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III Oman in Regional Perspective

Author(s):
Volker Treichel, and Ahsan Mansur
Published Date:
November 1999
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Emmanuel K. Martey

Oman in Regional Perspective

Oman, a member of the Cooperation Council of the Arab States of the Gulf (the Gulf Cooperation Council, or GCC),1 has an economic structure similar to that of the other GCC countries. All are oil-dependent, open economies with liberal exchange and trade systems and currencies that are effectively pegged to the U.S. dollar. Given their monocultural export orientation, these economies have been subject to similar impacts from changes in world oil prices; however, they vary in the extent of their dependence on known oil and natural gas resources. Oman’s dependence on the oil sector, as measured by the share of oil production in total GDP, government revenues, and export receipts, exceeds that of the GCC as a whole. That dependence, even when compared with the GCC average, has not changed significantly over the past six years(Figure 3.1.)

Figure 3.1Oman and the GCC Countries: Oil Dependency and Openness of the Economy

(In percent)

Sources: Data provided by the Omani authorities; IMF staff estimates.

1 Sum of export and import values, divided by GDP.

2 Range is from an average of 60 percent in Saudi Arabia to 165 percent in Bahrain.

Macroeconomic Developments and Shared Issues

In recent years Oman’s rate of economic growth has been in line with that of the GCC as a whole. During 1991–97 Oman’s real GDP expanded at an annual average rate of 5.2 percent, compared with 5.3 percent for the GCC (Table 3.1). Although the share of the non-oil sector in GDP varied considerably among the GCC countries during this period, the average rates of expansion of the non-oil sector as well as of oil production tended to be similar.

As in other GCC countries. Oman’s real GDP growth performance during 1991–97 was supported by substantial domestic investment. The ratio of domestic investment to GDP averaged about 16 percent in Oman and 22 percent for the GCC. Similarly, the ratio of domestic saving to GDP in Oman averaged 25 percent, compared with 28 percent for the GCC as a whole. Moreover, as in all the GCC countries, Oman’s national saving was significantly lower than domestic saving, reflecting the substantial outflow of remittances associated with the large number of expatriates. Domestic saving among the GCC countries varied sharply, from 37 percent of GDP in the United Arab Emirates to 17 percent in Kuwait (after the regional crisis of 1990–91).2

Monetary policy in Oman, as in other GCC economies, has been passive, given the exchange rate arrangement, the liberal trade and payments system, and the openness of the economy. The GCC economies vary in their degree of progress toward the use of indirect instruments of monetary policy, such as repurchase agreements and open market operations. Unlike most other GCC economies, Oman still maintains some limited quantitative credit and interest rate ceilings; such ceilings existed in many other GCC countries until fairly recently. Although Oman’s financial system is not as deep as that of Bahrain, Oman does have a highly capitalized and active formal stock exchange. The stock exchange in some of the other GCC countries, by contrast, is not yet formalized.

During 1991—97, Oman’s current account deficit, at 3.6 percent of GDP, was on average the lowest in the GCC. The average for the GCC countries during this period was a much larger 9.5 percent. Even excluding the exceptionally high current account deficits of Kuwait, Saudi Arabia, and the United Arab Emirates in 1991, associated with the regional crisis, the GCC-wide average deficit was still 4.4 percent of GDP. In general, the economies with higher fiscal deficits tended to register higher current account deficits.

An important feature of the GCC economies is their degree of openness, as measured by the ratio of total trade (exports of goods and services plus imports of goods and services) to GDP. Although Oman’s economy is quite open, with exports plus imports equaling 71 percent of GDP during 1991–97, it is not the most open within the GCC. The openness of the other GCC economies ranged. on average over the same period, from 62 percent in Saudi Arabia to 166 percent in Bahrain. Notwithstanding this regionwide openness, intraregional trade is low when transit trade is excluded. This development is largely explained by similarities in natural resource endowments and the relatively small size of the non-oil sector in each country. Including transit trade, Oman’s participation in regional trade is considerable, albeit predominantly concentrated in trade with the United Arab Emirates (Table 3.2). More than 80 percent of Oman’s regional non-oil exports go to that country, and over 80 percent of its non-oil imports from the region emanate from there. Moreover, the United Arab Emirates accounts for about 40 percent of Oman’s global exports and about 20 to 30 percent of its global imports, Oman’s imports from non-GCC countries were about three times its imports from the GCC. However, Oman’s non-oil exports to GCC countries tended to exceed such exports to non-GCC countries.

Table 3.1Oman and the GCC Countries: Selected Indicators,1991–97

(In percent)1

IndicatorOmanGCC
Real GDP growth5.25.3
Non-oil real GDP growth5.93.8
Inflation rate 20.62.3
Ratios to GDP
Gross domestic investment16.422.4
Gross domestic saving24.828.23
Gross national saving413.425.8
Official fiscal balance−7.1−8.75
Consolidated fiscal balance 6−1.8
Current account balance−3.6−9.5 7
Openness of the economy 870.995.5
Sources: Data provided by the national authorities; IMF staff estimates.

