Abstract
Oman's robust economic growth in past decades has generated substantial improvements in social welfare and financial wealth. Nevertheless, the growth momentum supported by the production of hydrocarbons has been showing limits, especially given the prospect of a permanent shift in global demand triggered by the transition to a low carbon economy. To navigate toward stronger, job-rich, and sustainable growth, well-crafted and carefully sequenced reforms would be needed. The authorities' reform agenda, under the strategic direction of Oman Vision 2040, is a big step in the right direction. Steadfast implementation of these reforms is critical to fully unlock the potentials of the well-educated national labor force and accelerate the non-hydrocarbon private sector-led growth.
The Path Toward Stronger Growth in Oman1
Oman's robust economic growth in past decades has generated substantial improvements in social welfare and financial wealth. Nevertheless, the growth momentum supported by the production of hydrocarbons has been showing limits, especially given the prospect of a permanent shift in global demand triggered by the transition to a low carbon economy. To navigate toward stronger, job-rich, and sustainable growth, well-crafted and carefully sequenced reforms would be needed. The authorities' reform agenda, under the strategic direction of Oman Vision 2040, is a big step in the right direction. Steadfast implementation of these reforms is critical to fully unlock the potentials of the well-educated national labor force and accelerate the non-hydrocarbon private sector-led growth.
A. Context
1. Oman has registered significant economic development in past decades, supported by large hydrocarbon production.2 Oil and oil-related production, which accounted for about 36 percent of total real GDP in the period of 2016–2020, continues to be the key pillar of Oman's economy, sustaining the wellbeing of its nationals and contributing to the accumulation of sovereign wealth. Export diversification has improved with both volume and types of non-oil exports expanded, but exports of manufactured goods are generally of lower technology values.
2. Nonetheless, economic competitiveness has declined mostly owing to lower productivity and relatively high wages. The segmented labor market, as shown by the wage gap between the public and private sectors and the relatively large share of Omani citizens in the public sector, has hindered the growth of labor productivity. Public investment has resulted in high-quality and well-developed infrastructure, but private corporate investment has slowed down, associated with declining profitability.
3. Against this backdrop, this paper analyzes the characteristics of and challenges facing Oman's economy through the lens of a production function and provides policy and reform recommendations to lift growth potentials. The paper is structured as follows: section 2 analyzes characteristics of Omani economy; and section 3 discusses the policies and proposed reforms. The last section concludes.
B. Characteristics of Omani Economy
Economic Output and Export
4. Large oil wealth has supported economic development and lifted living standards in Oman in the past several decades. In 2016–2020, crude oil and natural gas production accounted for about 32 percent of total real GDP, and downstream oil and gas activities such as refining and petrochemical manufacturing accounted for about 4 percent of total real GDP. Nonetheless, progress in raising the share of the non-oil sector in the economy in the past 10 years has been limited—from 58 to 63 percent of real GDP between 2010 and 2020. Living standards were broadly maintained at the same relative level in the past forty years—GDP per capita in Oman was about half of the U.S. level in 1980 and in 2020 (Figure 1).
Size of Non-hydrocarbon Sector and GDP Per Capita
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Haver, country authorities, and IMF staff calculations.Size of Non-hydrocarbon Sector and GDP Per Capita
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Haver, country authorities, and IMF staff calculations.Size of Non-hydrocarbon Sector and GDP Per Capita
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Haver, country authorities, and IMF staff calculations.5. Real non-hydrocarbon GDP growth has slowed down since the global financial crisis. In the period 2001–05, real GDP growth averaged around 0.9 percent while non-oil growth averaged around 3.9 percent per year. Real GDP growth increased to about 5.2 percent per year between 2006 and 2010 with non-oil growth averaging around 7.2 percent. However, real GDP growth has slowed since the 2014 oil price slumps (Figure 2). Oman's potential growth has slowed down in recent years, driven by the declines in trend growth of capital investment growth, employment, and total factor productivity (TFP).3 The global financial crisis and 2014 oil price plunge have weighed on confidence, investment, and growth in both the hydrocarbon and non-hydrocarbon sectors. The contribution of total factor productivity (TFP) has been relatively small, and its contribution turned negative since the global financial crisis. In 2020, the COVID-19 crisis and oil price shock caused a large recession notwithstanding a range of policy support measures, which could have caused damage to the economy, bringing to the forefront the urgent need for reforms.
Average Growth and Contribution to Potential Non-hydrocarbon Growth
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Average Growth and Contribution to Potential Non-hydrocarbon Growth
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Average Growth and Contribution to Potential Non-hydrocarbon Growth
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
6. Export diversification has improved but there is still a large scope for improvement (Figure 3). Introducing new goods and tasks would allow active learning and progress up the quality ladder, which would make investment and labor more productive and increase overall productivity. Economic diversification is a stage that countries typically experience before they move into more advanced stages of development and become more specialized on products with high technology content (Lian and others, 2021). Hausmann, Hwang, and Rodrik (2007) show empirically that export sophistication is one of the major determinants of growth, accounting for initial conditions, institutions, financial development, and other growth factors. Over the years, Oman has progressed toward more export diversification, although GCC countries in general lag Emerging Market countries (EMs) in the overall degree of export diversification, due to the dominance of oil exports.
7. The volume and types of non-oil exports have expanded. Though total exports are still dominated by oil and minerals, the share of oil and minerals has decreased from 75 percent of all exports to about 61 percent between 1996 and 2019. In 2019, the non-oil export basket accounted for about 39 percent of the total export and included a range of goods and services such as chemicals, agricultural products, metal, vehicles, electronics, textile, and services.
8. Exports of manufactured goods are generally of lower technology values. Oman's export share of high-technology products is low, compared to high-income countries, but relatively high if compared to GCC countries who also rely on oil and oil-related exports. Goods with higher technology values generally are more knowledge-intensive, entail more transfer of technology and innovation and thus more spillover effects to other domestic sectors. The relatively small size of Oman's knowledge-intensive exports imply that the trading sectors still have room to deepen their participation in the global value chains and grow.
Export Diversification
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Export Diversification
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Export Diversification
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Labor Market
9. Public sector jobs, which generally pay higher wages and benefits and provide greater job security, remain attractive but the share of Omanis working in the private sector has been rising. Private sector employment relies more on expatriate workers (IMF, 2021). There were about 1.4 million expatriate workers in Oman by the end of 2021, accounting for 80 percent of total employment. The government of Oman has been implementing policies to promote employment of Omanis in the private sector, and the share of nationals in the private sector employment has been generally trending up in the past two decades.
