bob looney teaches economics at the Naval Postgraduate School in California.
Published November 24, 2020
Chances are, you are barely aware that Oman is a country — or where it is, or how it fits in the crazy quilt of Middle East geopolitics. But the luxury of ignorance about this oil-drenched, Arizona-sized absolute monarchy tucked into a strategic corner of the Arabian Peninsula is likely to grow increasingly costly.
The death of Sultan Qaboos bin Said al Said in January 2020 sent shockwaves through the Gulf region. During his 49 years of uninterrupted rule, Sultan Qaboos led the country’s successful economic development and managed to keep the winds of political chaos at bay. This stability was evident in the peaceful accession of Qaboos’s chosen successor, Sultan Haitham.
However, it soon become apparent that Haitham had also inherited the increasingly severe economic pressures of Qaboos’s later years. Now with the addition of Covid-19, Haitham faces exacting challenges that, unless skillfully handled, could destabilize Oman’s fragile social contract.
The Golden Years
After deposing his despotic father in 1970, Sultan Qaboos focused on setting Oman on the path to rapid development and a high living standard. His early efforts were so successful that Oman was just one of 13 countries (and the only Arab state) heralded by the World Bank’s Commission on Growth and Development for achieving a quarter-century (1960-1990) of 7 percent or higher average growth.
Unlike the leaders of other Middle Eastern oil producers, Qaboos decreed that Oman’s petroleum revenues must be invested to benefit future generations, a goal that became a centerpiece of Vision 2020, the country’s innovative development strategy adopted in 1995. To diversify away from oil, Vision 2020 emphasized private-sector development, offered firms incentives to hire Omanis rather than foreign nationals and shifted educational priorities to provide the needed technical and vocational skills.
From 1970 to 2010, Oman’s human development (as measured by the UN’s Human Development Index) rose faster than that of any other country. GDP per capita in terms of purchasing power topped out at about $35,000 during the last oil boom. But it was still a comfortable $27,000+ before Covid-19 — or about the same as Turkey’s.
Or Was It Fool’s Gold?
Upon closer inspection, however, it’s clear that Vision 2020’s early success came largely from reallocating oil revenues, whereas promised governance and economic reforms needed to make growth partly independent of the price of oil were either delayed or undermined. Case in point: “Omanization” faced significant pushback from private employers who found the hiring incentives insufficient to offset the generous legislated minimum wage for Omani citizens, which roughly matches those of Saudi Arabia and Kuwait. In the end, Qaboos largely defaulted to the classic “rentier” model of governance, whereby the ruler distributes wealth (in this case, from oil sales) in exchange for political quiescence.
The lack of significant reforms gradually took its toll. On the World Bank’s Worldwide Governance Indicators, Oman declined from the 60th percentile in 1996 (the first year of available data) to the 57th percentile in 2018 for overall governance, from the 68th to the 63rd percentile for control of corruption and from the 66th to the 60th percentile for government effectiveness. Between 1996 and 2019, the country fell from the top to the bottom of the “moderately free” category of Heritage House’s Index of Economic Freedom.
By 2010, it was apparent that Oman’s development strategy had hit diminishing returns. International Monetary Fund data show that after increasing at an average rate of 8.5 percent in the 1980s, growth declined to 5.0 percent in the 1990s, 3.5 percent in the 2000s and 3.2 percent from 2010 to 2019. Since the 2014 oil-price collapse, the country has been running fiscal deficits that reached a high of 21 percent of GDP in 2016. By 2019, government debt totaled 60 percent of GDP, and there were nationwide protests over lack of employment opportunities — no great surprise since youth unemployment is running around 14 percent.
Concern over Oman’s budgetary condition and revenue prospects caused Standard & Poor’s to downgrade the country’s credit rating to BB+ (solvent, but below investment grade) in May 2017. And with the recent Covid-19 downturn in global economic activity, there is little prospect that rising oil prices will bail the country out in the near or even medium term.
