Oman - Transformation of an economy (Vol. 1 of 3) : Main report

Report No. 1620-OM Oman: Transformation of an Economy (In Three Volumes) Volume 1: Main Report October 25, 1977 Europe, Middle East and North Africa Region Country Programs Department II FOR OFFICIAL USE ONLY U Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Official Exchange Rate) Prior to August 15, 1971 O.R. 1 = U.S. $2.40 U.S.$1 = O.R. 0.417 August 15, 1971 to January 1973 O.R. 1 = U.S. $2.60 U.S.$1 = O.R. 0.385 February 1973 to May 1976 O..R. 1 = U.S. $2.895 U.S.$1 O.R. 0.346  FOR OFlCAL UM ONLY TABLE OF CONTENTS VOLUME ONE: MAIN REPORT Page Number MAP COUNTRY. DATA SUMMARY AND CONCLUSIONS ....................... i-viii Chapter 1. INTRODUCTION .................................... I Chapter 2. OUTPUT AND INCOME GROWTH ..... ................... 7 Chapter 3. MANPOWER AND EDUCATION ............ .. ............ 12 Chapter 4. DISTRIBUTION OF INCOME ............ .. ............ 20 Chapter 5. PUBLIC FINANCE . ................................ . 22 Chapter 6. MONEY, CREDIT AND PRICES ........... .. ........... 34 Chapter 7. BALANCE OF PAYMENTS . ............................ 40 Chapter 8. THE DEVELOPMENT PLAN AND PROSPECTS .... .......... 48 LIST OF TEXT TABLES Table No. Title Page Number Volume One 1. GDP by Origin 7 2. Use of Resources 10 3. Indicators of Educational Development (1975) 15 4. Suimmary of Budget Trends 23 5. Government Revenue 25 6. Government Current Expenditures 28 7. Government Development Expenditures 30 8. Factors Affecting Changes in Domestic Liquidity 37 9. Summary of Current Account 41 10. Classification of Private Imports by End Use 43 11. Financing the Current Deficit 45 12. Plan Projections 51 12A. Mission Projections 52 13. Five Year Plan-Overall Resources and Its Uses 54 This report is based on the findings of a mission which visited Oman in November/ December 1976, consisting of R. Chopra (mission chief), H. Moon and M. Marto (general economists), J. Goering (Agriculture), I. Elwan (power), T. Mackay (consultant) and E. Becker-Boost and M. Al-Ali (UNIDO), Ms. Z. Shatila was the mission secretary. This document has a restricted distribution and may be used by recipients only in the perfomance of their official dutie. Its contents may not otherwise be discicod without World Bank authorizition.  TABLE OF CONTENTS (Continued) VOLUME TWO: MAJOR SECTORAL DEVELOPMENTS Chapter 9. AGRICULTURE AND FISHERIES ....................... I Chapter 10. HYDROCARBONS, MINING AND MANUFACTURING .......... 29 Chapter 11. POWER .................... ; ...................... 42 Chapter 12. TRANSPORT . ...................................... 52 Chapter 13. CONSTRUCTION .................................... 56 Chapter 14. HEALTH .......................................... 59 LIST OF TEXT TABLES Table No. Title Page Number Volume Two 14. Distribution of Cultivated Area by District and Crop 2 15. Indicative Estimates of Agriculture and Fisheries Output 8 16. Indicative Estimates of Imports. Domestic Production and Consumption of Basic Food Items, 1975 10 17. Government Services to Agriculture 14 18. Farm and Off-Farm Incomes in Northern Oman 15 19. PropLsed Capital Expenditures in Agriculture and Fisheries 17 20. Alternative Estimates for Crude Oil Production, 1976-80 31 21. Breakdown of Public Investment in Industrial Sectors 41 VOLUME THREE: STATISTICAL ANNEX  :~ :0. ~~.: eec--J C C 0. S C. ac C ~ 0 0-* *p - 5- eli~~~~~~~~It ~ tI - S- - Sa S-SW -. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ I Wa 55555 -. SI at S~~~~~I :mC C rC a I x I St 55 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~b 0-I~ ~ ~ ~ ~ ~ ~ ~~~~~~~~ 0. 45 N cm-.~~~~~~~~~~~~~~~,0r C 8aIC IT T a c. . S~~~~~~~~ W .0.1 0au z -" 4Z5 S.. S -~~~~Ir Ib - e hbJS 54 tO ,- CC 40. .ew. o -o 00. . . 00 a 7 :9 &.'a -0W . as alub 5 2 5~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~9 * r *~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~W  AE J ig I I I C I S I I j IL S 1 3 I .. t - - - It iL X 7Z lKil, S I Si e 9 Z a o .1 B :.2 0 fi . . . . . t n 1 i S, t t i 5- 1. A V, !31  Page 3 of 4 pages COUNTRY DATA - OMAN AREA 1 POPULATION 2/ DENSITY 2/ 300,000 km-/ 0.77-1.5 million (mid-1975>- 3-5 per km sq- Rate of Growth: 3% (from 1966 to 1975) .. per km sq of arable land GNP PER CAPITA IN 1975:-/US$1980 GROSS NATIONAL PRODUCT IN 1975 ANNUAL RATE OF GROWTH (Z, constant prices) US $ Mln. X 1960-65 1967-70 1975 GNP at Market Prices 1,771 100.0 Grose Domestic Investment 647 36.5 Gross National Saving 4/ 608 34.3 Current Account Balance- -335 -18.9 Exports of Goods, NFS4/ 1,085 61.3 Imports of Goods, NFS4/ 1,045 59.0 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1975 Value Added Labor Force V. A. Per Worker USS Mln. % '000 % US$ % Agriculture 52 3 112 48 464 5 Oil 1,373 64 5 2 274,600 3014 Services- 716 33 118 50 6.068 67 Total/Average 2,141 100 235 100 9,110 100 GOVERNMENT FINANCE General Government Central Government (US Mln.) % of GDP (USS Mln.) % of GDP 1975 1975 1970-75 197 197 196 - 7 Current Receipts 1124 52 44 Current Expenditure 935 43 30 Current Surplus 189 9 14 Capital Expenditures 6/ 501 23 17 External Assistance (net)- 369 17 6 MONEY, CREDIT and PRICES 1970 1971 1972 1973 1974 1975 (Million Rials outstanding end period) Money and Quasi Money 35.4 45.5 44.8 46.6 87.3 117.9 Bank Credit to Public Sector . . 7.2 6.6 57.7 69.2 Bank Credit to Private Sector 3.7 4.3 6.5 18.9 55.8 86.0 (Percentages or Index Numbers) Money and Quasi Money as Z of GDP 33.1 36.4 31.8 27.5 15.4 16.0 General Price Index (1963 = 100) .. .. .. Annual percentage changes in: General Price Index .. .. .. Bank Credit to Public Sector (1974=100) . . 12.5 11.4 100.0 119.9 Bank credit to Private Sector (1974=100) 6.6 7.7 11.6 33.9 100.0 154.1 1/ Government estimate (Statistical Yearbook, 1973, Sultanate of Oman). 2/ In the absence of a population census, population estimates for 1975 range from 0.77 million (based on U.N. estimate) to 1.5 million (Government estimate for planning purposes.) Unless otherwise indicated, data in this report rely o'n the U.N. estimates of population and derived figures for the labor force, GNP per capita, etc. 3/ Based on World Bank Atlas methodology (using weighted average of 1973-75 prices and exchange rates) and 0.77 million population. 4/ Treating oil sector as non-resident. 5/ Including military services. 6/ Including grants. May 27,1977 not available not applicable  Page 4 of 4 pages COUNTRY DATA - OMAN BAIANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1973-75) 1973 1974 1975 US $ Mln. % (Millions US S) Exports of Goods, NFS_- 179.4 846.1 1084.6 Oil 701 99.9 Imports of Goods, NFS 222.1 588.4 1044.6 Resource Gap (deficit = _) -42.7 257.7 40.0 Interest Payments (net) 9.0 6.7 -5.2 All other commodities 1 0.1 Workers' Remittances -51.3 -108.1 -156.8 Total Other Factor Payments (net) -25.8 -275.1 -213.0 Net Transfers Balance on Current Account -110.8 -118.8 -335.0 EXTERNAL DEBT. DECEMBER 31. 1975 Direct Foreign Investment -US $Mln. Net MLT Borrowing * Public Debt, incl. guaranteed 225.9 Disbursements 30.7 139.1 195.4 Non-Guaranteed Private Debt Amortization .-36.2 33.6 Total outstanding & Disbursed 225.9 Subtotal 30.7 102.9 Capital Grants (net) 10.1 24.1 207.5 2/ Other Capital (net) .. .. .. DEBT SERVICE RATIO for 1975- Other items n.e.i. _14.2 2-5 - Increase in Reserves (+) -84.2 -11.3 -37.4 Public Debt, incl. guaranteed 3.5 Gross Reserves (end year) 108.0 199.7 241.2 Non-Guaranteed Pr3.5 Net Reserves (end year) 147.0 133.6 96.2 Total outstanding & Disbursed RATE OF EXCHANGE IBRD/IDA LENDING. (Dec. 31, 1976) (Million US$): IBRD IDA Outstanding & Disbursed 1.2 Undisbursed 7.3 Average - Since Fehruarv. 1973 Outstanding incl. Undisbursed 8.5 US $ 1.00 = 0.345 Rial 1.00 = USS 2.895 1/ Net of current and some capital outflows by the oil sector. 2/ Ratio of Debt Service to Gross Exports of Goods and Non-Factor Services. not available not applicable May 27, 1977  SUMMARY AND CONCLUSIONS i. The Sultanate of Oman occupies 300,000 square km in the Southeastern corner of the Arabian peninsula. The country is largely desert except the Batinah--the northern coastal plain, the plains of Dhofar in the South and some oases in the interior. The cultivated area is about 37,000 ha or approx- imately 0.13% of the total area. Irrigation is done with well water or "falaj", the ancient but effective system of Oman which is still used. Little is known about mineral resources other than oil, natural gas and copper. Deposits of limestone, asbestos, chromium, iron and others are known to exist but in most cases further exploration work is needed to establish their commercial exploitability. ii. There has been no population census in Oman and figures vary. The U.N. estimates made in 1974 imply a population of about 800,000 in 1976, but the government uses 1.5 million for planning purposes. The people in the hinterland are overwhelmingly Arab, while on the coast there are Baluchi, Persian, Indian and Pakistani people also. Due to the small population and limited skills, there are a large number of expatriates in the labor force, estimated at about 70,000. Migration out of rural areas to urban areas and neighboring countries occurs on a substantial scale. iii. Prior to July 1970, the country had a ruler that distrusted modern influences, and Oman was a conservative and isolationist state. Only the United Kingdom and India had diplomatic representatives. Apart from the oil concessions granted and limited exploration activity, there were few outside influences on Oman. Even after the beginning of oil exports in 1967 and the new opportunities that oil revenues offered, the country spent little on development. With the coming of Sultan Qaboos in mid-1970, many of the restrictions were removed, a number of political and social reforms were affected, and a rapid push towards economic development was made. iv. The rapidity with which public expenditures were made, mainly with the objective of quickly giving the country the needed economic and social infrastructure, and the extremely limited domestic capacity to prepare and implement projects, together with the high defense expenditures, led to a sharp swing from a surplus to a deficit situation in the balance of payments and budgetary position in 1972. It culminated in the cash flow crisis of 1974/75, despite the sharp increase in oil prices at the end of 1973. The desire to make up for the past neglect was understandable and the investment thrust in infrastructure was justifiable, but the projects were in some cases too costly. This was partly because contracts were negotiated rather than arrived at through bidding, partly due to limited trained staff to negotiate and implement projects, and in some cases due to inappropriate design stan- dards. The Government now realises these shortcomings and the growth of expenditures has been curbed, various institutional procedures have been adopted to tighten up the administration and most contracts are now awarded through bids. These are steps in the right direction, but further measures will be needed to make full and effective use of Oman's resources.  