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Meeting the 21st century challenges. (Special Report: Oman)(Cover Story).

In the 31 years since he came to power, Sultan Qaboos bin Said has worked tirelessly to transform his country from an insular backwater into the thriving, sophisticated regional hub of banking, commerce and industry we know as 21st century Oman.

This remarkable renaissance in the country's fortunes has been achieved by enlightened leadership, the wise use of earnings from Oman's comparatively modest oil reserves and the willingness of the Omani people to participate in a national effort to raise their country's profile at home and abroad.

Until Sultan Qaboos came to power in 1970, Oman was little known to any but its immediate neighbours. His father Sultan Said bin Taimur, who ruled from 1932 to 1970, kept the country closed to the outside world for almost 40 years.

As a result when the young Qaboos came to power the task facing him was immense. Oman's economy at that time was based on subsistence agriculture and fishing. There were only three schools, two hospitals and 10 kilometres of tarmaced road in the entire country.

Today, despite its late start, the sultanate can confidently hold its own with its oil-rich neighbours. Schools, colleges and universities offer free education to all Omanis. Healthcare is also free with the country's hospitals boasting specialists in various disciplines. Multi-lane highways link its major cities with all but the most mountainous villages and as a member of the World Trade Organisation, Oman has already embarked upon its global future.

Omanis, perhaps more than any other Gulf nationals, play a vital part in the running of their country at all levels. In hotels, banks and offices you are much more likely to deal with members of a national (Omani) workforce than in any other Gulf Co-operation Council (GCC) state. Women are active in politics, banking and business as well as the home.

Because Oman has less oil than almost all its Gulf neighbours, it has had to work harder to achieve progress. As a result the country has evolved gradually, steadily and successfully. Oman enjoys a stable social, political, and economic system and enjoys excellent relations with neighbouring countries, enabling the sultanate to play an active role in promoting regional political and economic co-operation.

Market-orientated policies and private sector development are deeply rooted economic concepts and practices in Oman. Until the terrorist attacks against the United States on 11 September the markets were showing signs of increased confidence. Oil prices were good, business and consumer confidence was buoyant, the much discussed and keenly anticipated privatisation programme had begun to gather pace and the introduction of legislation, aimed at attracting increased foreign investment, was on track. However, following the events of 11 September, shockwaves reverberated through the international business community and Oman was no exception.

Tourism, a sector the sultanate with its history, geophysical diversity and commitment to preservation of its ecological balance is actively promoting, was among the first to be hit. Director General of Tourism Mohamed Ali Said, told The Middle East that within a few days of the attacks on the US, a number of European tour operators had cancelled scheduled visits to the sultanate. The cancellations involved several hundred individual tourists, Mr Said confirmed.

However, if the predictions of the movers and shakers in Oman's business community are to be believed the economic setback will be temporary and short lived.

A Muscat-based business consultant of many years experience told The Middle East this week: "In the first few days after the attacks people were wondering what form US retaliation would take.

"Gradually, as the days and weeks passed it became clear the Americans were dealing with things in a calm and considered way. President Bush has now made his first moves in Afghanistan. He has said this will be `a different kind of war' aimed at routing out terrorism without punishing the civilian population. I think the supplies of food and blankets the US is dropping in Afghanistan indicates their commitment to that ideal. If Bush continues to operate in this way' who -- except the most radical states -- will oppose him. Everyone has condemned terrorism in principal. Nobody wants a big, full-scale war. Nobody can afford a war."

Along with his GCC counterparts, Sultan Qaboos has condemned terrorism in all its guises. Speaking to the nation on 27 September, Sultan Qaboos said: "We are convinced that all forms and types of terrorism, and from whatever source, is an aggression against peace which all mankind cherishes. We are working with all nations to solidify international stability and security, and upon this conviction we condemn and reject terrorism as we have always done ... We call upon all to counteract terrorism and remedy its causes."

