Oman to backpedal on key reforms in favor of social stability
Al-Monitor Pro Members
Business journalist covering Gulf economies
Jan. 2, 2023
The wave of economic reform that has swept through Oman since 2020 to rein in budget deficits spinning out of control enters a consolidation phase. Elevated oil prices in 2022 fueled a buyback of public debt to put state finances on a short-term sound footing. Still, the underlying economic landscape remains fragile as diversification plans struggle to take shape. A rebound in global tourism fueled by the return of Chinese tourists benefits Oman, but its positioning on high-end markets prevents the sector from becoming a central pillar of the local economy. Investments in gas and hydrogen are a glimmer of hope.
In 2022, Oman recorded its first yearly fiscal surplus since 2013 on the back of high oil prices. It largely refrained from redistributing the $2.98 billion surplus to its citizenry, rather channelling it to cut public debt by about 18% to $46 billion by the end of 2022. But the rise from the "budgetary ashes" could be short-lived: the 2023 budget forecasts a $3.38 billion deficit with average oil prices at $55/barrel. The assumption is conservative, though, leaving room for upside surprises.
Oman appears to ‘pause’ on fiscal reforms. Personal income tax on high earners will not be implemented this year, contrary to a timeline revealed to Al-Monitor in March 2022. The value-added tax rate will stay at 5%, the Omani Minister of Finance said. “We expect the government to focus on increasing compliance, make more taxpayers comply with existing taxes [...] Add to it the additional burden of personal income tax might be too early,” Alkesh Joshi, Tax Leader for Oman at accounting firm Ernst & Young, told Al-Monitor. Public policy analyst Ahmed al-Mukhaini added that “according to some estimates, there are significant leakages in the taxation system, mainly for corporate income tax: only about 40% of taxes due for collection are being collected."
The ongoing push to redefine the welfare system in the five million-strong nation is likely to be more subtle in 2023. It will shift from launching new taxes and streamlining public expenditure — forecasted to stay flat in 2023 compared to 2022 preliminary spending results at roughly $34 billion — to divesting from state-owned entities.The Oman Investment Authority, a sovereign wealth fund under which public assets got consolidated in 2021, plans to raise more than $1.3 billion in 2023 by exiting investments, including in aviation and tourism sectors, Bloomberg reported.
“The focus has slightly shifted from fiscal to financial and economic sustainability to expand the Omani economy while ridding itself of public debt,” Mukhaini told Al-Monitor. “My sense is that they are still struggling with economic diversification,” adds Marc J. Sievers, the US ambassador to Oman from 2016 to 2019. Fossil fuel exports continue to be the primary growth driver. In 2023, the oil GDP is projected to grow 3.5 times faster than the non-oil GDP.
One limiting factor is rooted in the past. The former ruler, Qaboos bin Said Al Said, was “not that interested” in the economy, a source with knowledge of Oman’s leadership thinking told Al-Monitor on condition of anonymity. “What he cared deeply about were geostrategic issues, relations with major partners and national defense, to the extent that he handed over the private sector to 10-12 families. They still control most of the private sector to date, and I do not see much indication that they want to open it up to make the Omani economy more dynamic,” the source said.
The process is underway, argued Kumail Al Lawati, founder of Kapital, a Muscat-based debt advisory firm. “The private sector slowly, gradually and painfully transitions towards an economy where demand will not come predominantly from government expenditures. The days of easy money are gone,” he told Al-Monitor.
Companies will also need to put their house in order for Oman to achieve economic sustainability. “Many family businesses have what I call intertwined balance sheets, meaning liabilities going across one business to another and personal wealth used as collaterals. This is not healthy; balance sheet restructuring is needed,” Al Lawati said. It is a feature of Gulf economies where corporate governance is “below international best practices” despite recent improvements, according to rating agency S&P Global.
The energy sector remains a bright spot. Dwindling oil reserves is a background story, but Oman cashed in on strong demand for gas in 2022 and was on track to set an annual record in LNG export volumes. In 2023, state energy company OQ, together with Shell and TotalEnergies, will start developing Block 10 at the Saih Rawl gas field, expecting to reach production of 0.5 billion standard cubic feet of gas per day. The country announced a new government company in December 2022 to manage its natural gas assets and take gas costs off-budget, only taking in net gas sales revenues. There is no shortage of clients. In December, several Japanese companies signed a long-term deal to buy an additional 2 million tons of Omani LNG a year from 2025.