v. Despite inherent structural limitations of scarce water and natural resources other than oil, shortages of skilled and unskilled labor and a narrow domestic market, the economy has grown since the discovery of oil in 1967. The oil sector has been the engine of growth, but construction, trade and government services also recorded significant growth, while agriculture stagnated, if not actually declined. As a result, in 1975 oil accounted for about two-thirds of GDP, construction for 12%, while the share of agriculture, which employs about two-thirds of the Omani labor force, declined to less than 3%. The major reasons for the poor performance of agriculture were plant pests and diseases, continued application of traditional methods and substan- tial migration of able-bodied workers out of the rural areas. Manufacturing is at present very limited, accounting for only 0.3% of GDP in 1975. vi. Public investment grew rapidly from RO 1 million in 1970 to RO 173 million in 1975, accounting for 23% of GDP (compared to 7% of GDP for private investment). The share of public consumption in GDP also rose rapidly from 13% in 1970 to 43% in 1975, largely as a result of increasing military expenditures (33% of GDP in 1975). As a result of the increasing consumption expenditures, gross national savings as a proportion of GDP fell from 45% in 1970 to 29% in 1975. vii. The per capita income was estimated at $1,980 in 1975, based on the UN population estimate and the Bank's Atlas method. However, this grossly overstates the living standards of the Omani population. The average income in rural areas, where 70% of the Omani population lives, is estimated to be less than $200 per year. This includes substantial transfers from family members working abroad or in urban areas in Oman. The remaining 30% of the Omanis in non-rural areas had an average income of $1,250, while the expa- triates' average income was approximately three times that figure. The regional distribution of income is also very uneven, with the Capital area and the oil producing areas accounting for the bulk of the modern sector. Apart from allocating increasing amounts of expenditures to social sectors, the government has recently emphasized low cost housing and vocational train- ing programs, introduced minimum wage legislation and provided direct cash subsidies. viii. A modern system of education was initiated only in 1970, prior to which education was mainly religion-oriented. There are no teacher training or agricultural training institutions and only one vocational training centre. 44% of the relevant age group are enrolled in primary schools and only 2% in lower secondary. Higher education is done through sending students abroad. The government decided on a rapid rate of expansion, so that in 1975/76 there were 54,000 pupils enrolled in 181 government primary schools c:ompared to 900 in 3 schools in 1969/70. This rapid expansion has led to various problems including unsuitable physical facilities, lack of suitable curricula and a heavy reliance on expatriate teachers and foreign teaching materials. ix. Although the government has a laissez-faire and non-interventionist philosophy, the public sector plays a major role in the economy: in 1975, government expenditures accounted for three fifths of GDP, oil revenues were 96% of total revenues (excluding grants) and the government employed over 40% of the non-agricultural Omani labor force. As a result of the major shift  in expenditure policy in 1970, the budget surpluses changed to substantial deficits in the early seventies and amounted to OR 43 million in 1975. In 1972 and 1973 the deficits were financed by running down reserves accumulated in earlier years but after that by increasing recourse to grants and loans. x. Direct taxes other than oil, consisting of corporate income tax and Zakat (which is levied on some types of agricultural produce) and indirect taxes (customs duties and revenues from public utilities and municipal tax) were minor relative to oil. With oil production increasing from 21 million barrels in 1967 to 135 million barrels in 1976, the acquisition in 1974 of 60% shares in Petroleum Development of Oman (PDO), increasing taxes and royalties and the increasing oil prices in line with OPEC decisions, oil revenues rose steadily from OR 44 million in 1970 to an estimated OR 470 million in 1976. On the public expenditure side, the main increases took place in defense and investment expenditures, which rose from OR 67 million and 2 million in 1970 to OR 241 million and 173 million in 1975 respectively. The major emphasis of investment expenditures was on economic and social infrastructure, which accounted for 90% of public investment during 1973-75. xi. The role of monetary policy has been limited in Oman. Till the establishment of the Central Bank in November 1974, limited central banking functions were carried out. Up to 1972, there were only four commercial banks in Oman but since then they have grown rapidly. There has been no medium-term financing, although credit is "rolled over" by commercial banks. A decree was issued in 1976 to establish the Development Bank of Oman, but it is not yet operational. Monetary developments have mainly followed the fiscal operations of the Government. Money supply grew at an average annual rate of about 60% between 1970-74, but slowed down to about 44% in 1975 and less than 30% in the twelve months ending in September 1976. Commercial bank credit to the private sector increased from OR 3.7 million in 1970 to OR 86 million in 1975, while credit to the Government increased from nothing to OR 62 million over the same period. Available data indicate that a major part of the credit in 1975 was provided for trade (58%) and construction activity (20%). xii. No price indices are available in Oman, except for the prices of selected imported food items. However the rapid public expenditure in rela- tion to limited production capacity and import handling facilities led to substantial inflationary pressures since 1970. The rising prices of imported goods, particularly since 1973, also contributed. In 1975 and 1976, price increases have slowed down and some food prices declined as a result of gov- ernment intervention in the rice market, slowdown in international price increases and the growth of government spending and an improvement in port facilities and increased availability of accommodation. xiii. The exchange and trade system in Oman has been very liberal with practically no restrictions and very low import duties. The economy is trade- dominated, with imports and exports accounting for about 60% and 80% of GDP respectively in 1975. In view of the major impact of the government on the economy, developments in the balance of payments are closely related to those in the budget. The current account, after a few years of surplus, swung sharply into a deficit in 1971 which amounted to OR 116 million in 1975.  - iv - xiv. Exports of oil accounted for practically all exports, except for OR 1 million of mostly farm products in 1975. Imports have grown rapidly from OR 16 million in 1970 to OR 360 million in 1975, two-thirds of which were imports by the private sector. The increase in imports were largely due to the large investment expenditures after the increase in oil revenues, which also increased personal incomes and consumer goods imports. The proportion of capital goods in total private imports rose from 17% to 41% between 1970 and 1975, while that of consumer goods declined from 73% to 48%. Public sector imports are mainly defense-related. There was a net outflow of OR 103 million on the invisibles account, mainly consisting of remittances of expatriates and the profits of construction firms. xv. With increasing current account deficits and the drawing down of foreign exchange reserves, the need for external financing rose. Total grants, all from neighboring Gulf States, rose from OR 4 million in 1973 to OR 72 mil- lion in 1975, while loans rose from OR 11 to 67 million over the same period. Private foreign investment, except in oil, has not been significant in Oman. The level of net foreign exchange reserves, which had risen to a peak of OR 95 million in 1971 fell to a low of OR 8 million by September 1976, equivalent to about one month of imports. There were almost no foreign debts outstanding in 1972 but reported external debt outstanding and disbursed stood at OR 78 mil- lion ($226 million) at end 1975, some 60% of which was in commercial bank credits and 20% in supplier's credits. Debt service payments in 1975 were about 3.5% of total export earnings and are estimated to have been about the same level in 1976. xvi. The first Five Year Plan for 1976-80, formulated by a Planning Team partly financed under the Bank's ongoing Technical Assistance Project, was approved in the second half of 1976. The main objectives of the Plan are to shift the concentration of investment from infrastructure to income generat- ing projects to supplement oil revenues, to develop local human resources to gradually replace expatriates, to improve the personal and regional distribu- tion of income and to increase the role of the private sector. The allocation of investment is consistent with these objectives. Oil production is expected to decline by 2.2% per year, but as a result of a 13.7% p.a. increase in value added in agriculture and 72% p.a. in industry, GDP is projected to grow by 1.6% p.a. A striking feature of the plan is a projected decline in public investment of about 19% p.a. and total investment by 10% p.a. The Plan expects the balance of payments to swing sharply into surplus, mainly as a result of a projected decline in imports by 11% p.a. in real terms. Partly as a consequence of this and partly as a matter of government policy to limit debt, loans are forecast to decline to a level of only OR 19 million in 1980 in 