Speaking to The Middle East in the week following the attacks, Oman's Minister of Information Hamed Al Rashdi confirmed Oman would support any action which would "eradicate the roots of terrorism". Expressing great sympathy for those who lost loved ones in the US tragedy, the minister said that while the events were bound to have a knock on effect on the world economy, Oman would attempt to carry on with a "business as usual" policy as far as was possible. In this way, he indicated, terrorism, which by its very nature sets out to destroy and disrupt society, might be thwarted.

"Oman's current Sixth Development Plan (2001-2005) is possibly more ambitious than preceding ones", Hamed Al Rashdi told The Middle East. "After 30 years of development Oman is preparing to build upon the strong foundations we have established in education, healthcare and the construction of a modern infrastucture."

In order to move forward along the desired path of modernisation, Oman will continue to concentrate on two main areas -- further diversification away from oil dependency and increased Omanisation. If all goes according to plan, the success of one will fuel the success of the other.

Through consecutive five year development plans, Oman has achieved considerable progress on the economic and social fronts in a relatively short space of time. However, after intensive development efforts, the sultanate found itself at a crossroads, confronting a series of challenges which stem mainly from the fact that the economy is still largely reliant on oil.

Recognising the challenge, the government has initiated a structural adjustment process aimed at laying down a solid foundation for a diversified economic base led by the private sector. The government is now hoping that Oman's most precious resource its people will take up the challenge.

Mr Al Rashdi observed: "Omanisation has already proved successful. For example, some 80 per cent of banking sector employees are Omani nationals. We would like to see this example taken further, particularly in the private sector. We have established a situation where free market policies exist, including the provision of facilities for foreign investment. Often the private sector can offer a more attractive package than the public sector more salary, more incentives and often a better environment for the skills of an educated workforce."

However, traditionally Omanis have shown a preference for public sector employment, which offers job security, the promise of a pension and shorter working hours than those demanded by private sector employers. The private sector has also displayed a certain reticence about employing Omani nationals, over and above the required quota, since certain privileges, including the right of hire and fire, are denied them. As one major employer of both Omani and non-Omani labour explained: "Once you have an Omani national on your payroll the assumption is that he is there for life, legally you cannot get rid of him however unsuitable he may prove. That may work in the public sector but it just doesn't make sense in the business world. I want employees who are ambitious and keen, people who want to work, I cannot afford anything less, my company can not be competitive with anything less."

Sultan Qaboos is aware of the problem and, say his advisors, is looking at a number of ways in which the situation might be resolved to the satisfaction of both the young Omani job-seekers and private sector employers. Sultan Qaboos noted in his 27 September speech: "Nations are being built solely by the hands of the citizens ... The real wealth of any nation is made up of its human resources ... our call is to develop our human resources and remove all barriers that impede the development of them.

"This will contribute effectively and positively to the development of the community ... and will result in better employment opportunities, especially in the private sector. We repeat our call to the private sector to take the lead in this respect and to work hard towards increasing the level of Omanisation in both large and small enterprises and companies in the private sector.

"We call upon this important sector to open its doors to Omanis whether they are qualified or unqualified, trained or untrained ...

"We have no doubt that they will respond to this national call and will do their best to ensure an honourable life and suitable work opportunities for Omani job seekers."

Sultan Qaboos went on to stress that the status quo could no longer prevail: "Over the last 30 years the State has employed most of the national workforce but it is no longer able to absorb the large numbers seeking jobs. So the burden lies on the shoulders of the private sector to take on this responsibility. The private sector has a large foreign workforce, this gives Omani nationals the opportunity to work hard and replace foreigners."

Whether Sultan Qaboos' rallying call will have the desired effect remains to be seen. Certainly the government's commitment is not in doubt. There has even been talk of Oman eventually becoming an exporter of its qualified labour skills. There are already Omani doctors, soldiers and engineers working in Europe and the United States, why not physicists, pharmacists and plumbers as well?

