Oman's oil wealth under pressure

Current regional uncertainties are unlikely to cause any major political problems for Oman. Sultan Qaboos enjoys considerable public support and the government's frequent statements opposing the war reflect the general public mood.

Bilateral relations with the US and the UK are also unlikely to be undermined by the government's opposition to war given its 'nonstrategic' geographical location for a military strike against Iraq.

Regional uncertainties aside, the government is under pressure to speed up the pace of political reform. Since the introduction of the Basic Law , a new structure for the country's political institutions, in 1996 progress has been slow. The introduction of an elected Majlis al-Shura (Consultative Council) was viewed as a positive step, but its lack of powers has drawn criticism.

Council elections are due later this year. They could prove a good barometer of public opinion, especially following the recent decision to extend the electoral franchise to all citizens over 21 years as frustration at the apparent lack of progress is greatest among the younger generation.

Again, however, this does not pose a threat to the current political status quo. Regional uncertainties come at a difficult time for the Oman economy. Oil, the mainstay of the economy, accounting for nearly 80% of export earnings and 40% of GDP, has been hit hard by technical problems.

Crude oil production dropped 6% to 897,400 barrels per day last year and it is feared output could fall again this year. Recent reports suggest that the scale of the problems is far worse than initially thought.

With oil prices expected to come off recent highs once regional uncertainties subside, and crude export volumes heading for a second consecutive year of contraction, the oil sector faces a tough 18 months. LNG exports have also contracted, adding to concerns.

Development of Oman's natural gas reserves are central to government diversification plans. The non-oil economy will be unable to compensate for the downturn in the oil sector. The current heightened risk environment is hampering government efforts to attract foreign investment outside the gas and oil sectors, and several big ticket projects are on hold.

Adding to problems the local banking sector is also only just beginning to emerge from the bad debt problems of the past four years. Heavy provisioning levels suggest it will be unwilling to take on substantially more credit risk in the near future, despite signs that the worst is over.

The international environment is also unlikely to provide comfort given modest growth prospects and expected cyclical rise in interest rates. Faced with this environment the Government will need to reinvigorate its reform programme, the central tenets of which are diversification, promotion of the private sector and Omanistion (the replacement of expatriates with nationals) of the workforce.

Three years of windfall oil revenues provide some comfort, but further measures are needed to encourage private and foreign investment. There are already plans to extend 100% foreign ownership to the banking and insurance sectors and reflecting trends elsewhere in the region, foreign ownership of land and buildings is also being discussed.

However, demographic pressures are rising. The labour force is growing at an estimated annual average rate of 6%. Omanisation of the workforce is gradually changing the make-up of the labour market, but is not a long term solution to the problem.

Rigidities in the labour market (specifically the large gap between nationals and expatriate salaries) need to be addressed. Economic growth looks set to fall again this year because of the problems in the oil industry, but should recover in 2004 as oil output recovers. However, recovery will be hindered on a number of fronts - softer oil prices, rising interest rates and subdued global economic growth.