1976 prices. xvii. Planning as a separate exercise from the executive functions of ministries was started only in 1974. Consequently, the planning staff in ministries and the Development Council is limited and needs strengthening. Together with limited data availability, this has resulted in a rather simple Plan taking into account that the project components, apart from some major projects, were in preliminary stages of preparation. The main objectives of the Plan and the allocation of investments seem to be in line with the  needs of the economy and address the critical constraints to development: to develop the non-oil sector and the limited human resources and to try and redress the personal and regional income disparities. xviii. Although the growth targets cannot be considered high, they may prove difficult to achieve fully. GNP is more likely to decline by about 3% p.a. rather than the forecast increase of 3% p.a. The mission estimates that oil production will be lower than forecast, because of the long lead time required to bring new fields into production. However, an alternative mission projection was made in case some new fields other than Dhofar come into pro- duction by 1979; in that case GNP would decline by only 2% per year during 1976-80. If the energetic exploration efforts of the Government and the use of advanced secondary recovery methods prove to be successful, then the decline in both oil production and overall economic growth could be arrested beyond 1980. Agriculture may not grow so fast as projected because the out- migration from rural areas is likely to continue, low yields continue to be a major problem and the scarcity of underutilized water resources and appro- priate soils allows for only limited economic development of new land. Nevertheless, selective development of new areas after careful consideration of the water and soil conditions should be done. Considerable yield increases on already cultivated land have been shown to be feasible by relatively simple methods e.g. improved plant spacing, pest and disease control and timely application of fertilizer. However, applying these simple methods on a nation-wide basis will take time and farmer education. xix. In manufacturing, although the high growth forecast may not be achieved, any developments will raise value added to a multiple of the low base of OR 3 million in 1976. A flour mill has been completed, construction of a gas pipeline is underway to provide a cheap source of energy, a cement plant is under active consideration and a list of various other projects is being considered. Although a large number of these projects are no more than mere ideas or in very preliminary stages of preparation, some of them are likely to be in production before 1980. The construction of a "topping plant" rather than a full-scale refinery should be seriously studied. xx. In view of the preliminary nature of most of the projects and the limited capacity to prepare and implement projects, it is difficult to project investment levels. However, some of the major investment projects e.g. cement and copper have been delayed in comparison to the Plan schedule, although both of them are making progress now. On the other hand, the cost of projects may be higher than forecast. Overall the likely outcome could be that the public investment over the Plan period may be realized but be a bit lower than projected in the earlier years and higher in the outer years. In the private sector, given the indicative nature of the plan forecasts and the limited project preparation, investment may fall short of targets, particularly in the manufacturing sector. Public consumption may also have been underestimated, partly because the growth of maintenance and recurrent expenditures as a result of past and future investments may be higher than the 12% p.a. increase in public current expenditures allowed for in the Plan. The Plan also assumes  - vi - a near halving of military expenditures by 1980, because of the cessation of hostilities in Dhofar and a reduced need for new equipment as a result of past purchases. This is a laudable objective, but it may be difficult to achieve. xxi. The major difference between the Plan and mission projections is in the balance of payments. Firstly, oil exports may be lower than assumed in the Plan. Secondly, the fast decline of imports assumed may be difficult to achieve, partly because the import substitution forecasts in the Plan may be too optimistic and partly due to the higher imports that would result if the fast decline in military expenditures does not materialize. As a result, current account deficits are likely to continue and Oman will continue to need higher external assistance than the Plan projects. xxii. In line with the slowing down of economic activity, particularly in construction, the Technical Secretariat of the Development Council expects a decline in total employment in the non-rural sector from 123,000 in 1975 to 114,000 in 1980. However, consistent with the "Omanisation" objective, employ- ment of Omanis is expected to increase by over 22,000 and that of expatriates to decrease by 32,000. Although replacement of expatriates by Omanis will occur, especially with the return of Omanis being educated overseas and those living abroad, in view of the limited skilled manpower in Oman and the small capacity for vocational and technical training, such replacement of expa- triates may take longer than anticipated. Nevertheless, the government should continue to emphasize the improvement and expansion of the education system, particularly vocational and technical training, and use external technical assistance wherever needed. xxiii. Overall, the economy faces a downward trend in the next few years, unless substantial new oil reserves are discovered. It is therefore impera- tive that Oman develop its non-oil sector while oil revenues last. The devel- opment of the country as a service economy, either as an intermediate station and warehouse for neighboring countries or as a centre for entrepot trade, offers limited possibilities, because of the substantial lead other competing countries have in these areas, the shortage of skilled manpower and to some extent the geographical location. Consequently, the major thrust has to be to develop non-oil, income generating projects. In view of' the limited finan- cial resources and the high costs of projects in the past, reducing the unit costs of projects through more careful preparation of projects and improved bidding procedures should be given high priority. xxiv. In agriculture, greater emphasis will need to be placed on increas- ing the yields on already cultivated lands, along with a limited program for new land development in suitable areas, where water and appropriate soils can be found. The major effort in increasing yields should be in dates and limes, in which little research has been done to control the incidence of pests and diseases. New land development should be largely devoted to high value fruits and vegetables', partly to replace imports and partly for exports. Efforts to raise agricultural production are essential not only to develop non-oil sources of income but also to increase the incomes of the 70% of the Omani population living in rural areas. It may also help in reducing the rate of  - vii - migration. Other measures needed in agriculture are to improve the provision of services and inputs to extension centres and ensure that expatriates hired for extension work can work with farmers effectively. The distribution of fertilizer and tractor services by government agencies preempts limited staff available for technical advice. The Government should consider using the private sector for distribution. xxv. In the livestock sector, the major effort should be to increase feed supplies, which in turn relate to broader issues of more focussed agricultural research, improved extension and the provision of basic inputs. Special ef- forts are needed to improve the cattle in Dhofar and there is a need to closely examine the economies of the fattening program. The prospects for fisheries development are good. The modern fishing methods, now being employed in joint ventures, will substantially raise the production but will not produce widely distributed benefits. With careful planning, there can be simultaneous devel- opment of modern fishing and traditional fishing, with assistance to fishermen by expanding market outlets and providing equipment and facilities to supply the markets. xxvi. In mining and manufacturing, the main possibilities are in the devel- opment of the hydrocarbon and other mineral resources, specifically through crude oil refining, development of gas based industries in addition to the use of gas as a fuel and the manufacture of cement and possibly copper, if it is proven to be economically justified. It is difficult to provide specific recommendations at this stage because in many cases the feasibility work done is insufficient. Oman has the potential for developing simple food and con- sumer good industries e.g. soft drinks, soap, batteries, brick, porcelain, nails and screws. However, in view of the limited domestic market, the appropriate size of plant needed will have to be carefully studied. One of the main constraints in the development of manufacturing industries will be the scarcity of skilled labor and management. xxvii. The Government needs to give special emphasis to the improvement of the quality and quantity of data, without which rational planning and imple- mentation is difficult. Apart from the urgent need for a population census, in agriculture, for example, better data is needed for production, prices, labor utilization and the ownership of land. xxviii. In view of declining oil production, the government should consider gradually increasing non-oil revenues. Taxation should also be used as a device to improve the distribution of income. Tax revenues can be increased by vigorous enforcement and collection efforts, increasing the coverage of income taxes through reactivation of land and urban property taxes, considera- tion of a gasoline tax, raising import duties to some extent and charging realistic rates on publicly provided services in line with costs. xxix. The banking system needs to be developed further. There is scope for the Central Bank to become more active by using instruments such as reserve requirements and discounts to contain inflationary pressures. Finan- cial intermediation needs development with measures to increase the variety  - viii - and attractiveness of financial assets to the private sector. Till the Devel- opment Bank of Oman starts functioning (decree issued-in 1976 but not yet operational), there is no term financing available. Strengthening of staff and research facilities of the Central Bank is also needed. xxx. The balance of payments projections of the mission imply a rising debt service ratio from about 3.5% in 1975 to about 18% in 1980 but declining thereafter. With the low level of foreign exchange reserves, the expected current account deficits will imply continuing reliance on external borrowing. Oman is creditworthy for borrowing on commercial terms. However, Oman will need to carefully watch its foreign exchange resources and attempt to borrow as much as possible on concessional terms from bilateral and multilateral sources.  