"Oman is determined it will not allow a situation to develop where the majority of its educated young people are pitched out of schools and colleges to become nothing more than observers of Omani life", explained one Muscat-based expatriate banker. "To some extent this has already happened, unemployment is a very real problem, particularly outside the capital (Muscat) area. But there is a very real will to get young people involved in Oman's future, meeting the needs of the people and generating wealth and job opportunities across the board for upcoming generations. But it will take time and patience to turn around thinking on this issue. Until recently young people thought a government job -- even if it meant merely shuffling papers around a desk -- was the best they could hope for, now they are told they should be seeking big money and job satisfaction within the private sector. However, if Oman can pull this off, find gainful employment for its new generations, it will have met the most vital challenge of the new century and stolen a march on every other GCC state in the process."

BUOYANT BUSINESS CONFIDENCE

The sultanate of Oman, a buoyant upper medium-income developing country, boasts impressive macroeconomic fundamentals thanks to sustained "good governance" under the guidance of Sultan Qaboos bin Said.

Oman's development strategy places emphasis on economic efficiency, achieved through the maintenance of prudent fiscal and monetary policies, and social stability, supported by a modern physical infrastructure and good welfare services. The International Monetary Fund (IMF) comments: Oman has continued to use its relatively limited oil resources prudently for rapid social development and economic diversification."

Over the past decade, real gross domestic product (GDP) growth has averaged 4.7 per cent annually, fuelled by higher oil output (sustainable capacity is now approaching one million barrels per day), and more recently, by the liquefied natural gas (LNG) production/exports, as well as increasing infrastructure investments. Meanwhile, consumer prices have remained subdued, averaging 1.3 per cent a year between 1990-2000, according to IMF figures, whilst fiscal and external accounts have improved considerably since mid-1999, underpinned by robust oil revenues.

Consumer and business confidences are reported buoyant in 2001, thanks to improved liquidity, and declining interest rates. Economic growth is projected at five per cent this year and next, spurred by strong domestic demand, and increases in public/private investments.

Public finances should remain quite healthy, at least over the next two years. As in 2000, the overall fiscal balance will show a large surplus. The 2001 budget was based on a cautious oil price of $18 a barrel, resulting in a projected deficit of Omani rial (OR)317 million. But according to Standards & Poor's, the global ratings agency, the government's consolidated fiscal balance, (i.e. aggregate budget and extra-budgetary funds) should register surpluses of five-to-six per cent of GDP in 2001, and four per cent in 2002.

The government is committed to fiscal prudence under the new five-year (2001-05) development plan. It is wisely utilising "oil windfall" by transferring excess budgeted oil revenues to the State General Reserve Fund, formed in 1980 for preserving national wealth for future generations, and redeeming a portion of public debt (estimated at OR1,500 million, or $3,896 million), thereby reducing debt-service costs, and freeing resources for more productive areas of capital spending.

The IMF has praised the government's handling of the economy: "The sharp increase in oil revenue in recent years has not deterred the authorities from moving resolutely on economic reforms, particularly privatisation." However, the Fund also advises: "Continued high dependency on oil, limited oil resources, and a rapidly rising young domestic labour force have heightened the need to further diversify the Omani economy."

Notwithstanding the ongoing diversification efforts, Oman's prosperity is heavily linked to underlying trends in world oil markets. The capital-intensive hydrocarbons industry contributes, on average, 40 per cent of GDP, and between 75-80 per cent respectively of total exports and budgetary receipts. Moreover, the relatively short life span of the oil industry (projected at 18 years based on proven reserves of 5.8 billion barrels, and production levels of 900,000 barrels per day) underpins the importance for greater diversification.

Standards & Poor's (S&P) has identified some structural deficiencies, namely, the fledgling non-oil private sector, which remains highly-reliant on public-sector spending and investments for continuing business, labour market rigidities discourage most private companies from employing young nationals, and a lacklustre pace of structural reforms, as well as inadequate diversification.

The cornerstones of economic policy are rapid diversification, privatisation through increasing the pace of liberalisation and the deregulation of the non-oil sector and greater Omanisation.

Oman is a keen advocate of the public private partnership concept, and has begun to open up the utilities and other strategic sectors. For states like Oman, privatisation offers scope for attracting private capital, including foreign investments and retiring public debt. Other benefits include improving the operational efficiency of the parastatals and providing more liquidity to the Muscat Securities Market.

