Oman has long recognised the risks of over-reliance on oil revenues and the importance of diversification to secure a sustainable future. In 2024, Oman’s government projected total revenues of RO 11.01 billion, with oil contributing 54 per cent (RO 5.94 billion), gas adding 14 per cent (RO 1.54 billion), and non-oil revenues making up the remaining 32 per cent (RO 3.52 billion). Oman Vision 2040 aims to address these risks by promoting diversification and reducing dependency on oil revenues.
This strategy reflects a proactive approach to achieving long-term economic stability. Global oil prices are influenced by numerous factors, including supply and demand dynamics, geopolitical events, and the actions of major producers like Saudi Arabia, Russia, and the US. Oman’s relatively small production scale limits its influence in these markets, making it susceptible to external decisions, such as OPEC+ production cuts. These decisions directly impact Oman’s revenue streams, further emphasising the importance of reducing dependence on oil. The Hotelling Rule, an economic theory related to non-renewable resources, suggests that oil prices should rise over time due to scarcity.
However, real-world conditions often deviate from this theory. Technological advancements, the development of renewable energy sources, and market interventions can suppress oil prices, adding uncertainty to revenue forecasts for oil-dependent economies like Oman. Oman’s fiscal policy heavily relies on oil revenues to fund essential expenditures, including public salaries, infrastructure projects, and social services. High oil prices provide a financial cushion, enabling increased spending. However, low oil prices expose fiscal vulnerabilities, such as budget deficits and rising debt levels. To address these challenges, Oman has implemented a series of fiscal reforms and strategies. Economic diversification is central to Oman Vision 2040.
The government aims to develop sectors like tourism, logistics, manufacturing, and renewable energy, creating alternative revenue streams and reducing reliance on oil. Subsidy reforms have also played a key role. By reducing energy subsidies and aligning domestic prices with international levels, Oman has curbed fiscal deficits while promoting efficient energy use. Tax reforms are another critical component of Oman’s fiscal strategy.
The introduction of a value-added tax (VAT) in 2021 marked a significant step in broadening the revenue base. Further reforms, including corporate tax adjustments and potential personal income taxes, are under consideration. These measures aim to create a more balanced and sustainable revenue system. Oman’s sovereign wealth funds, such as the Oman Investment Authority, provide a financial buffer during economic downturns and facilitate investments in long-term projects.
These funds are vital for stabilising the economy and ensuring resilience in the face of oil price volatility. Low oil prices can deplete foreign exchange reserves, limiting Oman’s ability to finance imports and service external debt. Conversely, high oil prices bolster reserves, strengthen the Omani rial (which is pegged to the US dollar), and enhance investor confidence. While the currency peg provides stability in international transactions, it also limits the flexibility of monetary policy, requiring careful economic planning. The Covid-19 pandemic underscored the vulnerabilities of oil-dependent economies like Oman.
The sharp decline in global oil demand and prices in 2020 led to significant fiscal deficits and economic contraction. However, the subsequent recovery in oil prices highlighted the cyclical nature of resource-based economies and the importance of diversification to mitigate these impacts. Lessons from other nations provide valuable insights for Oman’s journey.
Norway, for instance, has demonstrated the benefits of prudent resource management through its Government Pension Fund Global, saving surplus oil revenues during boom periods to cushion against downturns.
Oil price volatility remains a critical factor influencing Oman’s fiscal policy and economic stability. Despite these challenges, Oman has made commendable progress in implementing reforms and promoting economic diversification. By learning from global peers, embracing innovative strategies, and fostering a resilient economic framework, Oman can secure a prosperous and sustainable future for its citizens.
With Oman Vision 2040 as its guiding blueprint, the nation is poised to transition toward a more diversified and stable economy, ensuring long-term growth and stability.
Oman Observer is now on the WhatsApp channel. Click here