CHAPTER ONE INTRODUCTION Natural Resources 1. The Sultanate of Oman (formerly Muscat and Oman) occupies most of the southeastern corner of the Arabian Peninsula covering an area estimated at 300,000 square kilometers. It has a coastline of some 1,700 km long facing the Arabian Sea and the Gulf of Oman, and land frontiers, some undefined, with the People's Democratic Republic of Yemen in the southwest, with Saudi Arabia to the west and with the United Arab Emirates to the northwest. The Mussandam Peninsula in the north, separated by territory of the United Arab Emirates, is on the south side of the strategically important Straits of Hormuz. 2. With the exception of the long narrow fertile coastal plain in the north (Batinah), a number of oases in the interior and parts of the plain of Dhofar in the south, the country is largely desert, of which a part is rugged mountainous terrain with deep sunken valleys. The Hajar mountain range runs from the Strait of Hormuz to Sur, southeast of Muscat. The Batinah coastal plain, some 250 km long and 2-30 km wide, is an important agricultural area between the mountains and the sea. A great cleft, the Wadi Sumail, divides the Western and Eastern Hajar, and is a main route to the interior. The sand wastes of Rub-al-Khali reach west of the Western Hajar. Dhofar Province in the south has significant annual rainfall and is suitable for agriculture and animal husbandry. In effect, Oman has islands of settlements separated by desert. 3. The area under cultivation is estimated at about 37,000 ha, less than 0.15 percent of the total area of the country. About 40 percent of the cultivated area lies on the Batinah coast, and the rest mostly west of the Hajar mountain (interior Oman), plus about 1,000 ha in Dhofar. The Batinah region relies upon wells for its water supply, while the interior uses both falaj and well water. There are no forests; isolated scrub vegetation is fairly common, particularly on the Batinah coast, supplying firewood. The Gulf of Oman and the Arabian Sea provide fish for human consumption or for conversion into fish meal for animal feed and/or manure. 4. Temperature reaches about 110 degrees F in June and July, with aver- age temperatures of about 70 degrees F during December and January. Humidity is between 60-80 percent for most of the time. The Hajar mountains receive about 250 millimeters of rainfall mostly in the winter. Due to soil erosion and the consequent absence of vegetation, much of this rainfall is lost due to rapid runoff; however, a large portion percolates underground, and supplies the interior oases and the Batinah Coast (which receives no more than 100 millimeters of rainfall a year) with water for irrigation and domestic use throughout the year. In Dhofar Province, precipitation is about 600 milli- meters; the mountains behind Salalah in the South catch the summer monsoon rains, with a number of perennial springs reaching the coastal plain. Period- ically, there are prolonged droughts.  -2- 5. Little is known about mineral resources other than oil and non- associated natural gas (see Vol. II, Chapter 10 for a discussion of oil). Until recently, one cursory exploration has been undertaken. In 1973, the Government contracted with two foreign firms to survey the mineral resources. Preliminary results are reported to have indicated the existence of copper deposits in small but possibly commercial quantities. Deposits of limestone, asbestos, chromium, manganese, nickel and iron ore are known to exist, al- though in most cases further exploration work is needed before their commer- cial exploitability can be established. Population 6. There has not been a population census in Oman. Hence, little is yet known about its size, characteristics, or the detailed geographical dis- tribution of its population. In the absence of a population census, estimates of total population range from 750,000 to 1.5 million. More reliable figures would be available once a population census is undertaken and completed. The Batinah coast and a few oases in the interior are relatively densely populated. Towns of importance are Muscat, Mutrah, Ruwi, Nizwa, Salalah, Sur, Sib, and Sohar. Population growth is estimated to be about 3 percent. The rate of natural increase may rise as the spread of health services will lower death rates, while at the same time the resident population will be increased by the further return of Omanis from abroad, and perhaps the retention of foreign skilled and unskilled labor. Agriculture provides employment for two thirds of the Omani people. 7. The people in the hinterland are overwhelmingly Arab, while on the coast there are Baluchi, Persian and Negro mixtures, with many Indians and Pakistanis in the capital area. The Indians are often merchants whereas the Pakistanis or Muslim Indians are craftsmen or soldiers. Recently, many workers from India, Pakistan and some Arab countries have been brought in on construction projects. 8. There are many tribes in Oman and tribal traditions persist. A broad distinction can be made between the Ghafiri, with an orthodox Sunni Muslim background, and the more numerous Hinawi, closely associated with the Ibadi version of Islam. The Hinawi came originally from Yemen, while the Ghafiri arrived in a second wave from Central Arabia. A significant distinc- tion exists between the interior, with a partly nomad population, and the coast where some towns developed historically into outward looking "city states". Besides Muscat's formerly large and profitable sea trade with India, the Gulf and East Africa, coastal agriculture produced an export surplus of dates and fruits, while fishing gave rise to both exports and trade with the interior. On the other hand, agriculture in the interior has, with few excep- tions, been for subsistence, with little surplus. Oman's history has often emphasized the continuing tension between coastal Oman, more affected by world affairs, and interior Oman with an inward-looking tradition. Nevertheless, both the coast and the interior share important economic, social and political characteristics.  -3- Political Background 9. Oman is an independent Sultanate. The objectives and pattern of Gov- ernment have been drastically transformed since July 1970, when Sultan Qaboos Bin Said came to power after deposing his father, Sultan Said Bin Taimur. Sultan Said Bin Taimur had been a conservative, isolationist, and absolute ruler who resisted all foreign and modernizing influences, and attempted to keep Oman a traditional state. By 1970, only the United Kingdom and India had diplomatic representatives in Muscat, and Oman sent no representatives abroad. Oman, even in the middle of the twentieth century, was one of the least known inhabited regions of the world. Sultan Qaboos removed many of the restric- tions formerly imposed on his people and effected a number of political and social reforms. These reforms have attracted back a number of Omanis who have hitherto lived abroad, some taking senior positions in the Government. 10. For more than two centuries Oman had close relations with Britain, which were documented in a series of friendship and trade treaties. In 1650, an Omani army recaptured Muscat from the Portuguese, and during much of the 17th and 18th centuries, the Omanis dominated the Gulf Region. Muscat became the capital of a flourishing commercial country and held the position of chief entrepot of the Gulf Area. By 1770, the Omanis had built the largest fleet of any non-European state active in the Indian Ocean. Their power stretched down the coast of Africa where they appropriated former Portuguese colonies, and by 1730 they had occupied Mogadishu, Mombasa'and the islands of Zanzibar and Pemba. By the end of the 19th century, the coastal economy around Muscat col- lapsed and the population of Muscat fell from an estimated 55,000 to 8,000. As a consequence Oman was plunged into an economic depression which severed its connection with the outside world, and drove most of its inhabitants back into a subsistence economy. A second consequence of the collapse was that the conflict between the coast and the mountainous interior became more pronounced. 11. During this century, the Sultans have been challenged twice by the Imams (religious leaders) of the interior. The first challenge came in 1915 when Muscat was besieged, although in 1920, the Sultan and the tribes reached accommodation through the Treaty of Sib, which gave the Omanis of the interior a form of home rule with the right to administer their own local affairs and to elect their own Imam, in place of the Sultan of Muscat, who had held both titles until then for over a century. The Sultan, however, never relinquished his sovereignity. The most recent period of violence took place between 1954- 59. Oman's worldwide recognition as an independent state was temporarily blocked during this period by the Imam who claimed to be the elected leader of an independent (interior) Oman. In 1959, assisted by the British, the Sultan defeated the followers of the Imam, captured their mountain stronghold, and dissolved the Immamate of the interior. After some delays, however, Oman be- came a member of the Arab League and of the United Nations in 1971, and the IMF and the World Bank in December 1971. 