Energy and services will support higher growth in 2022

After moderately rebounding in 2021, mainly due to a base effect and higher energy prices, the Omani economy should register a relatively more vigorous growth rate in 2022. The key contributors will be rising hydrocarbon production and prices and easing COVID-19 restrictive measures. The share of fully vaccinated people in the total population rose to 50% towards the end of 2021, which has helped the services sector (35% of GDP) to recover. In line with the global vaccination efforts, Oman’s tourism revenues (nearly 4% of GDP pre-COVID) are expected to surge by over 80% year-on-year (YoY) in 2022 to USD 1.5 billion, also helped by a favorable base effect (it fell by more than 70% in 2020 and 3% in 2021). However, the fall in the number of expatriates will still weigh on construction, real estate, services, and retail sales. Indeed, Oman’s expatriate population (around 40% of the total population) had declined nearly 40% as of March 2021, mainly due to COVID-19 conditions. On the other hand, the phasing out of the OPEC+ cuts in April 2022 would allow Oman’s oil production to rise by nearly 10% YoY, bringing its daily crude and other liquids production to 1.1 million barrels per day (b/d). As the country’s oil reserves are aging, Oman is focusing more on gas production development (the mining sector accounts for nearly 45% of GDP), and gas production could rise by 4% YoY in 2022 on the back of the development of the Khazzan and Mabrouk gas projects. Coupled with rising energy prices, this will sustain Oman’s growth performance. The increase in private consumption will also have a positive impact on growth. However, higher inflation following the introduction of a 5% value-added tax (VAT) in April 2021 would further restrain the expansion of domestic demand. Investment growth will remain weak due to the government’s efforts to reduce fiscal spending to narrow the budget deficit. The economic diversification efforts and tax incentives for companies will also improve the business environment. These efforts underline the government’s willingness to attract foreign investments to diversify the economy away from oil by supporting sectors such as tourism, logistics, manufacturing, fisheries, and mining, as mentioned in its 2040 Vision program. 

The fiscal position will improve, but the debt will remain high

Before the COVID-19 crisis, Oman had already suffered from weak fiscal performance and twin deficits, which increased its debt level (around 70% is external). With the budget deficit widening by nearly 20% of GDP in 2020 due to the COVID-19 crisis and oil price shock, it became a significant issue. After implementing frontloaded fiscal consolidation efforts (implementation of the VAT, cut in water and electricity subsidies, reduction in capital spending, etc.) and with higher-than-budgeted oil & gas prices, the budget deficit should turn into a surplus in 2022. Fiscal consolidation has allowed Oman to reduce its budgetary break-even price from nearly USD 120 per barrel in 2018 to an estimated USD 106 in 2022, according to the IMF. Nevertheless, the headline fiscal balance will remain exposed to the volatility in oil prices (hydrocarbon accounts for around 75% of total revenues). International reserves are expected to be USD 15 billion (nearly four months of imports). At the same time, other public sovereign assets (including sovereign wealth funds) are seen at around USD 27.7 billion (around 30% of GDP) as per the IIF. Nevertheless, despite sufficient reserves, the country will need further long-term financing from its neighbors and international capital markets. The government has USD 6.3 billion in debt repayments scheduled for 2022, after USD 4.6 billion in 2021. Oman has asked for technical assistance from the IMF to develop a debt strategy and strengthen the fiscal framework. This should help the country to continue borrowing from international markets at a lower cost. The current account deficit will narrow in 2022 in line with higher hydrocarbon production and exports (around 60% of total merchandise exports), which will also help to maintain the peg to the U.S. dollar. 

Political stability will remain

The new Sultan Haitham bin Tariq al-Said, who was named as successor after the death of Sultan Qaboos in 2020, announced his politics will be focused on reducing debt and creating employment, particularly for young people. In May 2021, the country experienced social unrest from Omani protesters demanding jobs. To keep the situation under control, the authorities pledged some measures to create jobs in the public and private sectors and provide additional social benefits. Although the discontent may emerge again due to the implementation of further fiscal austerity measures, the government can take steps to defuse public anger. Geopolitically, Oman is expected to remain a diplomatic bridge between the U.S. and Iran in the upcoming period.