2020 and 2021, respectively. FDI inflows, which hovered between $2.3 billion in 2016 and $2.9 billion in 2017, spiked to $6.4 billion in 2018. As in other Gulf Arab states, oil and gas investments account for much of the country’s inward FDI.
Prioritizing Economic Reform
Critical domestic and economic challenges will determine the early success of the new leader. Haitham must prioritize three key components of economic policy: efficient spending, quality investments, and high-impact reforms.
Oman’s budget for 2020 projects a 2% increase in spending compared to 2019 and a modest reduction in the budget deficit. Unlike neighboring governments, such as Dubai’s, which increased its 2020 expenditures by 17%, the Omani government confronts substantial fiscal constraints. The government plans to finance 80% of the expected $6.5 billion deficit through foreign and domestic borrowing, while reserves will fill the remaining gap in spending.
Oil and gas revenue constitutes 72% of government revenue, and the 2020 budget assumes a conservative oil price of $58 per barrel. Rising oil prices owing to geopolitical risk may temporarily boost government coffers and provide a short-term fiscal cushion. Oil prices spiked 5% after the January 3 attack that killed Iran’s Islamic Revolutionary Guard Corps commander, Qassim Suleimani, in Iraq. Futures for Brent crude briefly exceeded $70/bbl on January 6 – a price threshold not reached since September 16, 2019. Following Iran’s January 8 retaliatory attack on Iraqi bases housing U.S. forces, Brent briefly peaked at $71.75/bbl, but futures dropped to $65.65/bbl shortly thereafter. Yet the subdued global market reaction to Gulf tensions suggests that a financial windfall from sustained high oil prices is unlikely.
Therefore, Oman’s longer-term spending patterns must become more efficient. After social spending, which constitutes around 40% of the budget, the government plans to pour $13.8 billion (approximately 40% of the budget) into investment projects with high employment and growth potential. This investment spending focuses on five “promising” sectoral clusters – transportation and logistics, manufacturing, tourism, fisheries, and mining – emphasized in the country’s Five-Year Development Plan (2016-2020) and broadly aligned with the objectives of Oman 2040. State-owned enterprises, such as the Oman Global Logistics Group and Oman Tourism Development Company, will facilitate investments into these sectors.
These sectors face stiff regional competition from neighboring states with deeper pockets. The United Arab Emirates is the Gulf’s de facto logistics hub, and Qatar is spending heavily to outfit its airport and port free zones with cutting-edge logistics technology. Oman, on the other hand, highlights the comparative advantage of its ports and free zones being located further away from the tensions emanating from the Strait of Hormuz.
Oman may struggle to compete with its Gulf neighbors in high-priority sectors, such as tourism. Saudi Arabia is aggressively promoting its tourism industry, and, in September 2019, the kingdom introduced an e-visa program allowing citizens from 49 countries to apply for tourist visas that will be valid for three years. The UAE, Bahrain, and Qatar also remain popular destinations for global travelers. Oman may serve as a second stop for Gulf-bound tourists interested in niche activities, such as adventure sports and ecotourism.
Attracting foreign investments that provide a demonstrable contribution to the local economy is a top priority for policymakers. On July 1, 2019, Qaboos issued four royal decrees – including a Foreign Capital Investment Law – to attract new investors. Yet high hopes for FDI, especially in non-oil sectors, have failed to materialize. Some Omanis express frustration that the sultanate’s role as a negotiator in disputes with Iran and Qatar has failed to produce financial dividends.
Omani nationals constitute approximately 60% of the country’s population; therefore, Oman is especially concerned about the ability of foreign firms to generate jobs for locals, transfer skills, and pay taxes. The Chinese have largely failed in this regard, with the slow progress and scaled-back nature of Chinese projects in the Duqm Special Economic Zone symbolizing a more general skepticism of economic partnerships with China. There is room for cooperation: Oman’s government raised $1 billion by selling a 49% stake in the Oman Electricity Transmission Company to the State Grid Corporation of China. Oman’s state-owned holding companies intend to privatize additional subsidiary companies in the coming years.
High-impact economic reforms must take precedence, and certain policy approaches require reconsideration. Oman has not implemented a value-added tax, as agreed upon in the GCC’s Common Excise Tax Agreement of 2016. The country’s modest excise tax – expected to generate around $260 million annually – offers no financial windfall. Oman’s increasingly strict approach to workforce nationalization is understandable given the country’s demographic composition, although it risks making the country less attractive for expatriate residents and foreign firms. Rather than supply-focused local employment generation using bans on expatriate work visas, for example, a demand-focused approach emphasizing local skills development is more sustainable for the long term.
That some Omanis view the controversial economic reforms in Saudi Arabia as bold, necessary steps suggests that an appetite for reform exists in Oman. The political transition presents the new sultan and his government with a choice to maintain the status quo of economic policy or undertake a deeper, structural transformation of prevailing economic institutions. The former scenario is more likely, but decisive action on long-overdue economic initiatives is urgently needed.
Qatar’s emir has made a flurry of diplomatic visits to Iran, Turkey, the UAE, and Europe to bolster regional relations, energy cooperation, and the Iran nuclear deal.
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