12. Guerilla activities in the southern Province of Dhofar started in 1963, as an active opposition movement against the former Sultan. This move- ment grew into a full-fledged guerilla action known as the Popular Front for  - 4 - the Liberation of Oman (PFLO). Military operations against this movement, assisted by some neighboring and other powers, constituted a major and growing drain on the resources of Oman. This strain has been eased to some extent by the military and financial aid from friendly neighboring countries. The Gov- ernment announced, in late 1975, the successful completion of the anti-guerilla operations. Economic Background 13. The economic history of Oman in the Twentieth Century can be divided into three broad phases. During the first period of up to 1967, Oman was a traditional, subsistence and inward-looking economy, about which little is known. The granting of oil concessions in 1937 and the start of limited ex- ploration activity represented the major external influence on economic devel- opments and along with the diplomatic presence of Britain and India probably represented most of the contact with the outside world. The beginning of oil production and exports in 1967 was the start of the second period, which ended with the change of the Sultan in 1970. Despite the possibilities that the increase in oil revenues offered, the then Sultan continued to maintain a traditional and inward-looking State. As a result of limited government expenditures, foreign exchange reserves accumulated. The period since 1970 under the new Sultan represents a clean break from the past with a major push to rapidly modernize the economy. The rapidity with which investment expendi- tures were incurred and the limited domestic capacity to prepare and implement projects implied not only a heavy reliance on expensive expatriate services but also a sharp swing from a surplus balance of payments and budgetary situa- tion to rising deficits, which culminated in the cash flow crisis of 1974/75, despite the sharp increase in oil revenues after the major oil price increases at the end of 1973. 14. Since the cash flow crisis the Government has taken various steps to curb the growth of public expenditures, fewer new projects have been initiated and attempts are being gradually made to bring greater control and order into the decision making process and preparation and implementation of projects. These have been steps in the right direction. The Government is to be com- mended for its progress in these areas. But Oman still has some way to go, and will need to make a concerted effort, in developing a more sophisticated system of economic management. 15. The major objective-of the Government in its rapid push for develop- ment and modernization has been to develop the economic and social infrastruc- ture to connect the major population and economic centers within the country, to open up the country to the outside world and provide basic services like health, education, water, electricity and housing, most of which were non- existent before 1970. The main constraints that faced the Government were (a) the extremely limited manpower base and hence the costly reliance on expa- triate services, skilled and semi-skilled manpower; (b) a limited natural resource base, with the exception of oil and natural gas and hence heavy reliance on a depletable resource; (c) the limited non-oil productive base of the economy and the limited domestic market, which led to a high reliance on  - 5 - imports; (d) due to the prolonged period of isolation and the subsistence type of an economy, the lack of a well-developed modern administrative and institu- tional base; and (e) a high rate of outmigration from rural areas to the fast developing and higher paying urban areas within Oman and to nearby Gulf States, which led to the stagnation if not an actual decline of agricultural output. 16. The rapidity and the magnitude of the change since 1970, although small in comparison to countries like the United Arab Emirates and Saudi Arabia, in a sense makes it difficult to evaluate the change in usual eco- nomic terms, which typically are used to evaluate marginal changes. However, unlike these countries, Oman is not an "oil country", but rather a small oil producer such as Ecuador, Trinidad and Tobago. The small size of the oil reserves, estimated at 1.1 billion barrels 1/ (equivalent to only nine years of production at the 1975 rate), compares to for example 68 billion barrels in neighboring Kuwait. The emergence of substantial budgetary and balance of payments deficits and the expected decline in oil production in the future, are factors that make Oman comparable to other developing countries, which produce some oil. Moreover, the very skewed income distribution has meant that around 70 percent of the Omani population living in rural areas have aver- age incomes less than $200 per year. Consequently, despite the non-marginal changes since 1970, the usual calculus of rational decision making at the margin should still be applied in the case of Oman. Oman cannot be viewed as an oil rich country with a balance of payments surplus but more as a develop- ing country that should use its depletable oil reserves to quickly and effi- ciently develop its non-oil resources. As is discussed in the report, the Government itself has decided to slow down the pace of change and increase the efficiency of resource use. Despite the continuing spiral of rising expecta- tions that invariably accompanies rapid development, the Five Year Plan, 1976- 1980, projects an absolute decline in public investment, in line with the expected decline in Government revenues. 17. Although the Government has a laissez-faire and non-interventionist philosophy, the public sector plays a major role in the economy. The Govern- ment's direct intervention in the market mechanism is limited: there is prac- tically no control on external trade and foreign exchange flows and only a maximum of 2 percent import duty on almost all items, non-oil revenues were only 2.3 percent of GNP in 1975, the use of monetary and fiscal policy as instruments of Government intervention has been extremely limited and there is little control on domestic economic activity generally. However, as a result of the dominant position of the public sector in economic activity, the Government actions to a large extent determine overall trends in economic developments. In 1975, Government expenditures were 75 percent of GDP, the Government employed over 40 percent of the Omani labor force (excluding agri- culture, fisheries and expatriates) and accounted for over four-fifths of total consumption expenditures and over three-quarters of investment expenditures. 1/ An earlier estimate put the reserves at 3 billion barrels, but that is now considered to be optimistic.  - 6 - 18. Another important feature of the economy is that because of the limited domestic production base and the heavy dependence on oil revenues, the economy is trade-dominated with imports and exports being about 60 percent and 80 percent of GNP respectively in 1975. Oman has had a long history of commercial activity, dating back to its days as a major trading and sea-faring power in the Indian Ocean. The natural flair for trade and the easy profits available in such activities in the Gulf area have led to a fast development of domestic commercial activities. Channeling these talents to the develop- ment of manufacturing industry away from trade and construction, to gradually develop non-oil activities to replace oil revenues, will be one of the chal- lenges that lie ahead. 19. The availability of reliable data is extremely limited in Oman. Com- prehensive Census results are not available and only a few and limited surveys have been conducted. Consequently in various crucial areas, the report has had to rely on crude estimates. The judgements expressed, especially insofar as they relate to quantitative evaluation, should be considered as broadly indica- tive of trends and subject to large error margins. The National Statistical Department of the Development Council has been, in recent years, working to improve the quantity and quality of data, but such endeavors always take a long time.  -7- CHAPTER TWO OUTPUT AND INCOME GROWTH 20. Despite the inherent structural limitations of scarce water and natural resources other than oil, shortages of skilled and unskilled labor and a narrow domestic market, the economy has witnessed a period of growth and gradual improvement since the major discovery of oil in 1967. Prior to the commercial exploitation of oil, Oman's economy was at a subsistence level, based entirely on meagre outputs from agriculture, fishing, and some minor handicraft activities. Although relevant information is extremely scarce, the output in the pre-1967 period probably merely kept pace with the growth of the population at best. With the emergence of oil as a major export, however, the economy was estimated to have recorded 100 percent real GDP growth in 1968, 4-6 percent per annum growth between 1968-1973, 40 percent growth in 1974, and about 20 percent in 1975. 1/ 21. With rising oil income, other service sectors such as construction, trade, and government sectors also recorded significant growth. In particular, the growth of construction since 1970 has been prominent owing to the rapid expansion of the government's development expenditure. Significant structural changes took place in the composition of GDP due to differences in the growth of these sectors and disparate movements in relative prices (Table 2.1). While the share of the oil sector increased from 31 percent in 1967 to about 64 per- cent in 1975, the share of agriculture declined drastically from 37 percent in 1967 to less than 3 percent in 1975. The share of service sectors fell from 32 percent in 1967 to 17 percent in 1970, but increased gradually thereafter up to 33 percent in 1975 as a result of increased demand for these services. Table 1. GDP BY ORIGIN (percentages, current prices) 1967 1970 1975 Agriculture 36.9 15.5 2.5 Oil 30.9 67.0 64.1 Construction 21.4 9.9 12.1 Public Administration 1.5 2.2 7.5 Others 9.3 5.4 13.8 Total GDP 100.0 100.0 100.0 1/ The national account statistics officially used (in current prices only), have been prepared by IBRD missions to Oman; however, they remain only indicative estimates, since basic statistical data to compile reasonable national account statistics are extremely limited.  - 8 - 22. The output of agriculture and fisheries has probably stagnated in the last decade, if not declined. Although it continues to be the most impor- tant means of livelihood for the Omani population--employing about two-thirds of the Omani labor force--these sectors generate incomes lagging far behind other sectors. Apart from unfavorable natural conditions, including limited water resources, a small cultivatable area, unfavorable climate and crop pests and diseases, sizeable migration of prime-aged agricultural labor into urban centers or neighboring countries (particularly in the seventies) seems to have significantly limited growth of this sector. While some farm crops such as wheat and vegetables showed some gains in production recently, major ones in- cluding dates, citrus and alfalfa seem to have recorded declines. Fisheries, for which growth has been similarly constrained by a declining fishermen pop- ulation, appears to have suffered a declining trend in output. However, the future potential for growth in fisheries is much greater than in agriculture as evidenced by a sharp growth in output in 1976 after modern fishing methods were introduced. In the livestock sector, lack of feed, compounded by poor health care and husbandry practices, are major causes of low productivity. (For a detailed discussion, see Chapter 9). 23. Mining has been the main lifestream of the economy, with crude oil production accounting for almost all value added in this sector. Oil produc- tion was rising rapidly until 1970, when it reached a peak of over 120 million barrels. But the level of production fell to 100-110 million barrels per year over 1971-74 period, mainly due to technical reasons and the absence of any significant new wells. Higher production levels were reached during 1975-76, with production estimated at 135 million barrels in 1976 (Table 7.1). Value added in oil production has steadily increased in current prices since 1967, with a sharp increase in 1974 as a result of the jump in crude oil prices. Practically all oil income accrues to the Government, the holder of 60 percent share in the only oil company producing oil in Oman, namely, Petroleum Devel- opment of Oman (PDO), and to its foreign shareholders. Prior to 1974, govern- ment oil revenues consisted of royalties and taxes paid by PDO. Since then an increasing part of Government oil revenues has consisted of proceeds from the sale of its share in the oil output. Oman is not a member of OPEC, but it generally follows OPEC pricing policies. Other mining activities are limited although deposits of other minerals are known to exist but in most cases further exploration work is necessary before their commercial exploitability can be established. (See Chapter 10 for discussion of oil and other mining activities.) 24. Trends in the tertiary sector have been dominated by the two main service sectors--construction and public administration. Other sectors, such as banking, trade, communication and transportation, have accounted for only 10-15 percent of GDP in total since 1970. Growth of construction has been the most prominent--mainly in infrastructure construction--due to the rapid expansion in the Government's development expenditure. In 1975, con- struction accounted for about 12% of GDP. (See Chapter 13 for more details.) Due to the rapid expansion in government activities and its personnel, value added in public administration grew over twenty times in current prices between 1970 and 1975. The number of government employees increased from approximately 1,200 in 1967 to over 15,000 in 1975 with about another 15,000  - 9 - persons working for police and defense forces. Although no reliable data are available, increases in government wages and salaries have been substantial, in particular since 1970. 25. Manufacturing activity in Oman has been extremely limited. Al- though a few activities have developed since 1970, manufacturing accounted only for 0.3% of GDP in 1975. By the end of 1976, there were only a few plants completed or in operation: namely plants for producing flour, furni- ture, aluminum products, pepsi cola, processed dates (two plants), dairy products and some minor undertakings such as a printing press, bakeries and bottling of industrial gases (See Chapter 10). The Government also fosters the development of a handicraft industry with training centers for copper, silver, pottery, weaving and traditional boats. 26. As the economic activities rapidly expanded, Oman's dependency on foreign labor and technology grew fast, which caused sizeable outflows of resources as factor income payments. These factor income payments--mainly in the form of remittances of the oil company's profits, expatriates' earnings, and of the construction companies' profits--reached OR 128 million ($370 mil- lion) in 1975, as compared to OR 4 million in 1967. As a result, the level of GNP was on the average less than 80 percent of GDP since 1968, with the growth of GNP slower than that of GDP. GNP for 1975 was estimated at OR 611 million in current prices. This gives $1,980 as the per capita GNP for 1975, based on (a) World Bank Atlas methodology; 1/ (b) the UN population estimate of 750,000 for 1974; and (c) the annual average population growth rate of 3 percent. This per capita income, however, is grossly misleading as an in- dicator of the income and living standard of the average Omani, as most of the oil income accrues to the Government, and a high proportion of the incomes generated in non-oil modern sectors accrues to expatriate workers in Oman. (See Chapter 4 for more details of income distribution). Mobilization and Uses of Resources 27. The pattern of resource use clearly reflects the attitude of the Government toward economic development and modernization of the country. Under the former Sultan, the Government opted for a very conservative policy, limiting the role of the government to a minimum. This led to conservative fiscal management, which essentially implied small government expenditures, budget surpluses and public expenditures being smaller than private ones. (See Table 2). Since mid-1970 under the present Sultan, however, the Gov- ernment took more positive and active policies toward development and this brought in substantial increases in government expenditures, which rapidly overtook the private sector. 1/ The present World Bank Atlas methodology uses 1973-75 as the base period for weighting prices and exchange rates.  - 10 - Table 2. USE OF RESOURCES (In percent of GDP at current prices) 1967 1970 1973 1974 1975 Gross domestic fixed investment 31 14 26 31 30 Government ( -) ( 11) ( 18) ( 25) ( 23) Private ( 31) ( 3) ( 8) ( 6) ( 7) Consumption 57 32 61 43 54 Government ( 4) ( 13) ( 37) ( 34) ( 43) Private C 53) ( 19) ( 24) ( 9) ( 11) Resource Surplus 11 54 13 26 16 Exports of goods & NFS /1 ( 33) ( 74) ( 60) ( 69) ( 66) Imports of goods & NFS /1 (-22) (-20) (-47) (-43) (-51) GDP at market prices 100 100 100 100 100 Net factor payment -9 -23 -24 -22 -17 GNP at market prices 91 77 76 78 83 Gross National Saving 34 45 15 35 29 /1 Oil sector is treated as resident. Therefore, these figures differ from the ones in the balance of payments section, which treats the oil sector as non-resident; this dichotomy was caused by scarcity of information on detailed transaction within the oil sector. Source: Table 2.2, Statistical Annex. 28. Thus public fixed investment which had amounted to less than OR 1 million until 1970, rose sharply reaching OR 30 million in 1973 and further to OR 173 million in 1975, representing 18 percent and 23 percent of GDP respectively. The majority of public development expenditure has been spent on providing basic economic and social infrastructure, which the country needed for economic development. During 1973-75, 90% of public investment went to infrastructure. Recently, gradually larger--but still only moderate-- amounts have been allocated to projects that will directly generate incomes in the future. (See Chapter 5 and Table 5.4). Although public investment progressed rapidly, difficulties were experienced by the Government in the course of implementing development projects, due to the shortage of manpower and underdeveloped institutional capacity. As a result of the understandable, but rushed drive for rapid development, the Government realizes that the cost of some of the projects may have been unduly high, partly because of limited trained manpower to prepare and negotiate projects and partly because of in- appropriate project selection and design standards. Some of the higher costs  - 11 - were principally due to the speed of the process per se, and the Government seemed to have accepted this as a necessary cost for quickly catching up with the past neglect. 29. Private fixed capital formation on the other hand has been mainly in the oil sector for exploring and drilling crude oil, although more recently, increasing amounts have been invested in housing construction. The demand for housing in urban areas increased very sharply after 1970, as the number of expatriates joining the Government or working for development projects in- creased, and also because of internal migration of Omanis to urban centres. Between 1967 and 1973 the amount of private capital formation was stable at about OR 10-15 million, but jumped to OR 31 million in 1974 and further in- creased to OR 50 million in 1975. While there have been some small private investments financed by foreign funds in Oman, there also has been some out- flow of Omani private capital seeking higher returns abroad. The overall magnitude of direct foreign investment in Oman, except for oil related activi- ties, has been minor. Furthermore, the Government has until now been unable to direct private investments to productive sectors, such as manufacturing or agriculture, and away from real estate or commerce. 30. In the wake of increasing public consumption expenditures, caused by expansion in government activities, soaring prices, and rising defense expenditures to manage anti-guerrilla operations in Dhofar, the proportion of gross national savings to GNP declined gradually after 1970. In 1974, when oil income almost quadrupled, the savings-GNP ratio rose sharply but declined again thereafter. The proportion of gross domestic investments financed by these savings, consequently, drastically declined from a surplus position in 1970 to 58 percent in 1973, requiring either net inflows of resources from abroad or use of accumulated foreign exchange reserves. In 1975, national savings financed 97% of total fixed investments. Although detailed informa- tion on resource movements in the private sector is not available, rising deficits in the government budget are largely responsible in bringing down the gross national savings ratio. Public consumption as a proportion of GNP rose rapidly from 13% in 1970 to 43% in 1975. 