Foreign investment bankers see Oman as a promising regional market in terms of privatisation. The divestment strategy is described as the most comprehensive in the GCC region, because it entails selling-off key infrastructural assets over the next five years. The telecoms operator -- General Telecommunications Organisation (GTO) was corporatised in July 1999, and Merrill Lynch and Andersen, the UL consultants are working on the sector's partial divestment.

In the near-term, a minority stake (of between 25-40 per cent) in the company is expected to be sold to an international strategic operator. Also, before end-2001, a strategic partner will be selected for managing Seeb (Muscat) International and Salalah Airports, under the 25-year services and maintenance contract, effective from 1 January 2002.

The winning bidder holding a 75 per cent stake in the new company, will be required to build a $150 million passenger terminal at Seeb, which meets international "B" level standards. Credit Suisse First Boston is advising on the airports' privatisation.

The restructuring of public utilities is now at an advanced stage. The existing assets of the ministry of electricity and water will be unbundled, and corporatised in preparation for their future sell-offs. The assets to be privatised are at Ghubrah, Rusail, and Wadi Jizzi. Power system privatisation will also include fixed transmission and distribution networks, as well as generating assets. According to official sources, transmission sell-off could occur by end-2002, and distribution during 2003/04.

Recently, the government has approved three independent power projects (IPPs), structured on build-own-operate (BOO) ventures. In the coming years, IPPs should help boost the installed generating capacity by 40 per cent. Other potential divestment sectors are wastewater and sewage, cement, hotels, wheat milling, the National Transport Company, and Oman Mining.

In the labour market, aims of Omanisation of jobs and the provision of vocational training, as well as improving higher education, remain a top priority. In some sectors, notably banking and financial institutions, Omanisation has been enforced rigidly, with nationals holding over 90 per cent of positions. However, in low-paid jobs within services industry, such as retailing and distribution, nationals represent just 10 per cent of total staff. Most Omanis are employed by the public sector, where some 80,000 indigenous constitute 70 per cent of total staff. But the State can no longer guarantee new jobs for the estimated 30,000 young Omanis entering the workforce every year. The under 25 age group comprises about 45 per cent of the total population.

The non-hydrocarbons private sector holds the key to future job-creation programmes. The present development plan envisages 110,000 new private sector jobs by 2005. Last year, the industrial sector had received $2,100 million in investments, but created about 32,700 new jobs.

Oman, a recent member of the World Trade Organisation (WTO) is liberalising key economic sectors by lifting constraints on foreign direct investment (FDI), thereby fostering a conducive regulatory climate for private (external) capital. The authorities are in the process of implementing institutional and legal changes to foreign trade and FDI regime, in compliance with the WTO's guidelines. Foreign participation in certain strategic sectors, like the petroleum and petrochemicals industries, has been raised to 70 per cent instead of 49 per cent. Foreigners are now permitted 100 per cent ownership of power projects. This will be reduced to 65 per cent through an initial public offering on the stock exchange within four years. Moreover, banking, insurance, and the brokerage sectors could be open to 100 per cent foreign equity from 2003, and telecoms by 2005. Corporate tax rates for foreign companies have also been cut from 50 to 30 per cent, but are still above the maximum 12 per cent rate imposed on wholly-owned Omani companies.

The IMF recommends that the imposition of a single, low corporate tax on both local and foreign companies could encourage more private investments. Meanwhile, investors are encouraged by the Omani legal system, described as the most transparent and advanced in the Gulf.

The IMF comments: "Overall, Oman's structural reforms are going in the right direction to sustain the growth momentum and increase investor confidence."

Oman's external financing position remains strong, reflecting large surpluses on both merchandise trade and current accounts this year and next.

Rising export volumes reflect higher LNG sales and expansions in the re-export trade, stimulated by the completion of Salalah Container Port -- which ranks among the world's 20 busiest ports.

The entire capacity (6.6 million tonnes/year) of the Oman LNG plant at Qalhat has been pre-sold through long-term contracts with Asian utilities in Korea, India, and Japan. The Korea Gas Corporation Oman's largest LNG customer will import 4.1 million tonnes annually over the next 25 years. Gas exports will earn an estimated $1,000 million this year, compared with $500 million in 2000.

