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Analysis

Will Sutlan Haitham’s Economic Aid Package Save Muscat’s Neutral Policy

Thursday 29 October 2020
Will Sutlan Haitham’s Economic Aid Package Save Muscat’s Neutral Policy

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Alwaght- The outbreak of the coronavirus and the resultant slump of oil demand and price left direct negative impacts on the Persian Gulf Arab states’ economies. The economic crisis for some of these countries has been heavier. An example is Oman, a country that for decades played the role of the “Switzerland of the Middle East”, that now is having challenges ahead in the continuation of the role. In other words, the economic crisis is turning into the Achilles heel of the new Sultan Haitham bin Tariq Al Said to follow the long-adopted policy of “friend to all, enemy to none” 

Moody’s Investors Service and Fitch Ratings in their prediction of the Omani economic conditions reported that the government budget has been cut considerably over the past three years despite the measures taken to fight the deficit. Also, the hard currency reserves and the State General Reserve Fund’s assets account for 50 percent of the GDP which is less than that of the neighboring countries, excluding Bahrain. 

Since 2015, the country has been facing recession with the main cause being the oil price fall in the global markets and also to some degree domination of recession on the global economy. Oman’s debts to the GDP earlier this year have been 60 percent but now they are 70 percent. In 2015, this was only 15 percent. Moreover, the budget deficit in 2019 recorded 16.1 percent and it in this year remains stable around 2.5 billion rials. With this, the country this year has a 0.5 percent growth rate and in 2021 it is predicted to be 0.8. 

Currently, oil and gas revenues provide 75 percent of the state incomes. Low oil prices on the one hand and the spread of the COVID-19 on the other hand are the key challenges Oman is facing in the short run. It is predicted that the financial deficit reaches more than 17 percent of the DGP by end of this year. 

According to estimations by Fitch Ratings, even if the oil prices rise to $35 per barrel, Oman will have over $10 billion budget deficit. According to a statement by the financial statistics institution, the fiscal deficit and the foreign debt maturity between 2020 and 2022 will be between $12 and $14 billion annually. 

Saudi Arabia and the UAE seek fishing in troubled waters 

The critical conditions push Oman to foreign loans, negatively impacting the credit ratings of the country in the region. Reuters news agency reported in earlier June that Muscat is seeking aid requests from the Persian Gulf neighbors. Bloomberg also reported that Oman was in negotiations with Arab monarchies for financial aids. 

Now the essential issue is that Oman will turn to which sides for economic aids and loans. The likeliest candidates are certainly the Arab neighbors and members of the (Persian) Gulf Cooperation Council, especially Saudi Arabia and the United Arab Emirates. Kuwait is itself hit by an economic crisis and thus cannot help. Stretching hands to Qatar is unlikely for Oman because of the possible consequences including Saudi and Emirati fury. 

But economic dependence on Riyadh and Abu Dhabi and partnership with them will damage Muscat’s policy of neutrality. 

Nabil Nweyrah, a researcher at the Institute for (Persian) Gulf Affairs, a Washington-based think tank, told Aljazeera that it was fully understandable that the UAE and Saudi Arabia take huge advantage of gaining influence on Oman foreign policy decisions so that they can direct Muscat’s policy in line with their policy. 

It is not only the matter of the foreign creditors’ efforts to influence Oman’s foreign policy. The small sultanate could have bigger concerns. The UAE and Oman finalized their borderlines in 2008 after a decade of tentative demarcation. But the Emirati movement along the border and next to the Dhofar province south of Oman keep the tensions relatively high. Also, Louvre Abu Dhabi museum in 2017 exhibited a map in which the Musandam province of Oman was portrayed as part of the UAE territory. Even worse, Qatar's name was fully eliminated from the map. 

Sultan Haitham’s package for the economic rescue 

Risks to the moderate path of the country push the new sultan to approve an economic program to reach financial balance in the mid-term and also to secure financial stability after the end of the coronavirus pandemic as the national treasury witnessed drying up amid crises.

A while back, Muscat announced a plan with the aim of economic reform to diversify its income sources and review such sensitive cases as tax and subsidies.

The plan was delayed under the late Sultan Qaboos. An appreciation of commitment to the economic program pushed some political elites in the country to admit that Haitham was picked to settle the economic crisis the country has been dealing with since 2015. In 2013, he was appointed the head of the “Vision 2040” committee. 

National media have recently reported that the sultan has ordered the designing of a four-year financial program from 2020 to 2024 including an increase in the non-oil incomes. Reports also suggest that he by the program eyes establishment of a unified national system to offer social security to the citizens of low income and also those impacted by the government efforts to cut public spending. Moreover, he instructed the government to launch development projects worth 371 million Omani rials ($964 million) across the country. 

The government had considerably cut its spending and is seeking to sell more US dollar bonds and is planning to increase value-added tax (VAT) to 5 percent next year. 

Additionally, in early May, the finance ministry instructed the local companies to replace the foreigner with local workers to tackle unemployment. 

The spending on infrastructural projects is set to increase. According to reports, 1.3 billion Omani rials are planned for spending on infrastructural projects by various state organizations. According to the budget document of the finance ministry, 7 billion Omani rials will be paid for service and industrial projects. And 1.3 billion rials will be allocated for oil and gas production. These spendings are slated to create more jobs in the Persian Gulf sultanate. 

The government is also resorting to joint plans with international partners to make up for the loss of its oil revenues. In December 2019, Bloomberg reported that Oman’s state-owned Electricity Holding Company, also known as Nama, sold a 49% stake in Oman Electricity Transmission Co. to State Grid Corporation of China, raising around $1 billion. The deal was part of the partnership in the Chinese ambitious “Belt and Road” initiative that links China to West Asia and Europe. In early 2019, Malaysia’s Petroliam Nasional Berhad (Petronas) said its subsidiary bought a 10 percent stake in Oman’s Al Khazzan gas field. 

The regional and international players wait to see if the new sultan would keep the moderate and neutral foreign policy his country followed for decades under the late sultan. 

The answer is that despite measures to reduce reliance on oil, Muscat still needs to request help from foreign sides. The new sultan could look at normalization with Tel Aviv as one of the ways to battle economic crisis, something Abu Dhabi as the second-largest economic partner to Muscat with a share of 34 percent in the Omani foreign trade calls for. This would remind of Sudan’s experience in moving towards normalization with the Israeli regime and not an achievement of Muscat’s historical mediatory policy.

 

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