Share of Nationals in Private Sector
(in percent)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Source: Haver, Oman NCSI, and IMF staff calculations.Share of Nationals in Private Sector
(in percent)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Source: Haver, Oman NCSI, and IMF staff calculations.Share of Nationals in Private Sector
(in percent)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Source: Haver, Oman NCSI, and IMF staff calculations.10. With a young population, large numbers of young Omanis are expected to enter the labor market over the medium term, while at the same time the room for the public sector to continue to absorb new labor has become increasingly limited. Based on the population structure, in a five-year horizon nearly 280,000 young Omanis would be added to the working-age population, and taking account of rates of labor participation and replacement of retirees, about 120,000 new jobs will need to be created. Consequently, based on the estimated employment-output short- and long-term elasticities between non-oil growth and employment of national and expatriate labor forces in the GCC (Behar, 2015), it is estimated that the non-oil sector would need an annual growth rate of about 6.8 percent to offer sufficient opportunities to job seekers. The relatively high government wage bill points to limited capacity to absorb additional employees without adding to fiscal vulnerabilities.
Public Wage Bill
(percent of GDP)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: National Authorities; and IMF Staff Estimates.*Emering Markets figure excludes LICs and GCC Countries.Public Wage Bill
(percent of GDP)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: National Authorities; and IMF Staff Estimates.*Emering Markets figure excludes LICs and GCC Countries.Public Wage Bill
(percent of GDP)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: National Authorities; and IMF Staff Estimates.*Emering Markets figure excludes LICs and GCC Countries.11. A segmented labor market with wage gap between the public and private sectors and skills mismatch hinder employment of Omanis in the private sector. The sizeable wage gaps skew the supply of Omani labor toward the public sector and the demand for labor in the private sector toward expatriates.4 Also, differences in labor policies between nationals and expatriates, pertaining to dismissal procedures, pensions, and other social security rules, also contributes to making nationals less attractive to businesses to the extent that these differences make employing nationals more costly.5
Wage Premia and Public Employment
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Oman National Central for Statistics and Information, IMF FAD Expenditure Assessment Tool (EAT). Latest annual data: 2020 for Oman and 2019 for EMEs and AEs.Wage Premia and Public Employment
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Oman National Central for Statistics and Information, IMF FAD Expenditure Assessment Tool (EAT). Latest annual data: 2020 for Oman and 2019 for EMEs and AEs.Wage Premia and Public Employment
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Oman National Central for Statistics and Information, IMF FAD Expenditure Assessment Tool (EAT). Latest annual data: 2020 for Oman and 2019 for EMEs and AEs.12. The efficiency of public spending on education can be improved and labor skills can be diversified further.6 Oman has made big strides in raising educational attainment, and Omani workers are better educated on average than expatriates. Nonetheless, while educational outcomes, as proxied by TIMSS scores, are similar to EM average, Oman's public spending on education is higher than averages in EMs, and skills mismatch remains a challenge as a large share of college graduates majored in business, administration and law (IMF, 2021).
13. Expatriates have contributed to economic growth in the past decades and will likely continue to play a role in future development. The use of foreign labor has helped overcome periods of local labor shortages and contain overheating pressures during periods of high oil prices. It has also helped to reduce the pace at which price competitiveness declined by containing the increase of aggregate wage levels, given the lower wages of expatriates.
Productivity and Competitiveness
14. Competitiveness has declined mostly owing to lower productivity and relatively high wages. Rising oil prices since 2000 have helped finance rapid increases in public spending, which has led to strong growth in consumption demand and boosted the low-productivity domestic non-tradable sector (IMF, 2014). The unit labor cost (ULC)-based real exchange rate (RER) reveals a significant decline in Oman's competitiveness owing to the divergence between wage and price inflation rates (IMF, 2021). Although sectors including transport and communication, construction, and manufacturing have shown improvements in output per worker in recent years (2016-2019), some service sectors such as financial and business services, education, wholesale, and retail trade have shown lower output per worker.7 Bolstering competitiveness would require lowering unit labor costs by increasing productivity and containing relatively high average wages.
15. Expenditure on research and development (R&D), which is closely related to innovation, has been low in Oman. R&D expenditure as a share of GDP has averaged 0.1 percent during 2010-19, compared to 2.4 percent in AEs. A significant correlation between R&D and innovation has been intensively discussed in literature, and the figure illustrates this relationship, using the number of submitted patents per capita as a proxy for innovation. The COVID-19 pandemic revealed the strong potential of digital technology in generating future growth opportunities, such as emerging clusters of opportunities related to the accelerated shift to e-commerce, increasing use of digitalization and modern communication technology in daily life (e.g., telehealth, online education, and working remotely).
Patent Submissions versus R&D Expenditure
(average period 2010-19)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: World Intellectual Property Organization, World Bank, and IMF calculations.Patent Submissions versus R&D Expenditure
(average period 2010-19)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: World Intellectual Property Organization, World Bank, and IMF calculations.Patent Submissions versus R&D Expenditure
(average period 2010-19)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: World Intellectual Property Organization, World Bank, and IMF calculations.16. Oman's innovation outputs have been limited relative to its level of innovation investments (Figure 4). A major benefit of innovation is its contribution to economic growth. Innovation can lead to higher productivity, expansion of new business and production opportunities, and greater global market share. As more goods and services are produced with higher productivity, the economy grows and standards of living increase. Measured by the Global Innovation Index (GII), Oman produces less innovation outputs relative to its level of innovation investments.8 Oman does well in terms of education, information and communication technologies (ICTs), and infrastructure inputs. However, the high level and standard of education and good infrastructure haven't been fully utilized to generate innovative output—Oman lags in terms of the output indices, measured by knowledge creation, knowledge diffusion, and other creative goods and services. These output sub-indices are built on variables including patent applications filed by residents, scientific and technical articles published in peer-reviewed journals, the entry density of new firms, spending on computer software, the number of certificates of conformity with standard ISO 9001 on quality management systems issued, and high-tech exports (net of re-exports) as a percentage of total exports, etc.
Global Innovations Index
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Global Innovation Index, and IMF staff calculations.Global Innovations Index
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Global Innovation Index, and IMF staff calculations.Global Innovations Index
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Global Innovation Index, and IMF staff calculations.Business Environment and Governance
17. Oman has been making efforts to improve the business environment and governance, which have broadly contributed to attracting investment and enhancing efficiency. Oman's business environment has experienced steady improvements in recent years, with simplified procedures in starting a business and dealing with various permits. Since the launch of “Oman Vision 2040” under the leadership of Sultan Haitham, Oman has implemented a range of reforms to further improve the business environment and attract private investment. These efforts include:
Updated Oman's Commercial Companies Law (CCL), Foreign Capital Investment Law (FCIL), Privatization Law, Public-Private Partnership Law, and Bankruptcy Law. Oman's Capital Market Authority (CMA) issued regulations on shareholders and boards of directors in 2019 for a more transparent and robust corporate governance system. In October 2021, the Executive Regulations of the CCL was issued to improve the regulatory framework of commercial companies. Under the new FCIL, 100 percent foreign-owned company is allowed, and single shareholder companies are also allowed. More clarity on the exact scope of business activities that would be allowed to be 100 percent foreign-owned is being developed.
Created the Public Authority for Special Economic Zones and Free Zones (OPAZ) in August 2020 to facilitate investment in the Special Economic Zones.
