Mutrah Souq in Oman
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Mutrah Souq in Oman
Last updated: April 29, 2013

Oman spurs job growth, but mind the oil price

Banner Icon The Sultanate tries to create new jobs through cheap business loans and diversification projects. But waning oil reserves means that the government must be cautious about its future spending, writes Bassam Aoun.

During his visit to Muscat last month, described by local authorities as “fruitful," Prince Charles of Wales advocated for a homegrown program that provides low interest loans to Muslim entrepreneurs with innovative ideas for ventures. Additionally, the Prince pledged that the UK would provide broad assistance for Oman in developing its SME sector so that it becomes more of an engine for growth.

This focus on Oman’s younger population has recently been a rising priority for Sultan Qaboos bin Said Al Said’s officials, particularly in light of the youth-led social movements spreading across the region.

Over the past fiscal year, Omani financial authorities have focused their efforts in spurring job growth via a fiscal stimulus package, one similar to what was employed by the US Federal Reserve. The Fed Chairman Bernanke, however, took a more indirect approach than his Omani counterparts. He is currently attempting to spur economic growth via a multi-pronged initiative involving the housing market. The American plan, dubbed QE3, involves pumping $40 billion per month into the economy by purchasing mortgage-based bonds, essentially spiking the amount of liquidity available in the real estate industry. With this approach, the Fed is ultimately doubling down on the housing market, hoping it will drag the economy out of its supposed slump.

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Oman’s plan, on the other hand, is to directly finance a program that gives Omanis generous business loans at manageable rates. This initiative, which has been in operation for a few years now and whose goals were broadly advocated by Prince Charles during his aforementioned visit, was a plan to alleviate unemployment woes. At its inception the program was crucially necessary for policymakers to ensure the nation did not fall victim to the instability plaguing its neighbors. Oman’s unemployment rate is worryingly high, particularly for its youth, which according to the International Labour Organization is in the neighborhood of 33%.

These loans are now available at an annual interest rate of 2% with a one-year grace period to make repayments. Any loan at or under 5,000 rials ($12,986) will face no interest charges. Small businessmen outside of Oman would undoubtedly salivate at this financing scheme; although a broad estimation, an average business loan is expected to charge an interest rate between 6% and 7%. Omani policymakers have boosted the funding for this program to 60 million rials ($156 million), a fourfold spike since late 2011.

When comparing Oman’s version of QE3 to the American original, certain caveats must be noted before questioning the efficacy of their methods. The two nations face astoundingly disparate labor pools; U.S. unemployment was last clocked at 7.7% while Oman’s is about 15 percentage points higher. Skill sets and general composition differ as well, be it by education or demographics. The U.S. is currently debating on how to deal with the retirement of the baby-boomer generation, a massive burden on the future working population. On the other hand, 31% of Oman’s working-age population is comprised of people aged 15-24, making policymakers’ priorities completely different than their American counterparts. Additionally, the aforementioned statistic is one of the highest in the MENA region and significantly above the world average of 27%. 

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Most importantly, however, is that at the time of this policy’s ratification, Oman could afford such a move. While other wealthier nations battle noxious budget deficits, Omani policymakers were tasked with exploring mediums to appease the masses. The government has also funded several construction and development projects throughout the Sultanate with the hopes of diversifying its budget before its oil reserves begin to run dry. Some sources, such as British Petroleum, have estimated that this could happen in less than twenty years from now.

Ministry of Finance officials have signaled that in the coming years, spending and generous projects such as the one discussed above will be subdued, so as to ensure that any deficit in the budget is obviated. For 2013, planned state spending will be approximately 13 billion rials ($33.8 billion), about 30% higher than the previous year. The breakeven oil price for the upcoming period is clocked at $104, therefore as long as the price of crude remains above this level, Omani officials will be able to balance their budget and subsequently keep financing their fiscal stimulus projects.

Additionally, Minister of Finance Darwish al-Balushi has clarified earlier this month that government sukuk, the Islamic equivalent of bonds, will not be issued this year and that a growth rate of 6% for 2013 will be sustained sans deficit. Given that the government will not seek broad public financing for its options, it provides a certain level of fiscal comfort, one that has become relatively endemic of the Gulf nations. However, unless the Sultanate’s forecasts remain intact, it will have to begin depending more on its diversification efforts rather than costly spending schemes to keep its economy afloat.

Bassam Aoun covers public finance for Your Middle East. These are his previous articles:

Social and economic change on Morocco’s agenda

Fuel, milk and alcohol targets of Tunisia's reforms

Yemen's public finances – in need of a helping hand

Bassam Aoun
Bassam Aoun is a Business Editor at Your Middle East. He is currently based in Abu Dhabi and holds a BA in Economics from the American University of Beirut and an MPP (Master of Public Policy) from the University of Chicago. He has written for the Chicago Policy Review and is interested in economic and fiscal policy in the Middle East.
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