Data are annual averages. Negative numbers represent deficits.

As measured by the consumer price index.

Data are for 1991–96.

In percent of GNP.

Average deficit equals 6.6 percent if the year of the regional conflict (1991) is excluded from the data for Kuwait and the U.A.E.

For Oman this includes SGRF operations. There is no directly comparable concept for the other GCC countries.

Average deficit equals 4.4 percent if the 1991 deficits for Kuwait, Saudi Arabia, and the U.A.E. are excluded.

The sum of imports and exports of goods and services in percent of GDP.

Sources: Data provided by the national authorities; IMF staff estimates.

Data are annual averages. Negative numbers represent deficits.

As measured by the consumer price index.

Data are for 1991–96.

In percent of GNP.

Average deficit equals 6.6 percent if the year of the regional conflict (1991) is excluded from the data for Kuwait and the U.A.E.

For Oman this includes SGRF operations. There is no directly comparable concept for the other GCC countries.

Average deficit equals 4.4 percent if the 1991 deficits for Kuwait, Saudi Arabia, and the U.A.E. are excluded.

The sum of imports and exports of goods and services in percent of GDP.

Table 3.2Regional Trade(In percent of total non-oil exports to or imports from the region)
Non-oil Exports 1Imports
Country19931994199519961993199419951996
Bahrain1.31.31.41.25.31.11.62.4
Kuwait1.72.22.72.20.60.70.80.8
Qatar1.31.11.32.20.60.51.31.2
Saudi Arabia7.48.68.39.26.67.713.311.0
U.A.E.88.486.886.285.286.890.183.184.7
Non-GCC101.0107.298.5104.7223.4217.3259.5268.7
Sources: Data provided by the Omani authorities; IMF staff estimates.

Includes reexports.

Sources: Data provided by the Omani authorities; IMF staff estimates.

Includes reexports.

Given the openness of the GCC economies, their responses to external factors, including changes in world oil prices and in interest rates as well as regional political crises, have been similar. The upsurge in world oil prices during 1974–80 led to sharp improvements in both the overall fiscal and balance of payments positions of Oman and the other GCC countries. Similarly, the subsequent weakening of oil prices during 1982–97 contributed to a weakening of both internal and external balances in Oman as well as in the other GCC economies.3 Following fiscal and balance of payments surpluses equivalent to 10 percent and 3 percent of GDP, respectively, on average, during 1974–80, the GCC economies recorded substantial deficits; those during 1992–94 alone equaled the surpluses recorded during 1975–80 as a percentage of GDP. Reflecting the favorable impact of world oil prices, Oman’s overall balance of payments surplus during 1974—80 averaged 4.3 percent of GDP, and the fiscal deficit averaged 3.0 percent, notwithstanding relatively high levels of government expenditure, primarily related to major infrastructural projects. In contrast, during 1991–97 Oman’s budget deficit (excluding SGRF operations) averaged 7.1 percent of GDP, and the balance of payments deficit was equivalent to 0.7 percent of GDP, notwithstanding a leveling off of total government expenditure. Fiscal deficits in the GCC countries as a group averaged 8.7 percent (Table 3.1); excluding the exceptional Kuwaiti experience of 1991, the figure is 6.6 percent. It is noteworthy that Oman’s internal and external imbalances declined substantially in 1996 and 1997, in response to higher oil prices and successful fiscal adjustment.

Despite the considerable fiscal deficits of the GCC economies, domestic inflation remained low, as their foreign exchange systems permitted the externalization of potential domestic demand pressures through a drawdown of external reserves. Oman’s domestic inflation during 1991–97 averaged less than 1 percent a year, and inflation for the GCC as a whole averaged only 2.3 percent a year (Table 3.1).

Regional Cooperation

The cooperation objectives of the GCC are both political and economic. The GCC framework comprises the Commission for Settlement of Disputes, the Ministerial Council (comprising the countries’ foreign ministers), and the Secretariat General, all of which operate under the policy direction of the Supreme Council (the highest authority, comprising the heads of the member states).

The GCC’s Unified Economic Agreement, ratified in 1982, aims, among other things, to achieve free trade among the members. The agreement provides for exemptions for members from customs duties on agricultural, animal, industrial, and natural resource products of national origin. It also provides for a common external tariff and trade policy and the coordination of economic development. So far, however, the GCC has been unable to reach agreement on unification of tariffs. Discussions are still proceeding regarding options to be adopted with a view to ultimately creating a customs union and a free trade region. Several proposals are being considered. One would create a three-tiered system, under which consumer goods and medical supplies would be duty free, but tariffs of 8 percent and 12 percent would be imposed on two other, unspecified categories. Another is an arrangement under which tariffs in the last two categories would be set at 4 percent and 6 percent, respectively. A third proposal would create a two-tiered system, under which duty would not be payable on consumer goods and medical supplies. Thus far about 90 percent of imports have been classified into three categories: essential commodities (which would be duty free), basic goods, and luxuries. Unification of GCC tariffs is also being deliberated in the context of a possible free trade agreement with the European Union.