Restructured the Ministry of Commerce, Industry, and Investment Promotion (MOCIIP) to provide a comprehensive range of business formation and private-sector development support, including investment advice to foreign companies looking to invest in Oman, especially in key target sectors that the country's diversification program identifies.9 On trade restrictions, though the trade-weighted average tariff rate is about the same as in other GCC countries, its prevalence of non-tariff barriers10 is relatively high compared to other GCC countries.
Undertook reforms for investment such as making its tender system transparent, modifying its labor laws to provide companies with workforce flexibility to address manpower redundancies, increasing access to credit, speeding up approvals for new businesses, and developing advantages for foreign investors, including permissions to invest in several new industries in the economy, and expanded land use.
Trade Restrictions, 2019
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: WEF, IMF staff calculations. Indices on the prevalence of trade barriers ranking and subcomponents are based on WEF’s quantitative and qualitative assessment of the trade environment. These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and standardized assumptions on business constraints, and information availability. For “Prevelance of non-tariff barriers”, 1 = strongly limit; 7 = do not limit at all.Trade Restrictions, 2019
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: WEF, IMF staff calculations. Indices on the prevalence of trade barriers ranking and subcomponents are based on WEF’s quantitative and qualitative assessment of the trade environment. These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and standardized assumptions on business constraints, and information availability. For “Prevelance of non-tariff barriers”, 1 = strongly limit; 7 = do not limit at all.Trade Restrictions, 2019
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: WEF, IMF staff calculations. Indices on the prevalence of trade barriers ranking and subcomponents are based on WEF’s quantitative and qualitative assessment of the trade environment. These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and standardized assumptions on business constraints, and information availability. For “Prevelance of non-tariff barriers”, 1 = strongly limit; 7 = do not limit at all.18. Improving economic governance would support higher investment. Good governance is often associated with stronger private investment, while weak governance coupled with a high perception of corruption may create uncertainty about the returns to investment due to factors including unpredictable policies and/or uneven enforcement of regulation.11 Based on Mauro's (1995) empirical results, an improvement in the corruption index by one standard deviation is estimated to increase investment by as much as 3 percent of output. While Oman's rule of law, voice and accountability, and political stability indicators are above the GCC average, it lags the performance of AEs.
Governance Indicators, 2020
(estimates range from approximately -2.5 (weak) to 2.5 (strong) performance)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: The Worldwide Governance Indicators.Governance Indicators, 2020
(estimates range from approximately -2.5 (weak) to 2.5 (strong) performance)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: The Worldwide Governance Indicators.Governance Indicators, 2020
(estimates range from approximately -2.5 (weak) to 2.5 (strong) performance)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: The Worldwide Governance Indicators.Capital Inputs
19. Private investment has been generally volatile and trending down since 2015. The rapid expansion of public investment reflected in part the expansionary fiscal position and investment in infrastructure as oil revenue expanded at the beginning of the century. The limited private investment likely reflects weak competitiveness that has also led to a concentration of the non-oil economy on non-tradable activities—notably construction and services—with a concentration of low-skilled and low-wage labor. The relatively labor-intensive non-oil sector generated less room for additional spending on physical capital, and the share of non-oil capital investment to non-oil GDP has been generally declining in recent years.
Gross Fixed Capital Formation
(in percent of GDP unless otherwise noted)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Oman NCSI, S&P Capital IQ database, and IMF staff calculations.Gross Fixed Capital Formation
(in percent of GDP unless otherwise noted)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Oman NCSI, S&P Capital IQ database, and IMF staff calculations.Gross Fixed Capital Formation
(in percent of GDP unless otherwise noted)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: Oman NCSI, S&P Capital IQ database, and IMF staff calculations.20. The public investment in infrastructure has resulted in high-quality and well-developed infrastructure. Oman's public capital stock/GDP ratio exceeds not only the GCC average but also AE and EME averages. The available quality indicators also show that the quality of Oman's infrastructure is above average. While these investments lay a solid foundation for sustained longer term growth, they also suggest room for better prioritization of projects going forward. Being more selective in the projects, and enhancing efficiency in implementing public projects would increase the “value for money” of public investment.
21. FDI inflows strengthened somewhat since 2018. Since Oman joined the WTO in 2000, FDI inflows have been relatively anemic until 2018 when a large hydrocarbon related FDI flowed into Oman. While the bulk of FDI inflows were directed toward the oil and gas sector in the past, ongoing economic reforms and policy initiatives to attract FDI could strengthen and diversify FDI inflows going forward.
Capital Stock and Infrastructure Quality
(latest avialable in percent of GDP and ranking)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: IMF FAD Expenditure Assessment Tool (EAT), World Development Indicators, and World Economic Outlook.Capital Stock and Infrastructure Quality
(latest avialable in percent of GDP and ranking)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: IMF FAD Expenditure Assessment Tool (EAT), World Development Indicators, and World Economic Outlook.Capital Stock and Infrastructure Quality
(latest avialable in percent of GDP and ranking)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: IMF FAD Expenditure Assessment Tool (EAT), World Development Indicators, and World Economic Outlook.22. Lower corporate investment is associated with declining corporate profitability (Figure 5).12 Corporates' Return on Equity (RoE) has been declining over the past decades. Though this trend has been a wider phenomenon in EMs in general, the decline in GCC countries has been more rapid in recent years than in EMs especially prior to the pandemic. The deteriorating performance of corporates is widely distributed across sectors, suggesting that the reasons for the decline are less likely to be sector specific. A broad decline of corporates' capacity to generate revenues appears to be the origin of RoE underperformance.
GCC Gross FDI Inflows, 2000-2020
(in USD billion)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: World Economic Outlook, UNCTAD, and IMF staff calculations.GCC Gross FDI Inflows, 2000-2020
(in USD billion)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: World Economic Outlook, UNCTAD, and IMF staff calculations.GCC Gross FDI Inflows, 2000-2020
(in USD billion)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: World Economic Outlook, UNCTAD, and IMF staff calculations.
Corporates Performance
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: S&P Capital IQ database, and IMF staff calculations.Corporates Performance
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: S&P Capital IQ database, and IMF staff calculations.Corporates Performance
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: S&P Capital IQ database, and IMF staff calculations.23. SMEs constitute a small part of Oman's economy and have large room for development. A vibrant SME sector has been demonstrated to play an important role in tackling diversification challenges while being a major source of new job creation. Small firms have the largest shares of job creation, and highest sales growth and employment growth, even after controlling for firm age. Conditional on size, young firms are the fastest growing. Large mature firms have the larger employment shares, but small young firms have higher job creation rates (Ayyagari and others, 2014). Large firms usually have higher productivity growth given their economy of scale and larger human capital and technology endowment, relative to smaller firms. However, it is expected that being a small firm is a natural part of development and having a base of dynamic SMEs is crucial for market development. SMEs' contribution to GDP is relatively limited in Oman, and their share of total loans is also low.13 The number of registered SMEs has continued to grow despite the economic constraints imposed by the pandemic: there were 62.3 thousand registered SMEs in November 2021, up from 47.8 thousand a year ago and 44.1 thousand in March 2020, according to the National Centre for Statistics and Information.14
SME Loans, 2019
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: IMF 'Enhancing the Role of SMEs in the Arab World—Some Key Considerations'; Financial Stability Report by Central Bank of Oman, UAE, Kuwait and Bahrain and IMF staff estimates.SME Loans, 2019
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: IMF 'Enhancing the Role of SMEs in the Arab World—Some Key Considerations'; Financial Stability Report by Central Bank of Oman, UAE, Kuwait and Bahrain and IMF staff estimates.SME Loans, 2019
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: IMF 'Enhancing the Role of SMEs in the Arab World—Some Key Considerations'; Financial Stability Report by Central Bank of Oman, UAE, Kuwait and Bahrain and IMF staff estimates.24. Policies have been deployed to support the development of SMEs. To address SMEs' financing challenges, the Central Bank of Oman (CBO) has prescribed that at least 5 percent of total bank credit be disbursed to SMEs and the Oman Development Bank has worked to provide subsidized loans to SME subsectors. Oman created a SME Development Fund in 2014 to foster entrepreneurship and help finance SMEs. Meanwhile, the Public Authority for SME Development runs a technical support program, and entities such as Sharakah provide financial support and consultation to SMEs.