Whilst, imports will increase over the next two-three years, as more capital goods and industrial equipment are required for developmental projects. Surging oil revenues have led to a steady reduction in net foreign debt, and the accumulation of offshore assets. The balance in the State General Reserve Fund as of end-2000 was estimated at $4 billion, equivalent to 36 per cent of exports.

Total official external assets exceed the government's gross debt. The S&P projects the ratio of net external assets to total exports at a high of 60 per cent by 2002, up from 34 per cent in 2000.

The central bank's forex reserves have also strengthened considerably since early 2000. Thus higher reserves can better absorb unforeseen external shocks and provide for a comfortable import-coverage, exceeding three-months.

In addition, Omanis' private (offshore) investments are put at $15 billion, representing 76 per cent of GDP. Repatriation of overseas assets could provide a powerful boost for local markets.

The sultanate is largely under-borrowed, with an external debt estimated at below $7 billion, of which $3.8 billion comprise liabilities to foreign banks. Debt-servicing remains manageable within the context of Oman's substantial forex earnings' capabilities.

There is a strong international appetite for project financing, after the successes of the LNG and Salalah Port mandates.

The rial-dollar fixed peg of OR 0.385:$1 (intact since 1986) remains firmly underpinned by prudent economic policy and improving external accounts.

Oman therefore represents a good "risk profile".

Last February, S&P raised Oman's long-term foreign currency debt ratings to BBB from BBB-, with the outlook classified as stable. Omani investment-grade rating is on par with Qatar, China, and Malaysia.

The credit upgrade reflects sustained political stability, competent economic governance and a declining external debt burden, as well as a sound, well supervised banking sector. Most Omani banks, including the top-three, National Bank of Oman, Bank Muscat, and Oman International Bank, meet the mandatory capital/adequacy ratios of 12 per cent. Whilst, the bad debt ratio has fallen to about six per cent, with provisions covering 80 per cent of non-performing loans, according to S&P figures.

In view of modest hydrocarbons resources, the authorities should focus efforts on achieving non-oil industrialisation, promoting tourism, and mining (Oman holds untapped potential with mineral reserves of coal, chromite, base metals, and gold/silver), as well as attracting Foreign Direct Investment (FDI) into the non-oil sectors.

Growth prospects for the next three-to-five years will depend on the sustainability of current robust oil prices, and implementing energy-based downstream projects. These include the $3 billion aluminium smelter, the $1.4 billion petrochemical facility, the $1 billion Omani-Indian fertiliser plant, and the $870 million oil refinery.

These mega-industrial projects, when fully implemented, could inject powerful "multiplier effects" into the economy by boosting the activities of construction, manufacturing and service industries. They will also increase the non-oil sector's contribution to GDP and exports, while increasing import volumes and external (private) debt.

The non-oil economy is projected to grow by 5.2 per cent a year during the sixth five-year plan.

The sultanate's future status as an energy exporter lies with greater utilisation of natural gas reserves. Probable reserves could total 40 trillion cubic feet (Tcft), against the proven figure 23-24 Tcft. It also hopes to boost recoverable oil reserves to 10 billion barrels in the coming years, through increasing application of enhanced oil recovery techniques.

Structural reforms underway are aimed at developing a more diversified-vibrant private sector, that is more self-sufficient. Private businesses are expected to play an important role in the financing and management of infrastructural projects. Investments planned for 2001-05 amount to OR 8,118 million ($21 billion), of which the private contribution is pegged at 54 per cent.

