Oman Review

Oman: Rebooting its economy

Oman: attracting investments through PPP model

On September 17, as Oman government officially embarked on its Tanfeedh programme – the National Programme for Enhancing Economic Diversification – the country took one more step to reboot the economy, after the crude crash slashed its main source of revenues and major contributor to growth.

The programme, part of Oman’s ninth five-year development plan, the last of the series of five-year plans for Vision 2020 which aims to achieve the goal of economic diversification, is centered on enhancing economic activity in the three main areas of tourism, manufacturing and logistics and focuses on studying the hurdles to boost economic activity in each sector and how to resolve them. 

“Five weeks ago, Oman embarked on its Tanfeedh programme. Over 250 government officials, private representatives of Majlis Oman, private sector leaders, experts, with many talented young entrepreneurs have been meeting since then almost daily. The objective is to expedite the process of diversifying Oman’s GDP away from oil while creating sustainable jobs for Omanis,” Dr Ali bin Masoud al Sunaidy, Oman’s Minister of Commerce and Industry said in his address at the recent MEED’s Outlook Oman Forum.


BOLD STEPS 

With production of less than 1 million barrels per day (bpd) of oil, the Sultanate of Oman has less oil and gas reserves compared to its GCC neighbours, except Bahrain, according to World Bank. Since the sharp drop in oil prices in the second half of 2014, the government has taken bold steps to increase revenues from non-oil sources.

These include turning to debt markets for the first time (it sold $2.5 billion in bonds on June 8) and taking on some reforms such as subsidy cuts, reduced benefits for public sector workers and increased fees. Furthermore, they introduced a royalty on telecom operators, a “fair tax” on liquefied natural gas (LNG) exports, and an increase in royalties paid for mineral exploitation.

Oman has recently approved a 35 per cent tax on petrochemical firms and increased taxation on LNG companies. The change will see taxes on LNG firms increase from 15 to 55 per cent. Reforms in 2015 include the doubling of the price of gas for industrial users.
 

Sunaidy: expediting the process of diversifying Oman’s GDP

Sunaidy: expediting the process of diversifying Oman’s GDP

The World Bank estimates that $10 billion in revenues were lost in 2015, and the new budget projects a deficit of 16.8 per cent of GDP in 2016.

Government subsidy spending is expected to fall by 64 per cent in 2016, as local fuel prices are brought in line with global prices, said a World bank report. The deregulation of petrol prices began in mid-January 2016, with diesel and petrol prices increasing by up to 33 per cent. An increase in the corporate income tax rate from 12 to 15 per cent, as well as the removal of the tax exemption for the first OMR 30,000 of taxable earnings, has been approved by the Shura Council and a GCC-wide VAT has been agreed upon.

Other measures to boost non-hydrocarbon revenue include: revising electricity and water tariffs for commercial and industrial users; and increasing fees for government services including licenses and labour cards, vehicle registration, real-estate transactions and land allocation.


PRIORITISING PPP

Additionally, the government is now focusing on establishing the public-private-partnership (PPP) framework to attract investment in projects prioritised in its ninth five-year plan.

Attracting the much-needed investments through PPP model and increasing the role of private sector in upcoming projects are the prime priorities for the Sultanate, as was pointed out by Sunaidy. 

Reinforcing that the private sector’s role is the backbone of Oman’s ninth five-year plan, Sunaidy said that the government is focused on establishing the PPP framework to solve the funding challenge and attract much-needed investment to deliver projects prioritised in the plan. “Nearly 50 per cent of RO9 billion ($23.37 billion) projects outlined in the plan have already been awarded and under implementation with expected completion target this year and the next two years.

“By the end of September this year, nearly RO1.2 billion has been paid to contractors by the Ministry of Finance,” he said. He noted that the tight budgets of today provide an opportunity for PPPs and private sector ownership and project finance.
 

Petrochemical firms have been brought under the tax net

Petrochemical firms have been brought under the tax net

Commenting on the Tanfeedh project, Sunaidy said, the focus is on manufacturing, tourism, logistics sectors as well as the two enablers, namely, finance and human capital development. “The result is so far very encouraging and very promising. The Tanfeedh Labs have identified a number of projects that are ready to be implemented in these sectors while offering innovative ways of financing infrastructure projects including PPPs and the transfer of current government assets to the private sector. This work will continue to cover the remaining two main sectors fisheries and minerals, as identified in the Ninth Five-Year Plan.”

About infrastructure projects, Sunaidy said the Mina al Sultan Qaboos Waterfront development in Muttrah is expected to be launched for investment this month. Work on the ambitious scheme will likely begin next year, he said.


ECONOMIC OUTLOOK

The initial results may be encouraging but the Sultanate’s short-term economic outlook is still weak, forecasts FocusEconomics in a report.

“The ongoing low-oil-price environment will continue to drag on government finances and thereby on growth, despite government’s efforts to restructure the fundamentals of the economy,” said FocusEconomics in its recent FocusEconomics Consensus Forecast Middle East & North Africa. 

Analysts forecast growth of 1.8 per cent for this year, which is up 0.2 percentage points from September’s forecast. They expect the economy to expand 1.6 per cent in 2017.

The World Bank, on the other hand, said the country’s macroeconomic outlook is highly vulnerable to the behaviour of oil prices and hinges on the success of the government’s efforts to capitalise on non-hydrocarbon revenues. Real GDP growth is projected at 1.6 per cent in 2016, lower than in 2015, reflecting lower oil revenue and the associated dampening of spending and domestic demand. 

Growth is projected to pick up again starting 2017, as the non-oil sector expands, despite lower levels of investment spending, which will constrain growth in the oil sector. Non-urgent projects are expected to be postponed. The government will continue to prioritise infrastructure investment, including in tourism, airports, railways and ports. A new mining law is expected to streamline and centralise licensing processes, to improve the industry’s efficiency. 

Since Oman has maintained consistently good relations with Iran, new trade and investment opportunities are expected including a gas pipeline between the two countries. However, in light of the projected level of oil prices, the fiscal and current account are estimated to be in deficit at 16.8 and 14.1 per cent of GDP respectively in 2016.