25. Investment in renewables. Oman is actively working to reduce its dependency on hydrocarbons and increase economic diversification. For example, Oman's National Energy Strategy aims to derive 30 percent of electricity from renewable sources by 2030.15 Oman's Ministry of Energy and Minerals has been identifying areas for green hydrogen and renewable energy-related investments with other governments. Model simulation suggests that an initial green investment push combined with initially moderate and gradually rising carbon prices would deliver the needed emission reductions while supporting GDP and employment in the near term (IMF, 2020b). In the medium term, it can spur innovation, create new sources of growth, and reduce poverty and inequality while delivering cleaner air and water.
C. Reforms for Strong, Job-Rich, and Sustainable Growth
26. Strong, job-rich, and sustainable non-hydrocarbon private sector-led growth is needed to ensure higher living standards for future generations. The global trend toward transitioning to renewable energy would significantly affect oil exporting countries' fiscal revenues and economic activity, rendering the tasks of economic diversification and transformation more urgent, and Oman is no exception. For it, a more diversified and competitive tradable sector and a growth that generates sufficient high-quality jobs for the well-educated Omanis and future generations, are the key.
27. To achieve this objective, a comprehensive set of reforms supported by three overarching principles are needed. The reforms would range from labor market policies to social safety net reforms, from business environment and regulatory framework to educational reform. The reform actions would need to be fully implemented to ensure an efficient market-based resource reallocation mechanism that would motivate the creative abilities of Omanis and attract private investment, and therefore being effective in supporting growth. The reforms should be sequenced properly—from the core issues to cross-cutting issues while taking into consideration the implementation capacity. The medium-term fiscal framework would help avoid procyclical fiscal policies and anchor needed spending rationalization.
| Principle I. Broad-Based Reform | Principle II. Proper Sequencing | Principle III. Multi-Year Efforts |
| A broad-based reform that tackles challenges from multiple areas within a coherent framework would be more effective than a piecemeal approach. It would allow the various effects and spillovers from separate policy measures to be addressed and harmonized and help create positive tailwinds that increase the probability of success of the reforms. | Policies that foster conducive business environment and attract private investment need to be implemented in the near term. Harmonizing labor market policies would improve competitiveness and productivity, which should be accompanied by the social safety net reform to ensure adequate and equitable social protection. Other reforms on cross-cutting issues could proceed with a measured pace while taking into consideration the implementation capacity. | Persistent efforts are needed to fully implement comprehensive reforms. No reform design is perfect, and there will need to be a focus on resolving unexpected challenges as they manifest in a dynamic manner, reflective of the core principles and objectives of the reform agenda. Sustained broad consultation with private stakeholders and the public is crucial to secure broad social support for the multipronged reform agenda. |
| Principle I. Broad-Based Reform | Principle II. Proper Sequencing | Principle III. Multi-Year Efforts |
| A broad-based reform that tackles challenges from multiple areas within a coherent framework would be more effective than a piecemeal approach. It would allow the various effects and spillovers from separate policy measures to be addressed and harmonized and help create positive tailwinds that increase the probability of success of the reforms. | Policies that foster conducive business environment and attract private investment need to be implemented in the near term. Harmonizing labor market policies would improve competitiveness and productivity, which should be accompanied by the social safety net reform to ensure adequate and equitable social protection. Other reforms on cross-cutting issues could proceed with a measured pace while taking into consideration the implementation capacity. | Persistent efforts are needed to fully implement comprehensive reforms. No reform design is perfect, and there will need to be a focus on resolving unexpected challenges as they manifest in a dynamic manner, reflective of the core principles and objectives of the reform agenda. Sustained broad consultation with private stakeholders and the public is crucial to secure broad social support for the multipronged reform agenda. |
28. The implementation of the authorities' reform agenda under Vision 2040 is continuing. The near-term priorities include improving business environment for private investment; advancing national program for diversification to further develop renewable energy, manufacturing and tourism; promoting digital transformation and fintech; and continuing the implementation of the actions identified under the National Strategy for Adaptation and Mitigation to Climate Change. The Oman Vision 2040 Implementation Follow-up Unit is actively developing, updating, and following up with the implementation of the initiatives, in cooperation with relevant government agencies.
Near-term reforms: a three-pronged reform consisting of improving business environment, enhancing access to financing, and further liberalizing labor market policies and strengthening social safety nets, would be critical.
International experience shows that diversifying away from oil can be difficult. In the GCC region, diversification would require realigning incentives for firms and workers to encourage individuals to work in the private sector and for firms to look beyond the confines of domestic markets and seek new export opportunities (IMF, 2014). Supported by social safety net reforms, harmonizing labor market policies across all sectors in line with market conditions would be needed to enhance competitiveness, attract private investment, and promote strong, job-rich, non-hydrocarbon private sector-led growth. Enabling an export-oriented private sector that is not dependent on oil and gas to grow and thrive would also requires facilitating financing for corporates and SMEs, and building a capable and motivated work force outside the public sector, including entrepreneurs.
Pillar I. Reforming Labor Market Policies and Strengthening Social Safety Net
29. Omani authorities have been making efforts to improve labor market functioning. The 10th Five Year Development Plan endorses policies that contribute to modifying the structure of employment and introducing a new structure based on a wide base of skilled manpower through recruitment of skilled labor and offering it incentives. The plan also encourages new investments based on knowledge-economy, developing the education system and increasing the participation of women in the labor market. To this end, the authorities have simplified the system of multiple minimum wages linked to qualification levels and introduced a single minimum wage of OMR 325/month in 2020. The government has introduced a time-bound wage subsidy of OMR 200/month for first time Omani jobseekers to facilitate private sector employment of Omanis, relaxed restrictions on job transfers for expatriates, reduced hiring fees for expatriates, and launched government sponsored training and habilitation initiatives to facilitate job seeking in the public and private sectors. The Job Security Fund that was established in November 2020 has provided unemployment benefit to facilitate the reallocation of workers. Work on updating the labor law is ongoing.
