Oil revenues set to reinvigorate private sector

The enhancement of the private sector’s role as well as increasing education and skills levels can be fuelled by the hydrocarbons sector for some time to come.

The Omani economy is enjoying something of an oil revenue windfall. According to the Ministry of Finance, revenues for the first six months of 2012 were $19.1bn, up from $14.1bn for the corresponding period in 2011 – representing a 35 per cent increase.

This is newsworthy in itself, but it is how the Sultanate is choosing to spend this welcome cash-injection that reveals the government’s priorities and the future course for the country. And it’s jobs that are top of the agenda. Indeed, oil revenue is bringing about a redoubling of efforts to curb unemployment and, more specifically, a re-examination of how the private sector can generate more jobs.

As the figures indicate, the oil industry is alive and well in many ways, and hydrocarbons still account for around three-quarters of Oman’s budget income. And given the market for oil is currently so strong, one might wonder whether plans for economic diversification are quite so essential.

Certainly, the price of oil so far this year has exceeded expectations; figures released from the Ministry of Finance show Oman sold its oil at an average price of $115 per barrel in the first five months of 2012. Furthermore, Oman has in many senses benefited from not being a member of OPEC – its non-member oil producer status gives it greater control of its revenue stream, and has allowed it to take full advantage of the high oil prices. Whereas OPEC has continued to closely monitor production levels of its members to avoid an oversupply of oil in the market (implementing an overall group output limit, but stopping short of setting individual country production quotas), Oman has raised oil production, from 878,800 bpd in the first half of 2011 to 915,000 bpd over the same period in 2012. Meanwhile, oil exports rose 1.9 per cent to 133.6 million barrels in the six-month period, according to the Ministry of Oil and Gas.

Difficult to predict

But this continues to mean the economy remains beholden to crude oil price fluctuations. In fact, the 2012 budget had anticipated a deficit of $3.1bn for the year, (with expenditure of $26bn and revenues of $22.9bn), with the conservative assumption that oil prices would hover at around $75 per barrel, according to HE Darwish bin Ismael al-Balushi, Minister Responsible for Financial Affairs. Oil prices may be up at the moment, but they are difficult to predict, let alone rely on.

For now, the windfall revenue gains are more than sufficient to cover the additional expenditure resulting from the recent salary revision, which included a directive from Sultan Qaboos bin Said mandating the creation of 50,000 jobs, and will generate surpluses for the year ahead. But the authorities are keen to ensure that economic diversification – part of the Sultanate’s long-stated development strategy – remains on track so that in the short term they are not overly exposed when and if oil prices fall, and in the longer term are prepared for a future when oil resources are depleted. Getting Omanis into work is central to the Sultanate’s development and diversification programme to move the economy towards non-hydrocarbon revenue.

Attention is therefore turning to achieving more sustainable growth, and the government has made it clear that the priority will be job creation in the non-hydrocarbons sector. In August this year, the Ministry of Finance announced plans to spend an additional $1bn from its oil windfall to create jobs for its citizens over the next 12 months (although specific details were not available at the time of writing). In this way, the government’s recent moves have linked the fortunes of the job market with the performance of oil.

To tackle unemployment, the state knows that the public sector alone cannot meet the high demand for jobs. In August, the Council of Ministers urged the private sector to join hands in the execution of key development projects, a process that will make the private sector more visible in the public eye and “help in generating more employment and steer the growth wheels.” Moreover, it is expected that this new drive to tap into the private sector will create new opportunities for public-private partnerships (PPPs), particularly in areas such as housing, healthcare, electricity and water, and infrastructure, which given the predicted fast growth rate of the population will likely see increasing demand in the years ahead.

Expanding private sector

However, the success of such measures is far from guaranteed, and will depend heavily on the private sector meeting the government halfway. Certainly, the state has done much to expand the private sector by addressing the so-called “skills gap” among young Omanis, introducing programmes to encourage entrepreneurship and business skills as part of its drive to reduce youth unemployment. The College of Banking and Financial Studies, for example, has been successful in preparing young Omanis to replace expatriates in banking and financial institutions. Indeed, the Central Bank of Oman’s has estimated that more than 84 per cent of workers in the private sector are expats, who send home roughly RO2.774 billion per year in remittances.

Moreover, obtaining start-up capital has also been made easier; last October, for example, Oman launched its first small and medium-sized enterprise (SME) Loan Guarantee Programme in an effort to bridge the gap between cash-rich local financiers and potential young Omani entrepreneurs. The loan programme provides 80 per cent guarantees for SME loans up to $650,000, with interest rates ranging from 3.4 per cent to 4.3 per cent, and is part of the Omani government’s “Vision 2020” for a vibrant and diversified private sector and a generation of entrepreneurial Omanis who can serve as job creators in a post-oil economy.

Concerns of young Omanis

Yet skills, education and capital are only part of the problem. A recent statement issued by the Council of Ministers acknowledged that while there are already a number of jobs available in the private sector, there is reluctance on the part of young Omanis to fill these posts. Shift-work, extended hours, less job security and the fewer number of public holidays are some of the reasons Omani citizens turn down private sector jobs. A recent report by the Shura Council said that of 53,000 people who resigned from their private sector jobs in 2011 nearly half moved to work in the public sector.

The flip side of some private sector managers’ complaints about Omanis being reluctant to take up existing jobs is that private businesses are not making the kinds of wholesale reforms necessary if they are to play a significant role in getting Omanis into work. The same report by the Shura Council found that the large number of resignations from the private sector reflects the frustration and discontent of Omani workers due to allegedly low wages amid the rising cost of living; some 48 per cent of private sector employees’ salaries do not exceed RO200 per month. So not only must the private sector expand to take advantage of the labour-intensive industries the government has earmarked for growth, it must also see an improvement in job offerings relative to the public sector.

Increased investment in job creation, as well as a recognition of the preference for public sector employment and efforts to increase the attractiveness of the private sector, should go some way to addressing the situation. However, there is no quick fix. The broader economic development strategy the Sultanate has embarked on is by its very nature long-term, and therefore it is to be hoped that the enhancement of the private sector’s role as well as increasing education and skills levels can be fuelled by the hydrocarbons sector for some time to come.

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