Vision 2020’s early success came largely from reallocating oil revenues, whereas promised governance and economic reforms needed to make growth partly independent of the price of oil were either delayed or undermined.
To make matters worse, Covid-19 lockdowns have decimated the once booming tourism sector, resulting in a new round of debt downgrades. In April 2020, when the pandemic crunch was still in its early stages, the IMF forecast a deficit of 16.9 percent of GDP for 2020.
The timing could hardly have been worse. The government’s rapidly deteriorating fiscal situation means that it cannot afford stimulus measures to combat the Covid-19 economic downturn. In April, the government was forced to cut spending by 10 percent, followed in May by a 23 percent reduction in the salaries of new civil servants. With the continued deterioration of the government’s fiscal position, the decline in household incomes is expected to last well into 2021.
If at First You Don’t Succeed …
With adversity comes opportunity — maybe. The recent drop in oil revenues and the Covid-19 crisis have provided an opening for Qaboos’s successor to break from the country’s long-standing rentier model. In August, in his first significant action since accession, Sultan Haitham issued 28 royal decrees, including a new Provincial and Municipal Affairs Law that decentralizes control of day-to-day affairs.
While decentralization or localization nominally began in the 1990s, it did not follow the typical pattern of transferring authority and decision making from the central government to provisional authorities. Instead, it involved a hybrid system that perversely reinforced the Sultanate’s power. Sultan Haitham’s reforms break with this pattern by establishing a new System of Governorates and Municipal Affairs overseen by the Interior Ministry. As envisioned, this system would increase state legitimacy by responding faster to problems and better managing corruption.
Haitham has also moved to loosen the central government’s tight grip on the economy, proposing changes to promote private sector development. Among these is the creation of an independent Public Authority for Special Economic Zones and Free Zones to manage the virtually unregulated trade zones in Duqm, Mazyouna, Salalah and Sohar that dot the coastline. The government is also considering stepped-up privatizations to generate revenue — although movement in this direction is constrained because it would result in job losses.
Less visibly, power is slowly being devolved to the front line within existing governmental structures — especially in health care and, more recently, education. Health service delivery is now overseen at the local level, and educators have been given more discretion. (A cynic might note that both these reforms have the ancillary benefit of buffering the Sultan from at least some responsibility for failure.)
Significant obstacles to decentralization remain — decreeing reforms is only the first step in a tortuous journey. To show its determination, the government is bringing in younger, better-educated state employees under improved training and management systems. To make room for the new workers, approximately 70 percent of senior managers, experts and hangers-on with more than 25 years of service are being forcibly retired under Covid-19 austerity measures announced in May.
While decentralization may improve the efficiency of service delivery, the most significant gains are likely to come in encouraging new industries that lessen the country’s dependence on oil. Renewable energy — particularly solar — is a logical avenue, given Oman’s generally high level of technical expertise and an average of 10 hours of sunshine a day.
Another possibility is that Oman, which sent 99 percent of its oil exports to China in 2019 and borrowed US$3.6 billion from Chinese lenders in 2017, will offer China cut-price oil in return for guaranteed Chinese investment as part of its Belt and Road Initiative. Such an agreement would need to be carefully negotiated, however, given the disastrous experiences of Pakistan and Kazakhstan.
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Whether Oman’s economy and its social contract will be able weather the present crisis is anybody’s guess. But while there’s no question that the country’s new Sultan has been dealt a weak hand, his recent moves suggest that it’s still too early to count him out.
Unfortunately, more is riding on the outcome than the continuing prosperity and tranquility of this little country of five million. The sultanate straddles the chokepoint entrance to the Persian Gulf, still the source of much of the world’s oil. And it is one of the few countries that can boast of good relations with Iran as well as Iran’s deadly enemy, Saudi Arabia. If Oman sinks into instability, China’s geopolitical reach will be extended, and the management of peace in the region will be that much more difficult.