30. Nonetheless, more needs to be done to improve the functionality and flexibility of the labor market. In particular, with the anticipated decline in oil revenues due to the climate change mitigation actions, public sector jobs will become even scarcer and the responsibility for employing nationals will have to be mainly shouldered by the private sector. Deeper reforms to support the transition to a harmonized market-based labor market would include:
Gradually eliminate other factors that may hinder market efficiency and segment the private and public labor markets, including flexibility in hiring and firing workers, and other differential policies for nationals versus expatriates.16 The current minimum wage of OR325 per month can be revisited to better reflect labor productivity and there is merit to extend minimum wage requirement to cover expatriates. Wage growth in the public sector should not outpace that of the private sector to help secure the gains from reforms and better align the incentives between public sector and private sector jobs.
Strengthening transparent public sector performance metrics and linking them to pay scale and promotion can help foster creativity and better job performance Also, a clear accountability framework which lays out how individual work contributes to the whole entity's goal can also stimulate employee's performance.
Build a social incentive structure that encourages entrepreneurship, employment in the private sector, and attaches high recognition to career achievements in the private sector. It is critical to clearly signal limited future jobs in the public sector.
Deploy as needed temporary policy measures to alleviate the pain from economic transition. Notably, reallocation of workers across jobs can entail costs for certain workers who require skills upgrading or retraining in order to be re-employed. Government support in enhancing job search and training is important. Unemployment benefits and the coverage periods can be adjusted to better tailor to the needs of the labor force.
Further increase female employment to promote inclusive and sustainable growth. Measures can be deployed to further encourage women to participate in the workforce, including by improving the working environment for women, and providing flexibility in work schedules and locations. Promoting more women to senior positions and encouraging female entrepreneurs under SME initiatives could generate positive demonstration effects to encourage further female labor participation (Box 1).
Going forward, the world is becoming more digital and greener, underlying the urgent need to diversify areas of specialization of college graduates—from business administration, law, and manufacturing to the areas that are in greater demand in future, such as information technology, data science, climate issues and renewable energy.
Enhancing Female Labor Force Participation
Higher female labor force participation (FLFP) benefits growth and development through multiple channels including:
A boost to growth and productivity. Greater participation of women in the labor force has direct impact on growth through higher domestic demand and the impact on productivity. Women bring new skills and ideas for production and management, boosting aggregate productivity (Ostry and others 2018; Christiansen and others 2016). Empirical analysis has also demonstrated this positive relationship. The entry of married women greatly expanded potential GDP in the United States in the 1970s and the 1980s (Juhn and Potter 2006). Ostry and others (2018) finds that male and female labor are complementary in production, which implies that standard models that do not differentiate between genders, i.e., assume perfect elasticity of substitution between men and women, understate the favorable impact of gender inclusion on growth, and likely misattribute a part of growth that is caused by women's participation to technology advancement.
More inclusive growth. Service sector tends to be more gender equal in employment (Borghans and others, 2014). As countries develop, the service sector's share in the economy expands, employing more labor, while agriculture sector's shares in output and employment decline. Because services are more gender equal in employment than other sectors, reducing barriers to FLFP leads to a more efficient allocation of labor and to gains in both measured marketable output and welfare (Ostry and others, 2018), and contributes to a more inclusive growth.
Possible higher wages for the male. Increasing FLFP can increase male wages because gender complementarity increases productivity, but also can dampen male wage as the capital/labor ratio is likely to be lower when total labor supply increases. Empirical analysis has found that the first effect dominates when the elasticity of substitution between capital and labor is below a certain threshold (Ostry and others, 2018).
The Basic Law of the Sultanate of Oman confirms the equality between men and women in Oman, and there are no legal restrictions or limitations in the female's participation in labor force. The Oman government has taken initiatives to promote participation and involvement of women in economic and social development process, guided by the National Strategy for Advancement of Omani Women (2007-2020) and Oman Vision 2040 which aims to further promote socio-economic empowerment of women. The current female labor force participation rate is low, compared to other GCC countries and middle-income countries more broadly. Literature finds that in Oman, education level and proximity to urban areas are significantly positively associated with higher female labor participation, while other factors including social norms and traditional customs continue to challenge female labor participation (Mansour and others, 2020).
Omani female forms a pool of skills, talents, and labor force that can be better utilized to support future growth and development, especially as women in Oman are well-educated—as shown by high net enrollment ratios for secondary education (comparable to male) and higher net enrollment ratios for tertiary education than male (IMF, 2021). Increasing FLFP would likely reduce the demand for expatriates, including high-skilled expatriates, and naturally contributes to higher Omanisation ratios across the economic sectors. The following considerations can be of help to enhance FLFP:
Measures can be deployed to further improve working environment for women, including by providing flexibility in work schedules and locations, extending maternity benefits, improving the provision of childcare, and facilitating job searching.
Promoting more women to senior positions and encouraging female entrepreneurs under SME initiatives could generate positive demonstration effects to encourage further female labor participation.
Pressing ahead with the structural reform agenda to promote private sector development and economic diversification, which would help form a virtuous cycle between urbanization progress and greater economic empowerment of women.
Labor Force Participation Rates
(In percent)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Source: World Development Indicator and IMF staff calculation.Labor Force Participation Rates
(In percent)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Source: World Development Indicator and IMF staff calculation.Labor Force Participation Rates
(In percent)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Source: World Development Indicator and IMF staff calculation.
Estimated Share of Women in Managerial Positions
(In percent)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: ILO; and IMF staff calculations.Estimated Share of Women in Managerial Positions
(In percent)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: ILO; and IMF staff calculations.Estimated Share of Women in Managerial Positions
(In percent)
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Sources: ILO; and IMF staff calculations.31. Policies toward expatriates can be revised accordingly to address the remaining issues. Given the economic structure in Oman, it is anticipated that expatriate labor will continue to be needed in the foreseeable future, though the demand could decline as reforms incentivize Omanis to move from the public to private sector and productivity is gradually lifted. More flexible expatriate labor policies can help facilitate resource reallocation across industries and attract more high-skilled labor, thereby increasing productivity. In this regard, the recent reduction of fees for hiring expatriates is a welcome step. Moreover, significant potential for positive spillovers from expatriates to the wider economy—including transfer of skills in a range of sectors, and strengthening of consumption, savings, and investment—could be harnessed by improving the policy framework for expatriates.17 For example, restrictions on investing in real estate by expatriates has been gradually relaxed in other GCC countries over time. In Oman, the authorities launched the Investment Residency Program, which offered self-sponsored residence permits, which would help generate more job opportunities while attracting and retaining investment. Also, allowing expatriates to invest in residential and commercial real estates under the usufruct system would encourage consumption and investment of expatriates and thus support domestic demand.18
32. Reforms to social safety nets should accompany the labor market reforms to ensure adequate and efficient social protection. The ongoing social safety net reforms would simplify the various social assistance programs, tackle potential weaknesses in the existing social safety nets, improve efficiency and strengthen adequacy of the social safety nets. Potential future savings from improving the efficiency of the existing social programs can be reallocated to areas that need more resource. The establishment of the Job Security Fund and the extension of the coverage to first time job seekers are a welcome step.