Oman's supporting infrastructures (physical, financial, and legal) are sound for facilitating sustainable development and growth across its prudently managed economy.
The Sultanate of Oman: Key Macroeconomic Indicators

 (Est)
 1998

Gross Domestic Product (US$ Mn) 14,086
Nominal GDP growth (annual % chg) -11.0
Consumer Prices (annual % chg) -0.5
Domestic Debt (% of GDP) 32.7
Fiscal Balance (% of GDP) -5.7
Deposit Rate (%) 8.46
Oil Output (000' barrels/day) 905
OPEC Basket Price (US$ barrel) 12.28
Exports (US$ Mn) 5,509
Imports (US$ Mn) 5,826
Trade Balance (US$ Mn) -317
Current Account (US$ Mn) -3280
Current Account (% of GDP) -23.0
Forex Reserves (including gold) US$ Mn 1,149
Import-Coverage (months) 2.2
CBO Foreign Assets (US$ Mn) 2,007
Deposits in OECD Banks (US$ Mn) 2,499
Total External Debt (US$ Mn) 6,312
Total External Debt (% of GDP) 49.0
Debt Service ** 35.7

 (Est)
 1999

Gross Domestic Product (US$ Mn) 15,605
Nominal GDP growth (annual % chg) 10.8
Consumer Prices (annual % chg) 0.5
Domestic Debt (% of GDP) 27.1
Fiscal Balance (% of GDP) 1.2
Deposit Rate (%) 8.12
Oil Output (000' barrels/day) 910
OPEC Basket Price (US$ barrel) 17.47
Exports (US$ Mn) 7,215
Imports (US$ Mn) 4,801
Trade Balance (US$ Mn) 2,414
Current Account (US$ Mn) -456
Current Account (% of GDP) -3.0
Forex Reserves (including gold) US$ Mn 2,848
Import-Coverage (months) 7.0
CBO Foreign Assets (US$ Mn) 2,836
Deposits in OECD Banks (US$ Mn) 2,933
Total External Debt (US$ Mn) 6,771
Total External Debt (% of GDP) 43.4
Debt Service ** 27.1

 (Est)
 2000

Gross Domestic Product (US$ Mn) 19,771
Nominal GDP growth (annual % chg) 26.7
Consumer Prices (annual % chg) -1.0
Domestic Debt (% of GDP) 21.3
Fiscal Balance (% of GDP) 11.8
Deposit Rate (%) 7.63
Oil Output (000' barrels/day) 960
OPEC Basket Price (US$ barrel) 27.60
Exports (US$ Mn) 11,125
Imports (US$ Mn) 5,147
Trade Balance (US$ Mn) 5,978
Current Account (US$ Mn) 2,676
Current Account (% of GDP) 13.5
Forex Reserves (including gold) US$ Mn 2,462
Import-Coverage (months) 5.75
CBO Foreign Assets (US$ Mn) 2,448
Deposits in OECD Banks (US$ Mn) 4,359
Total External Debt (US$ Mn) 6,962
Total External Debt (% of GDP) 35.2
Debt Service ** 20.0

 (Est)
 2001

Gross Domestic Product (US$ Mn) 21,353
Nominal GDP growth (annual % chg) 8.0
Consumer Prices (annual % chg) 1.0
Domestic Debt (% of GDP) 21.2
Fiscal Balance (% of GDP)
Deposit Rate (%) 6.45 (/)
Oil Output (000' barrels/day) 976
OPEC Basket Price (US$ barrel) 24.0
Exports (US$ Mn) 10,800
Imports (US$ Mn) 5,919
Trade Balance (US$ Mn) 4,881
Current Account (US$ Mn) 2,195
Current Account (% of GDP) 10.3
Forex Reserves (including gold) US$ Mn 2,264 (//)
Import-Coverage (months) 4.5
CBO Foreign Assets (US$ Mn) 2,188 *
Deposits in OECD Banks (US$ Mn)
Total External Debt (US$ Mn)
Total External Debt (% of GDP)
Debt Service ** 26.2

(/) = June; (//) = July; * = June; ** = Scheduled debt service
(principal & interest repayments as a per cent of total export
earnings), plus short-term debt.

Population: 2.54 million (2000); GDP per capita: US$7,760

Sources: IMF, International Financial Statistics, Central Bank of
Oman, Standards & Poor's and Bank for International Settlements.
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Comment:Meeting the 21st century challenges. (Special Report: Oman)(Cover Story).
Author:Lancaster, Pat; Siddiqi, Moin A
Publication:The Middle East
Article Type:Cover Story
Geographic Code:7OMAN
Date:Nov 1, 2001
Words:4447
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