Besides plans to push daily oil production in 2023 to 1.17 million barrels per day and to increase its footprint in gas markets, Oman is betting on a forward-looking clean venture: green hydrogen, an energy carrier obtained by splitting water molecules using electrolysis powered by renewables. As it pledged to net zero by 2050, Oman launched in October 2022 its hydrogen strategy and Hydrom, a hydrogen-focus subsidiary of its national energy company Energy Development Oman. The country aims to produce one million tons of green hydrogen annually by 2030 to target markets in South Korea, Japan and northwest Europe. “They are developing the market; we are developing the supply,” summarized Abdulaziz Al Shidhani, Director General of Renewable Energy and Hydrogen at the Ministry of Energy and Minerals.
Hydrom looks to award the first green hydrogen project in the first quarter of 2023, with a preference for projects focusing on localizing industries in Oman. For export, Al Shidhani told Al-Monitor that the Ministry of Energy and Minerals will “leave it to the investors” to decide on the best carrier to transport hydrogen: gaseous hydrogen, ammonia or ethanol. “Our anticipation is that it will start with ammonia,” he said.
According to Abdullah Al Harthy, founder of Oman’s Green Hydrogen Summit, local appetite for the green hydrogen opportunity is rising. “Locally, nobody was really interested in green hydrogen or even understood it when we launched the summit in 2021. But it all changed after people from abroad expressed great interest in Oman’s potential and our Minister of Energy announced ambitious goals,” he told Al-Monitor.
Scenario 1: Oman backs the wrong horse
Green hydrogen is not the holy grail; critics say it is an inefficient and expensive use of renewable electricity. Green hydrogen is bleeding energy at each stage of the value chain. According to the International Renewable Energy Agency, about 30-35% of the energy used to produce hydrogen through electrolysis is lost. The conversion of hydrogen to other carriers, such as ammonia, can result in an additional 13-25% energy loss. If 10% leaks from production to use, the environmental benefits of using green hydrogen over fossil fuels would be completely wiped out; scientists told Reuters. Also, large amounts of fresh water required to produce hydrogen is an issue in the water-scarce region. “There is no solution; it has to go with desalination,” Al Harthy said, noting that new technologies could provide an alternative to the energy-intensive process. “We are not going to touch groundwater to produce hydrogen; the main source will be desalinated water,” Al Shidhani corroborated, mentioning potential plans to build desalination plants along the coastline between Duqm and Dhofar.
Notwithstanding fair questioning over the environmental relevance of green hydrogen, direct electrification of heavy industries still present technical challenges, offering an opportunity for green hydrogen to step in to replace the current use of fossil fuel-based hydrogen. Global hydrogen demand reached 94 megatonnes in 2021, but only 1% of the production is low-emission hydrogen. According to estimates, GCC countries could reap $70 to $200 billion in annual revenues from hydrogen by 2050 if the green hydrogen market takes off.
Scenario 2:Oman backslides to the good old days
The taxation of people’s purchasing power through VAT fetched Oman $896 million during the first half of 2022. Still, despite all key rating agencies revising Oman’s credit rating outlook upward in 2022, social discontent builds up among citizens. The government already sent gestures of appeasement. The previous decision to phase out residential electricity subsidies by 2025 was adjourned, and neither personal income tax on high earners nor a VAT rate increase will be implemented this year. Omani news outlets now run reports to inform the local audience that the “sizeable” portion of the 2023 budget allocated to basic services such as education, health, housing and social welfare underscores the government’s “commitment to sustaining the well-being” of the Omani population. “The risk is always that when the oil is doing well, the incentive to reform is kind of put on hold,” Sievers told Al-Monitor.
Conclusion - most likely scenario:
To preserve social stability, Oman backpedals on some contentious measures viewed as a push to dismantle the welfare system. But a global recession could sink oil prices and give the Omani leadership the catalyst needed to secure public acceptance for the next leg of economic reforms. Mukhaini said Sultan Haitham, who had big shoes to fill, managed to make his mark: “He made bold decisions which would not have been made in the past and convinced people that being different does not mean being bad.” The Qaboos-Haitham transition opened roads for forward-looking ventures, like in green hydrogen. Still, economic diversification efforts fall short and Oman’s economy and fiscal revenues “will remain heavily linked to the hydrocarbon sector” as Fitch Ratings noted in its latest rating upgrade.
Sebastian Castelier has been reporting on GCC countries since 2016, with a focus on how the oil-rich region navigates the long-term energy transition economically, socially and politically. He has been a contributor to Al-Monitor since 2019 and writes for various publications, including Haaretz, Al Jazeera, The Independent and Le Temps, among others.
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