Pillar II. Improving the Business Environment
33. Private investment, whether foreign or domestic, is largely driven by profitability, which is mostly determined by competitiveness and productivity. Freezones, tax incentives, or other forms of preferential treatment would only help private investment at the beginning of the business. Over time, higher competitiveness and productivity, supported by flexible and conducive labor market and business and regulatory enviroment, are the key to sustain a vibrant private sector investment and growth. This would require steps to further improve the business environment, including reinforcing the ease of entry of firms and exit of underperforming or zombie firms to release resources to more productive uses, and establishing a transparent and level playing field based on robust competition policy that strengthens competition among firms.
34. Better business environment would help improve investment including FDI. The Tenth Development Plan also targets setting up necessary infrastructure for the acceleration of private investment and the execution of major strategic projects and public-private sector partnership projects, as well the attraction of direct foreign investment. In this regard, the recent launch of the electronic licensing service via its Invest-Easy Portal, which is governed by the Foreign Capital Investment Law, is a welcome step.19 Specific consideration to improve the business environment can be given to:
Promoting market competition. Market competition leads to lower prices, higher quality goods and services, greater variety, and more innovation. Competition is critical not only in product markets, but also in labor markets. When firms compete to attract workers, they must ensure a competitive wage and compensation scale and conducive working conditions. The Competition and Anti-Monopoly Law (Royal Decree No. 67/2014) aims to combat monopolistic practices by prohibiting anti-competitive agreements and price manipulation. It includes a reporting requirement for any activity, such as mergers and acquisitions, which results in a dominant market position for one firm. Competition Protection and Monopoly Prevention Center was established under Royal Decree 2/2018 to monitor the application and implementation of the Competition Law. Strengthening the role of the Center to investigate infringing parties, regulate market practices and promote competition is crucial.
Strengthening procurement policymaking and implementation. The procurement framework and public-private partnerships (PPP) can be strengthened, such as strengthening capacity for project appraisal, conducting systemic audits of investment projects, and strengthening risk management for a fairer, more open and transparent process. The e-tendering system, which has been developed and used as part of the e-government initiates, would facilitate the strengthening of the procurement framework.
Establishing formal mechanisms for regulatory notification and public comment. Ministries or regulatory agencies could benefit from soliciting comments on proposed regulations from the general public and conducting impact assessments of proposed regulations. It would be particularly helpful before important policy actions, to strengthen public support including from community organizations and private sector associations. This would also improve the quality and effectiveness of policy and regulations as well as increase the transparency of the regulatory process, which would go a long way toward assuaging the concerns of potential investors.
Providing more flexible policies toward FDI and addressing the challenges faced by foreign investors. The structural and fiscal reforms would all help improve the business environment and strengthen investor confidence. Korea's experience showed that FDI liberalization is more effective when embedded in a broader reform agenda (OECD, 2013).20 Additionally, a forum or venue for regular public dialogue is an essential component of reforms, helping to improve both the effectiveness of reforms and the buy-in from local stakeholders; and such dialogue should also include foreign investors as well as across ministries and different levels of government (Box 2). Following up with the foreign investors' feedbacks and addressing the practical challenges they face is a critical part of this dialogue.21 Once the economy of scale is established—studies have found when a critical mass of FDI is attracted, it will become easier to attract more FDI as foreign investors perceive the presence of other foreign investors as a positive signal—a positive feedback loop can be formed and help attract more investment. Further reducing non-trade barriers would also help attract foreign investment and facilitate trade.
Enabling the business environment for green investment.22 Development in renewables and green projects is particularly important in the context of an accelerating global trend in developing environment-friendly industries. Such investment would help narrow the technological gap with respect to other countries and promote sustainable creation of high value-added jobs. However, starting business in renewables would require specific infrastructure and skilled labor, and whether these production inputs can be easily found in Oman plays an important role in attracting foreign investors.
A New Approach to State Intervention in Economic Diversification
Industrial policy, defined as the promotion of new infant industries or protection of local traditional activities from competition by products from more advanced countries, have been facing opposing arguments, even in cases with known market failures or unfair competition from foreign governments. These arguments mainly include information asymmetry, i.e., government usually is not in the best position to identify correct industries, products and firms to support, since it requires deep knowledge of the markets and technological processes, and rentseeking, i.e., government may be influenced by bribes and lobbying, which generate big distortions and lead to market inefficiencies. World Bank (1993) acknowledged that state intervention to spur specific industries was successful in some cases, but suggested that in general industrial policy did not work.
However, researchers, including Rodrik (2005), Ocampo, Taylor, and Rada (2009), Stiglitz and Greenwald (2014) also found that policies play an important role in the structural transformation and diversification of developing economies. Dani Rodrik (2004) proposed a new approach to industrial policy — a process of economic selfdiscovery where during an interactive process, strategic cooperation between the private and public sectors serves to elicit information on business opportunities and constraints and, on the other hand, generates policy initiatives in response. Governments will be constantly on the lookout for ways in which they can facilitate structural change and collaboration with the private sector. Much of the industrial policy is therefore concerned with the provision of public goods for the productive sector, including public R&D, health and infrastructural facilities, vocational and technical training.
Cherif and Hasanov (2014) noted that GCC countries have pursued some of the policies that promote diversification—such as the creation of special economic zones, links between universities and businesses, skills development, SME funds, developments banks, and export promotion agencies—but these policies are yet to deliver the desired results, and diversification policies on their own are unlikely to be enough to spur non-oil exports. They suggested three key principles to achieve high and sustained growth in their 2019 paper: (i) the support of domestic producers in sophisticated industries, beyond the initial comparative advantage; (ii) export orientation; and (iii) the pursuit of fierce competition with strict accountability. While they argue for some level of state intervention to pursue technology and innovation-oriented policies, they also emphasized that the role of state intervention is to correct market failures where exist and enforce a strict market discipline, rather than continued tolerance for under-performing, under-innovating and rent-seeking firms.
Pillar III. Enhancing Access to Financing
35. Progress has been made in facilitating access to financing. Oman Credit and Financial Information Centre (Mala'a), established by Royal Decree 38/2019 issued on 8th May 2019, is an independent organization under the supervision of the Central Bank of Oman, providing access to credit through information services, credit rating, creditworthiness and solvency insights for individuals and corporates. Mala'a includes members from banking, finance, small and medium enterprise funds, telecommunication, and insurance industries, and collaborates with several Government registries as Data Providers to establish a centralized database of credit and financial information. The Oman Development Bank (ODB) also administers loans with an OMR 1 million (USD 2.6 million) ceiling to support development of smaller industries in the agriculture, fisheries, petroleum, mining, and services sectors. ODB also offers an SME loan guarantee program in partnership with commercial banks, interest subsidies, and attractive export financing rates.23 In 2013, the government launched the OMR 70 million Al Raffd fund to finance start-ups and entrepreneurial ventures.
