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Oman’s Renewed Economic and Political Challenges

Lakshmi Priya is Research Analyst at Manohar Parrikar Institute for Defence Studies & Analyses, New Delhi Click here for detail profile.
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  • June 25, 2021

    The pandemic induced economic slowdown in Oman, compounded by the vagaries of the international oil market, has resulted in a series of youth protests in the country. Hundreds of unemployed Omani youth, protesting mass layoffs, took to the streets in May. The government had to use force to quell these protests. For the new Sultan, Haitham bin Tariq Al-Said, these protests amplified the economic and political challenges that lie ahead. Meanwhile, his government has announced 32,000 new employment opportunities and subsidy to private companies employing Omani youth. The fruition of these measures would depend on its success in spurring economic growth. However, whether accommodating the demands of the youth would help Sultan Haitham in securing popular legitimacy and further consolidating his leadership, is something that remains to be seen.

    Plummeting Economy

    Sultan Qaboos, who ruled for close to 50 years (1970-2020), modernised and transformed Oman through increased economic diversification, industrialisation, natural gas production, infrastructure development and privatisation. Nonetheless, Oman essentially remained an oil-based economy. The oil price crash of 2015-16 led Sultan Qaboos to adopt economic reforms that included a drastic cut in public spending, increased taxation, and reduction in subsidies by 20 per cent. However, these measures subsequently triggered the unrest of 2017-18. Depleting reserves and falling oil prices had led to an economic slowdown and rise in unemployment, especially among the youth.

    Largely dependent on the export of hydrocarbons, Oman’s economy has been vulnerable to fluctuations in global oil prices. It also suffers from structural issues that are unlikely to be resolved any time soon. Oman’s oil production is going through a long-term slowdown. According to the country’s finance ministry, the future growth in reserves will be limited to a successful implementation of enhanced oil recovery techniques.1 Besides, Oman is over-reliant on external funding. As per the Fitch Ratings, Oman faced a higher fiscal deficit and drawdown of fiscal reserves in 2020, and the willingness of lenders to fund Oman’s huge external financing needs will be critical to the sustainability of the country’s government finances.2  

    The COVID-19 Shock

    The succession of Haitham bin Tariq Al-Said in January 2020 generated hope among the youth, but the new ruler inherited a low performing economy that required tough decisions. Before Sultan Haitham came to power, the global economic shock caused by the pandemic had already dealt a blow to the weak economy of Oman. Due to containment measures, the non-hydrocarbon GDP decreased by 10 per cent and the economy contracted by 6.1 per cent in 2020. Sectors such as construction, hospitality, wholesale and retail trade took the heaviest toll. According to the International Monetary Fund, lower oil-generated revenue, economic contraction and fiscal support measures led to the widening of the fiscal shortfalls, and in 2020 Oman’s deficit widened to 17.3 per cent of the GDP.3 Oman had to depend on the issuance of external bonds, the drawdown of deposits and sovereign funds, and proceeds from the privatisation drive. Oman’s debt rose to 81 per cent of the GDP in 2020, from 60 per cent in 2019.4 It is to be noted that, like most other Gulf Cooperation Council (GCC) countries, Oman does not have ample fiscal buffer to rely on.

    Political Fallout

    The protests in Oman have also highlighted the political challenges for Sultan Haitham. Oman has in the past witnessed protests advocating political reforms and the introduction of political participation. Muscat and other major cities had witnessed protests in 2011-12 soon after the Arab Spring spread in the region. The protests renewed in 2017-18. Though Oman had since 2007 incorporated incremental political reforms by introducing elections for the Majlis al-Shura (Consultative Council) and the Majlis al-Baladiya (Municipal Council), it has not significantly changed the political situation. Oman remains an absolute monarchy, and the youth who aspire for democratic participation remain disenchanted. The recent protests, although largely focused on economic issues, and coming at a time when the government has announced an indefinite postponement of the municipal council elections due in 2021 owing to the Covid-19 pandemic, underline the mounting challenge for Sultan Haitham who was reportedly handpicked by Sultan Qaboos to succeed him. Given the slow pace of political reforms in Oman, the youth are demanding accelerated measures to devolve more power to both chambers of the council of Oman.

    Haitham’s Economic Reforms

    In the past year-and-a-half, Sultan Haitham has taken a number of measures to revive the economy. First, the 10th five-year plan (2021-25) focuses on economic diversification, fiscal sustainability, labour market, youth employment, investment and the private sector, besides emphasising education, health and skill development.5 The sectors earmarked for economic diversification are agriculture, fisheries, manufacturing, transport, energy, mining and tourism.  In order to diversify its economy, Oman focuses on attracting foreign capital in non-oil and export-oriented sectors by taking regulatory reform measures and infrastructure development. Second, the government intends to capitalise on its geographic advantage to develop into a regional logistics hub. And third, the government emphasises enforcing local procurement requirement for foreign companies along with the promotion of Omanisation of the workforce.6 Sultan Haitham imposed a 10 per cent budget cut for the government authorities and introduced a five per cent value-added tax in a phased manner currently applicable to businesses earning more than one million Omani Rial (OMR).7  He also minimised grants, reduced the retirement age, and decreased wages for the new hires.

    It is apparent from the protests that the reforms were not received well by the Omani youth. Responding to the protests, the government announced new jobs for youth and accelerated Omanisation of the workforce and asked the public sector companies to appoint Omanis in place of foreign staff by July 2021. The foreigners make up more than 40 per cent of Oman’s population of 4.6 million. The government reserved 11 professions in the private sector for the Omani nationals in June 2020. Between March 2020 and March 2021, more than 200,000 migrant workers engaged in the private sector left Oman.8 However, the young population in the Sultanate perceives the private sector as exploitative and seeks jobs in the public sector. The young demography of Oman is getting restless and needs quick solutions to the economic woes, which is a challenging task for Sultan Haitham considering the country’s dependence on oil.

    Conclusion

    The recent protests have renewed the focus on need for economic and political reforms in Oman, and it is apparent that any short-cut to reforms will not prove beneficial in the long run. The reforms have to be systematic and bring long-term stability to the gulf country with modest oil resources. The economic and political reforms have to go hand-in-hand while time is of the essence. The tact lies in keeping the youth contented while re-inventing the ailing economy.

    Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.

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