The GCC Investment Corporation is intended to consolidate members’ endeavors in productive activities and may participate in or provide loans for development projects in the GCC or other Arab countries. Other GCC entities include the Gulf Standards Organization (for a common standards and measures framework), the Patent Office (for patent regulation), and the Commercial Arbitration Center (for settlement of trade disputes). The Gulf Organization for Industrial Consulting advises the private sector on the industrial policies of GCC governments. A recent concrete development in GCC-wide industrial effort is in respect of two gas distribution networks linking the GCC. One of these two networks is planned to link Oman with Dubai. Also, in December 1997 the GCC members agreed to link the electricity grids of Bahrain, Kuwait, Qatar, and Saudi Arabia. A second phase would link Oman and the United Arab Emirates, and the third phase would connect the first two links. In addition, GCC-wide branch banking has been approved. National banking authorities would have jurisdiction over the opening of branch banks.

A key policy focus of GCC governments in recent years has been on the role of the private sector in the economy. Several public entities in Oman and Kuwait have been privatized in recent years, and there is increasing emphasis on providing opportunities for private sector (including foreign) participation in the GCC economies. Oman is making concerted efforts in this regard, using the Muscat Securities Market to provide an important venue for such participation. In October 1996 a royal decree endorsed amendments to Omani corporate law intended to encourage foreign investment and promote industrial diversification. The GCC, in continuing discussions with the European Union, is seeking EU capital inflows into the GCC industrial sector as a means of diversifying the GCC economies and acquiring technology. Currently, manufacturing in most GCC countries, including Oman, is concentrated in such activities as clothing and textiles, foodstuffs, building materials, home appliances, and petrochemicals.

Prospective Challenges

The central challenge currently facing Oman—like the other GCC countries—is to forge a path of development that ensures steady growth in real income per capita along with sustainable fiscal and external sector adjustment, while further developing economic links with other GCC countries. To produce optimal results, Oman’s efforts would need to be focused on a number of key areas relative to other GCC countries:

  • Oman’s high oil dependency profile relative to the GCC as a whole, and its resulting greater vulnerability to changes in oil prices, lend urgency to diversifying its economy. However, Oman’s comparative advantage is in natural resources. Accordingly, a diversification strategy that draws on these resources would seem to offer the best prospects. Potential resources besides petroleum include gas, fisheries, an extended coastline (suited for tourism, for example), and proximity to important regional markets.
  • An improvement in Omani labor productivity, including through training, should enhance the total productivity of the country’s available resources. As the analysis of Section II indicates, Oman’s total factor productivity was, on average, barely positive during the decade ending in 1997. Economic growth in the longer term should not rely on increased investment and labor input, as it has in the past; rather, emphasis should be given to enhancing factor productivity, particularly for Omani nationals. Oman’s low saving rate makes the case for higher factor productivity more pressing.
  • Oman’s ratios of saving and investment to GDP are lower than the corresponding ratios for the GCC as a whole. Although Oman’s domestic saving-GDP ratio exceeded its investment-GDP ratio by a wider margin than for the GCC as a whole (see Table 3.1), Oman’s national saving is much lower than its domestic investment. In addition to strengthening domestic efforts to promote saving, Oman needs to attract more foreign private capital to fill its saving-investment gap. The related challenge is to create a domestic environment with appropriate incentives to the inflow of foreign capital.
  • Fiscal adjustment is more pressing for Oman than for most other GCC countries because of the relatively short horizon of its oil reserves. Like those of most other GCC countries, Oman’s investments in its reserve fund for the future have declined in recent years, and fiscal adjustment will be critical in reversing this trend. As the exploitation of new oil and gas reserves will also entail additional financial commitments, the availability of resources to facilitate such productive ventures dictates that government consumption requirements should not crowd out the needs of the productive sectors.
  • Financial policies needed to complement these fiscal and real sector policies include measures aimed at enhancing the existing coordination of the institutional framework of regional capital markets, to attain economies of scale in financial mobilization. Most GCC countries are now attaching ever-greater importance to foreign investment in their capital markets, and Oman will need to pursue this objective more vigorously.
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1The GCC comprises Bahrain. Kuwait. Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
2For more on developments in saving and investment in Oman see Section II.
3The period 1982–97 exhibited great volatility of oil prices, including a marked increase in 1990 associated with the regional crisis. The overall level of oil prices was, however, significantly lower than during the period 1974–80.

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