36. For corporates, who generally have good financing channels, more flexible and efficient market resource reallocation is key. A market-driven restructuring mechanism can be strengthened to allow non-viable firms to exit in an efficient way to facilitate resource reallocation.
Greater reliance on some form of out-of-court restructuring mechanisms offers a cost-effective and speedy alternative to address some corporates' financial difficulties. Out-of-court restructuring mechanisms may require government involvement through potential financial and regulatory incentives as well as through mediation and arbitration. Oman's Bankruptcy Law came into force and effect in July 2020, which would improve the business environment in Oman once the executive regulations and the law are enforced, contributing to attracting more foreign investment and growing the private sector.24
To ensure the financial sector maintains adequate flow of credit to the economy, non-bank sources of financing for corporate restructuring—e.g., special investment vehicles—could also be promoted.25 If public capital injection is needed, it should be subject to safeguards that address concerns of moral hazard and conflict of interest. Further development of the Oman stock market and local debt market would help diversify corporates' funding sources and support non-oil private sector development more broadly.
37. Specific considerations can be granted to SMEs, who naturally face different types of challenges. Existing SMEs could grow into bigger companies—such as by integrating into the industrial chains of bigger companies or proliferating by providing services to bigger companies—or remain to be SMEs or exit as market evolves. New SMEs could emerge, and a proliferation of such startups would be instrumental to promoting innovation and facilitating diversification and growth.
Better business incubation support and improved access to credit would contribute to their development, especially when labor market reforms align wages in the public and private sectors with productivity and market conditions and individuals are incentivized to explore their creative abilities in the private sector. Startups would particularly benefit from enhanced access to credit; and business incubation support, including via facilitating sharing of information and providing training on business management and marketing.
Investors can benefit from a well-designed SME Credit Guarantee Scheme (CGS) with the objective of providing third-party credit risk mitigation to lenders to stimulate debt financing to SMEs. A World Bank global survey identifies the following key principles for a successful design and implementation of the CGS: (i) clearly defined legal framework to strengthen the credibility of the scheme—namely, ownership of the policy, sources of funding, financial accounting standards, and independent oversight; (ii) sound corporate governance and risk management with clearly defined mandate of the CGS; (iii) regular monitoring and evaluation; (iv) quality and timely credit information for SME's access to bank financing, which could help relaxing collateral requirements.26 Besides, some country evidence shows that the introduction of collateral registries for movable assets can increase the likelihood of firm access to bank financing.
Medium-Term Reforms: Addressing the Cross-Cutting Issues
Research has found that investing in infrastructure, education, R&D, facilitating financing, and opening trade support growth and development. For Oman, addressing these cross-cutting issues, including expanding the usage of the digital technology and investing in renewable energy, are instrumental to promote export diversification and economic transformation.
Addressing Cross-Cutting Issues - Flow Diagram
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Addressing Cross-Cutting Issues - Flow Diagram
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
Addressing Cross-Cutting Issues - Flow Diagram
Citation: IMF Staff Country Reports 2022, 344; 10.5089/9798400226502.002.A002
38. Investing in human capital would help ensure sustained improvements to productivity. Human capital encompasses the knowledge, skills, education, and health of a country's working age population. Increasing human capital improves productivity and is key for sustained economic growth, particularly in the context of rapid technological change.27
39. The effectiveness of spending on education could be improved to achieve higher quality education. Reforms to increasing the quality of basic and higher education so that graduates are acquainted with competitive qualifications and employability skills to enter the local and international labor market are all welcome steps. There is scope to improve spending efficiency, enhance education outcome, and expand vocational training. Specifically, education reforms can be introduced aiming to diversify the areas of specificalities for college students and above, covering a range of subjects such as STEM,28 information and digital technology, data science and engineering, and social science, which are the foundations for economic and social development, and to encourage citizens to pursue the highest educational outcome with best efforts, thus better preparing them for advanced positions in their career path. Vocational training can take more flexible modality, including via a combination of on-site job training and classroom learning, and responds to the evolving needs of the market. Additionally, if accompanied by improvements in education, stronger research institutions, and university–industry collaboration, R&D investment would likely generate higher returns.
40. Promoting investment in R&D can help improve the quality and sophistication of the products and competitiveness. To encourage spending on innovating technologies, government can invest directly in R&D (through subsidizing targeted scientific programs in universities and government research institutes) and design policies that encourage firms to undertake more private R&D because it often involves a high level of risk, significant fixed costs, and returns that materialize only in the medium to long term.
41. Developing Fintech and digital technology would support development and facilitate economic diversification. New technology, such as artificial intelligence (AI) and machine learning (ML), is improving efficiency and reducing cost, enhancing forecasting accuracy, and improving risk management and compliance. It also enhances financial inclusion and boosts geographic competition among banks, which can service more distant customers. These new technologies also offer the potential to strengthen prudential oversight and to equip central banks with new tools to pursue their monetary and macroprudential mandates. For example, many country Financial Stability Board authorities are currently using ML and Natural Language Processing (NLP) tools in data analysis, processing, validation, and plausibility. AI can identify patterns that humans fail to spot and thereby enhance the quality of supervision. It can also make supervision more agile by flagging anomalies to supervisors in real time (ECB 2019). Given the rapid development of advanced technology, adopting digital technologies, as being implemented as part of Oman's e-government initiatives, and investing in relevant education are of even greater importance to support development and facilitate economic diversification (Box 3).
Fintech in Oman
In recent years, the Oman government and the CBO have been building an ecosystem that is conducive to the success of the financial services sector. The CBO has taken steps to develop Fintech and the digital transformation journey in the financial and banking sector.
The CBO has been drafting an Open Banking API Strategy, as part of a broader push to stimulate innovation in the finance sector. The Open Banking API Strategy is part of the Oman Fintech strategy, which aims at establishing a comprehensive and nurturing fintech ecosystem in Oman.
In December 2020, the CBO launched the Financial Regulatory Sandbox, allowing participants to live-test their innovative fintech solutions in a safe environment under the supervision of the central bank. A Regulatory Sandbox allows the regulator, innovators, financial service providers and customers (as final users) to conduct field tests in an off-market development environment and collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks.
In November 2021, Oman and Saudi Arabia signed a memorandum of understanding (MoU) to strengthen cooperation in the fields of communications and information technology. The Saudi-Omani Digital Skills Initiative was launched at the same time. The initiative aims at exchanging best practices and expertise, participating in meetings and joint working sessions, and implementing joint programs and initiatives, to develop digital skills to meet the needs of the labor market.
A number of initiatives have been undertaken by banks to keep up with the fast-evolving landscape. In September 2020, Bank Muscat, one of the biggest financial institutions in the country, launched a US$100 million fintech investment vehicle called BM Innovate to create a strong network in the fintech ecosystem and invest in both local and international fintech companies. The Oman Banking Perspectives 2021 (KPMG report) notes that some banks are harnessing data and advanced analytics to get a real-time understanding of their customers. Others are engaging and partnering with third parties to increase speed to market, reduce costs and close capability gaps.
