1. Page 1 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
June 1, 2014
Oman Is on Its Way to a New Growth Model
Oman is on its way to a new growth model.
Figures released last month showed a nominal
GDP growth of 2.8%, while real GDP will be
available only later this year. Underlying the
headline figure, the non-hydrocarbon sector
saw a nominal growth rate of 7.6% while the
hydrocarbon sector declined by about 1%.
These numbers summarize well the economic
dynamics in Oman in recent years, where the
non-hydrocarbon sector has been driving
economic growth. This has been underpinned
by a large expansion in government
expenditure, mainly financed by higher oil
revenues. The reliance of this growth model on
high oil prices though suggests the need for
further reforms in order to achieve higher
sustainable growth and employment. As a
result, we forecast real GDP growth to slow to
3.0% in 2014, from an estimated 3.8% in 2013.
Contribution to Real GDP Growth
(%, 2002-14)
Sources: Ministry of the National Economy
and QNB Group analysis, estimates and forecast
Growth in recent years has been mainly driven
by the non-hydrocarbon sector as oil
production has plateaued. The key growth
sectors—construction, transport, public
administration and defense—have benefited
from a large expansion in government
spending. As a result, government expenditure
has jumped from 33% of GDP in 2010 to 43% of
GDP in 2012. As non-oil revenues continues to
account for less than 20% of government
revenue in Oman, the government financed
the spending spree through higher
hydrocarbon revenue, taking advantage of
high international oil prices. Consequently, the
break-even fiscal price of oil (the price at
which the government budget is in balance)
has risen from USD62 per barrel in 2008 to
USD80 in 2012, and is expected to increase
further to USD120 by 2018 according to the
International Monetary Fund’s (IMF)
forecasts. This is well above QNB Group’s
forecast of USD102 per barrel in 2018,
suggesting the government faces a significant
risk of running a sizable fiscal deficit by then.
Indeed, the latest IMF forecast shows the
fiscal deficit exceeding 10% of GDP in 2018.
A growth model resting on high oil price
assumptions is likely to be unsustainable. The
government needs to contain its current
expenditure bill, whose size has ballooned by
50% since 2010 as the government created
100,000 new jobs in civil service and defense
sectors during 2011-13. In addition, the fiscal
authorities need to diversify their income by
increasing the share of non-oil revenue
through the introduction of new taxes and
customs.
In this respect, Oman can draw useful lessons
from Dubai’s diversification experience over
-1.1
-2.7
1.3 2.5
5.4 4.5
8.2
6.1
4.8
0.9
5.8
3.8
3.0
-6
-4
-2
0
2
4
6
8
10
2002 2004 2006 2008 2010 2012 2014f
Non-Hydrocarbon Sector Hydrocarbon Sector
Real GDP Growth

2. Page 2 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
April 20, 2014
the last three decades. In the 1990s, Dubai was
also facing dwindling hydrocarbon resources,
like Oman today. In response, the Dubai
government opened up the economy to private
investments and slashed business regulations,
making its economy the most competitive in
the region. These reforms successfully
diversified the economy, enhancing the role of
the private sector and making it the driving
force of its growth model.
Omani policymakers are taking steps in the
same direction as the Dubai model to enhance
growth and maintain fiscal sustainability. The
government has announced that its spending
would rise by about 5% in the 2014 budget,
compared with 29% in 2012. This leaves room
for the private sector to take part in the
financing of big investment projects. It has
also recently indicated that it is looking closely
at the possibility cutting fuel subsidies.
This is a good start. Oman needs to achieve
strong and sustainable growth to ensure
steady job creation while maintaining
medium-term fiscal sustainability and
reducing its dependence on oil. Key to this is
fostering the private sector to carry the burden
of growth while the government adjusts its
fiscal imbalances. The policies of recent years,
which have increased public sector wages
relative to the private sector go against this
objective and may need to be reversed if Oman
wants to achieve a stronger model of economic
growth.
Contacts
Joannes Mongardini
Head of Economics
Tel. (+974) 4453-4412
Rory Fyfe
Senior Economist
Tel. (+974) 4453-4643
Ehsan Khoman
Economist
Tel. (+974) 4453-4423
Hamda Al-Thani
Economist
Tel. (+974) 4453-4646
Ziad Daoud
Economist
Tel. (+974) 4453-4642
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend
on the individual circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a
complimentary basis. It may not be reproduced in whole or in part without permission from QNB Group.