31. As a result of the financial difficulties and the cash shortage that the country faced in 1974/75, the Government tried to curb spending. Few new projects were initiated and the institutional framework for project evalua- tion, approval and implementation was reorganized. Consequently, there was a sharp slowing down in the rate of growth of public investment and consumption expenditures in 1975 and 1976.  -12- CHAPTER THREE MANPOWER AND EDUCATION I. MANPOWER 32. Manpower is always an important issue in economic development. In the context of Oman, it is a crucial issue because of the immense need for skilled and unskilled manpower to carry out the accelerated pace of develop- ment on the one hand, and the shortage of Oman's manpower on the other. The total availability of Omani manpower is limited because of the small popula- tion and the retarded development of the educational system. The rapid growth of the economy since 1970 has only been possible with a high dependence on expatriate managerial skils and labor. As the rate of growth slows down and the aspirations of Oman's population continue to increase, the Government intends to rapidly build up the skills of the local labor force with the objective of gradually reducing the dependence on expatriate labor and to spread the benefits of development more widely. Population 33. There is considerable doubt about the present population of Oman, which creates serious difficulties for any planning exercise. No national census has been undertaken and although one was suggested a few years ago, it is unlikely to be held for some time. The 1974 United Nations estimate of 750,000 and an assumed rate of growth of 3 percent per year gives a popu- lation of about 800,000 in mid-1976 (Table 1.1). This compares with the official Government estimate of 1.5 m 'for planning purposes'. Most of the available information admittedly sparse, suggests a lower population than the official estimates. More recently, evidence from a number of small-area studies undertaken by various consultants,particularly in relation to agri- cultural developments, indirectly suggest that the existing population is un- likely to be greater than 800,000. The main evidence relates to the high level of emigration discussed in more detail below. It is impossible, how- ever, to be dogmatic about the population level and consequently in the analysis, where appropriate, consideration is given to the implications of alternative population levels. 1/ The Whitehead Consulting Group estimated the 1972 population as 600,000 although Fischer and Muzaffer produced a higher estimate of 750,000. Ghaleb estimated the 1973 population as 600,000. Whitehead Consulting Group: "Sultanate of Oman: Economic Survey", 1972; G. Fischer and A.M. Muzaffer: "Some basic characteristics of the labor force in Bahrain, Qater, UAE and Oman" (ILO, 1975); M.A. Ghaleb: "Employment problems and policies in least developed countries" (ILO, 1975).  - 13 - 34. In relation to the rate of population growth, there appears to be much less disagreement and 3 percent per annum is generally accepted. What- ever the existing level, there can be little doubt that the population of Oman will double by the end of the century. For forecasting purposes, it has been assumed that the annual rate of growth will be around 3 percent per annum. It is quite possible that this rate could rise in the future given a declining infant mortality rate. International movements of labour are likely to have a significant impact on population growth in the immediate future. Migration 35. One of the outstanding features of the economy is the large number of expatriates working in the country. This is common among the other Gulf states, which are significantly short of labour in relation to the avail- ability of capital. The labour shortage applies to both skills and numbers, and it is evident that the tremendous growth in economic and social develop- ment since 1970 could not have been achieved without this high importation of labour, which falls mainly into two categories (a) management and other skilled advisers--mainly from Western Europe, Egypt and Jordan and (b) un- skilled or semi-skilled construction workers, mainly from India, Bangladesh, Pakistan and Sri Lanka. These foreign workers probably totalled around 70,000 in 1976 and generally come without their families partly because of the limited' educational and other facilities and partly because a large number of expatriates spend only a few years in Oman (Table 1.2). 36. There has also been significant migration of Omanis, both inter- nationally and within Oman. Here again the lack of statistical data makes detailed analysis difficult. Oman has a long history of international migra- tion, dating back at least to the days when the country's prosperity was derived from seaborne trade with East Africa and the other Gulf states. A significant proportion of the population, such as the Bedu and the Shawawi, is still essentially nomadic. Probably the largest historical movement, in terms of numbers involved, was to East Africa and Zanzibar, but more recently a large number of people left for Saudi Arabia and the other Gulf states, mainly the supporters of the rival Imamate. With the passage of time such migration became more economically motivated. Since 1970, with the massive program of economic and social development, significant numbers of Omanis have been returning. 37. Some studies have been done in Oman with reference to small regions and they give some indications of the importance of migratio out of rural areas. The study done by Durham University of Great Bri ta, centered on Ibri in Northern Oman and underway since 1972, deserves--special mention. In the course of their research project, information was collected on population mobility and migration history of respondents, with care being taken to devise reliable enumeration procedures. At the time of their investigations the results showed that (i) of a total sample population of 16,700, about 15% were absent from home for an extended period, either in urban areas or abroad (ii) only 12 percent of those aged 15 and over had not spent at least six months away from home as wage earners (iii) the most important destinations  - 14 - within Oman were the Capital area and the oil fields and the most important abroad was Abu Dhabi, followed by Kuwait, Bahrain, Saudi Arabia, Dubai and Qatar (iv) the average duration of stay away from home was nine to ten months. 38. Although the Durham study covers only a limited area of Northern Oman, and its results cannot be generalized for the whole of Oman, other studies broadly confirm its findings for other areas. For example, the Gibb and IIACO studies on water resources (see Chapter 9) indicate orders of magnitude for migration similar to those of the Durham study. Although the actual numbers can be considered only as indicative, one can safely con- clude that emigration from the rural areas to urban areas and to neighboring countries has been occurring on a significant scale. Employment 39. According to government estimates, total private sector employment at the end of 1975 was approximately 93,000, of whom 28,000 were Omanis and 65,000 expatriates. The total number had increased from 35,000 in 1972, of whom 20,500 were Omanis and 16,500 were expatriates. Hence, the biggest increase in the labour force has been expatriates. The estimates of employ- ment by both industry and occupational groups are given in Tables 1.2 to 1.4. Construction accounts for over 80 percent of employment and dominates the whole structure, with the next most important sector--petroleum and minerals-- having less than 5 percent of employment. 40. Regarding the public sector, the comparable estimate for 1975 was total employment of about 15,000 of whom about 11,000 were Omanis and approxi- mately 4,000 expatriates. These figures exclude the armed forces, for which the recent paper by the Technical Secretariat put the total as 15,000 (12,750 Omanis and 2,250 expatriates) including the Royal Omani Police. 41. Estimates of the rural labour force engaged in agriculture are based partly on the results of the various studies and partly on the basis of the overall population estimates. Clearly, agriculture is still the major sector in Oman at the present time and the only one in which the number of expatriate employees is insignificant. II. EDUCATION AND TRAINING 42. Prior to 1970, education was mainly religion-oriented with about 6,000 children enrolled in basic education through some 50 Koranic schools operated in mosques, private houses, huts or under trees. The then ruling Sultan excluded foreigners and was antagonistic to secular education. Many wealthy Omanis surreptitiously sent their children abroad for schooling or emigrated. A modern system of primary education (six grades) was initiated only in 1970; junior secondary education (three grades) was started in 1972 and senior secondary (three grades) in 1973. There are no teacher training  - 15 - or agricultural training institutions yet functioning and it is necessary to go outside the country for higher education. An-estimated 80 percent of the population is illiterate. In 1971 a hastily formed Ministry of Education was given responsibility for coping with the rapid expansion in school enrollments. The Ministry is under constant pressure to expand schooling further and to assume responsibility for Koranic and self-help schools mushrooming through local village initiative. The demand for education far exceeded the capacity of a system already lacking qualified teaching staff, adequate curricula and teaching materials, and experienced administrative and planning personnel. In the absence of effective planning, social pressures have resulted in an indiscriminate expansion of the system, particularly at primary school level, leading to various problems. Table 3. INDICATORS OF EDUCATIONAL DEVELOPMENT (1975) Level Enrollment /1 % of relevant age group % girls Primary 54,000 44% 27% Lower Secondary 1,095 2% 15% Upper Secondary 200 - 26% Higher - Public Expenditure on Education and Training /2 (i) Education Recurrent Expenditure OR 7.2 million as % of total government recurrent expenditure 2.2% (ii) Education Development Expenditure OR 2.4 million as % of total government development expenditure 1.4% (iii) Total Education Expenditure as % of GNP 1.6% /1 Excluding pupils abroad. /2 Ministry of Education only. Primary Education 43. In 1969/70, there were only three government schools with a total enrollment of 900. In 1975/76, there were 54,000 pupils enrolled in 181 gov- ernment primary schools and the enrolment in koranic schools has been rapidly decreasing. Enrollment in government schools represents 44 percent (including over-aged) of the primary school age group of 6 to 11 years. 