42. Supporting green investment and strengthening energy efficiency standards would help address climate change and has the potential to attract private investors and contribute to growth and economic diversification. The long-term objectives would need to be linked to measurable short-term targets and policies to guide the reform process and facilitate an orderly transition. Supporting green investment under a sound medium-term fiscal framework, enhancing human capital and promoting clean and efficient energy technologies would support the energy transition, which should also take into consideration possible social and economic impacts. These structural shifts in the market could also cause some workers to exit the labor market due to lack of commensurate skills. This requires careful policy attention to tackle the potential hardships associated with these disruptions, including through strengthening the social protection system in the short term, and retraining workers over the medium-to-long term. Persistent efforts are of essence and sustained consultation and communication with relevant stakeholders and the public would help secure broad social support.
D. Conclusion
43. To promote stronger, job-rich, sustainable and inclusive, non-hydrocarbon private sector-led growth, a comprehensive reform that addresses the intrinsically linked economic challenges is the key. Stronger growth would broaden the revenue base that is critical for long term fiscal sustainability. Diversification would also lift growth and income levels by shifting resources from sectors where prices are highly volatile, such as mining and agriculture, to less volatile sectors, such as manufacturing, resulting in greater macroeconomic stability and lower vulnerability to adverse terms of trade shocks and more sustained growth over the longer term.
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Prepared by Fei Liu.
Hydrocarbon sector includes oil and natural gas production, and downstream oil and gas activities such as refining and petrochemical manufacturing.
Non-oil capital stock is approximated by using overall capital stock (calculated by perpetual inventory approach) minus capital stock of the large oil and gas companies based on company-level financial data sourced through S&P Market Intelligence.
The wage premia are calculated for Omani workers only due to data availability. Average wage is calculated by the median of each wage range weighted by the number of employed, and the public sector wage premium is the difference between the public sector average wage and national average wage, and the private sector wage premium is the difference between the national average wage and the private sector average wage.
See GLMM, 2014, Arab Gulf States: An Assessment of Nationalisation Policies. Also, according to the 2021 Investment Climate statements: Oman, the top complaints of businesses often relate to requirements to hire and retain Omani national employees and a heavy-handed application of “Omanisation” quotas (for details, see https://www.state.gov/reports/2021-investment-climate-statements/oman/)
For details, see Annex III in Oman 2021 Article IV Consultation Staff Report.
Due to data limits, the sectoral analysis starts from 2016. It ends in 2019 to avoid including the transitory impact from COVID-19 pandemic.
See Global Innovation Index 2021, Oman. Consisting of roughly 80 indicators, the GII aims to capture the multi-dimensional facets of innovation. The charts used innovation input sub-indices, including human capital and research, infrastructure, market sophistication, and business sophistication; and output sub-indices include: knowledge and technology outputs, and creative outputs.
MOCIIP was restricted in August 2020 following Royal Decree 97/2020. It assumed the functions that the Public Authority for Investment Promotion and Export Development (ITHRAA) previously held.
Examples of non-tariff barriers include health and product standards, technical and labeling requirements, etc.
See for instance Busse and Hefeker (2007), IMF (2016a).
The analysis is based on a firm-level data published in financial statements of over 400 GCC corpriates, and over 650 emerging market corporates over the 15-year period of 2006-2020. To approximate the profitability of the non-oil sector, firms in energy sector (8 Omani corporates and 28 other GCC corporates) have been excluded from the time series charts.
Sources: IMF “Enhancing the Role of SMEs in the Arab World—Some Key Considerations” (IMF, 2019); Financial Stability Report by Central Bank of Oman, UAE, Kuwait and Bahrain and IMF staff estimates.
See “Over 62K SMEs Registered in Oman till November 2021.” http://omannews.gov.om/NewsDescription/ArtMID/392/ArticleID/45208/Over-62K-SMEs-Registered-in-Oman-till-November-2021
Private sector employers typically avoid hiring citizens unless obliged to do so by the state. In such cases, they often treat this as a cost of doing business and do not develop the hired citizens' productive capacities (Kabbani and others, 2021).
Based on empirical analysis covering a set of AEs (see IMF 2016b), average per capita incomes of both the top 10 and of the bottom 90 percent of earners increase as a result of immigration, although high-skilled immigration benefits top incomes more strongly, possibly due to stronger synergies among high-skilled migrants and high-skilled natives.
Expatriates who have reached the age of 23 can purchase housing units under the usufruct system in multi-story residential and commercial buildings for a period of 99 years, provided that he has a residence permit of no less than two years when submitting the application and satisfied other applicable requirements.
The Ministry of Commerce, Industry and Investment Promotion has launched an electronic licensing service via its Invest-Easy Portal. The service targets companies governed by the Foreign Capital Investment Law. See http://omannews.gov.om/NewsDescription/ArtMID/392/ArticleID/44312/Commerce-Ministry-Launches-E-Licensing-Via-Invest-Easy-Portal
In November 1998, the Korean government enacted the Foreign Investment Promotion Act, with a view to attracting FDI and regaining the confidence of foreign investors. The Act eased the regulations and restrictions on investment by foreign nationals while expanding the range of tax incentives intended to attract foreign investment into the country. Complicated administrative procedures were streamlined with the relaxation of more than half of existing restrictions.
For example, while the Chinese authorities have adopted preferential policies to attract FDI, including tax concessions and special privileges for foreign investors, and establishment of Open Economic Zones, they have also relaxed certain governmental controls and provided practical assistance responding to the complaints of foreign investors (IMF, 2002). However, in general the empirical evidence on the impact of preferential policies on FDI flows has been mixed across countries (see Chalk 2001). The authors also noted that China's success, also came with some costs, such as an increasingly complex tax incentive system and growing regional income disparities.
Green investment is generally defined as the investment necessary to reduce greenhouse gas and air pollutant emissions.
The Bankruptcy Law introduces, amongst other things, three key procedures for individuals and legal entities to help them handle financial difficulties and challenges in paying debts: Restructuring; Preventative Composition; and Bankruptcy. Restructuring is a process whereby a debtor and its creditors agree to a “Restructuring Plan” which sets out binding steps to help the debtor overcome financial and administrative hardship and avoid liquidation. The Bankruptcy Law further introduces the concept of “Preventative Composition”, which is a method for a debtor to seek relief if the debtor is facing financial difficulties and it is likely the debtor will fail to pay off its debts. Under the Preventative Composition mechanism, the debtor must submit an application to the Court. In the event the application is approved, the Court shall assign a trustee to administer the Preventative Composition process, including meetings with creditors, preparing a list of debts owed by the debtor, and its opinion on how the debtor should settle the debts.
Some countries, such as Korea, created special purpose vehicles to purchase corporate securities and loans to SMEs, with funding from the central bank and the government providing equity for loss absorption. The US also created a public capitalization vehicle through the Capital Purchase Program under the Troubled Asset Relief Program.
Improving the quality of education is important for all countries and this calls for education policy reforms to enhance service delivery and to reduce the skills mismatch in the labor market (OECD 2016; World Bank 2018).
Science, technology, engineering, and mathematics.