1/ About 27 per- cent of the 'total enrollment is female. Earlier indiscriminate student admis- sion resulted in a high proportion of over-age pupils. 1/ Based on the UN total population figure.  - 16 - 44. A decline in first grade primary school enrollments in 1975/76 by some 30 percent from the previous year (Table 10.3) indicates that a ceiling has possibly been reached and that children of the more highly motivated and accessible (typically urban) families have now been catered for. On the other hand, the decline in new intake may reflect to some extent a successful enforcement of the recent government policy to keep school entry age children of seven years or below. Nearly three-quarters of new entrants were seven years or below in 1975/76, compared with only 10 percent in 1973/74. 45. The rapid expansion of schooling has necessitated using unsuitable physical facilities (mud-brick and date-palm stem self-help construction, and tents) and the Ministry is facing a heavy school building program to rehouse existing primary classes and to provide new ones. Responsibility for school construction is with the Ministry of Public Works which, having to meet the other heavy needs of the public sector, is under severe strain. In addition, most schools lack adequate furniture and equipment; the blackboard and un- adapted foreign textbooks are frequently the only teaching aids available. No Omani texts or teaching materials have been available and imported texts from other Gulf States have had to be used. These texts and materials, reinforced by the use of expatriate teachers, have of necessity dictated syllabi which now require to be changed to meet Omani educational needs. 46. A prerequisite for the expansion and upgrading of the primary schools system is an adequate supply of qualified teachers; at present, no teacher training institute is yet functioning in Oman. In 1975/76 over half of the total teaching staff of 2,230 were unqualified teachers with 25 percent having less than six years of schooling and using rote learning as their basic methodo- logy. Eighty-six percent of the teachers were expatriates, mainly Egyptian and Jordanian, compared to 15 percent in 1972 (Table 10.1). Upgrading courses of two hours per week are held in five "field centers" under a program prepared by the UNRWA/Unesco Institute of Education, but deficient organization, lack of instructional equipment and inadequate qualifications of the instructors have reduced the impact of this stop-gap measure. The output of the junior secondary schools is insufficient to provide an adequate supply of teacher trainees and it will be necessary to continue to employ an increasing number of expatriate teachers. Until the primary teacher training institute being financed under the World Bank project can begin operations, the government as an emergency measure is offering a teacher training option in the last year of junior secondary schooling, and has just recruited the first 26 students for a 2-year course. Secondary Education, Technical Education and Vocational Training 47. Junior general secondary education, covering grades 7 to 9 was initiated in 1972/73. It consisted then of seven classes accommodated within three existing primary schools. Enrollments have grown to 1,095 in 1975/76, representing 2 percent of the relevant age group, located in 23 junior second- ary schools (21 boys, 2 girls). Only 15 percent of total enrollment is female. About 200 pupils are enrolled in upper secondary schools (26 percent female). About 1,500 Omani pupils are enrolled in secondary courses overseas.  - 17 - 48. The lack of government policy and the essentially academic curricula of primary and junior secondary education offer little guidance or incentive for students to enroll in the limited available technical education or voca- tional training programs. A proposed introduction of handicraft and indus- trial arts into general education curricula should help. At present, skill training programs are few in number and small in size. The Oman Technical Institute, Matrah, is the only vocational training center in Oman and has a capacity for 500 students (40 boarding places). Pending a sufficient output of lower secondary school graduates, the Institute recruits primary school graduates for its 3-year main course. The course consists of a first year curriculum which is general (about one-third theory and two-thirds practical) with specialties in either commercial subjects, mechanics, electricity or carpentry in the final two years. There are currently 220 full-time student, 300 students on block release and part-time courses. Part-time courses are run in conjunction with Omantel, Oman Defence Force, and PDO. All teaching staff are expatriates. 49. The Department of Labor has five employment offices in the regions (Salalah, Sohar, Nizwa, Sur and Muscat) and plans to develop four regional vocational training centers (300 students each) to be operating by 1978. In addition the Defense Services provide literacy classes to all illiterate recruits and trade training in mechanical, electrical and construction engineering crafts to 150 selected recruits annually; and Petroleum Develop- ment of Oman Ltd. offers a few selected employees (12 in 1973) a 1,000-hour technical training course, possibly followed by higher technical training abroad and further training in senior management. On-the-job craft training and upgrading is also provided by the company to an estimated 100 Omani workers out of a total of 970 employed at lower levels. The Ministry of National Heritage operates three craft training centers, which include courses in weaving and pottery. 50. Despite the economic importance of agriculture, Oman has as yet no agricultural training institution. Only 18 Omani students are enrolled in professional and agricultural courses abroad. The 23 employees presently running the 23 extension centers have been given only six months practical training on experimental farms and are otherwise unqualified and are sup- ported by expatriate technical assistants. In recognition of the importance of agricultural developoment, the government plans to introduce agricultural subjects into primary and junior secondary education, and to establish an institution for agricultural training at secondary level. The World Bank education project, with participation by ODA, assists in financing a new agricultural secondary school, currently under construction, to provide training in practical agriculture. Higher Education 51. No higher education is available in Oman, but nearly 400 students were studying abroad in 1974/75 (Table 10.4). Thus far, about 50 percent of students graduating abroad have returned to Oman. Bilateral agreements now ensure the return of graduates and the government intends to continue to send  - 18 - students abroad as the most economical way of providing higher education to a limited number of students in the various subjects required. Expenditures on Education 52. Current education expenditures increased from OR 8,000 in 1967 to OR 7.2 million in 1975, and represented only about 2.2 percent of government current expenditures. About 80 percent was allocated to primary and junior secondary education, 4 percent to technical education, and 6 percent to mis- cellaneous expenses, including scholarships and grants-in-aid. Salaries account for about 60 percent of the total. Recurrent cost per primary pupil averages OR 1,000. Accurate records of government capital epxenditure before 1971 are not available. In 1971 and 1975, education's share was OR 0.8 mil- lion and 2.4 million respectively, representing 4 percent and 1.4 percent of the total capital budget. Education and Training Issues and Problems 53. Apart from the problems discussed already, there are the following issues: basic education, industrial manpower training, special manpower training for the public sector, and education planning and management. Programs for the Most Deprived 54. It seems likely that the rate of primary enrollment expansion may now begin to slow down and that special efforts will have to be made to get at the most deprived children. Six of every ten Omani children are not at school and there is a backlog of youths and adults who are unschooled or without a complete basic education. The Ministry of Education, with reason, has con- centrated on getting children into school and has yet to design and execute non-formal programs for those who have missed out. The Ministries of Health and Agriculture are beginning to buildup basic education programs, while the Department of Social Affairs has an experimental program for rural community development centers which has a basic education function, but all these are still in their infancy. Education and Manpower 55. Pressures on the Ministry of Education are compounded by the need for skilled manpower. Simultaneously with the expansion in social demand for schooling, the economic boom precipitated a sudden and massive demand for all levels and types of manpower to plan, manage and service development. The output of skilled Omanis has been negligible and though expatriate skilled Omanis are returning home, the bulk of the heavy demand for trained manpower is having to be met by importing expatriate labor, while the school system and other training programs are being geared to meet long term needs. The actual quantitative dimensions of the need, the types and levels, and how to train Omanis to fill existing and future jobs in the modern, private sector labor market are major issues facing the government. A simplistic estimate of the additional manpower required for the National Plan period 1976-1980 suggests that around an average of 3,500 semi-skilled and 1,200 skilled  - 19 - workers would be needed annually to meet the plan targets while on the supply side, an average of about 2,000 primary school and 200 secondary school leavers would be available annually during the period. The imbalance is thus qualita- tive (lack of skill training qualifications) as well as quantitative. In any case, it is hoped that it could be offset by the return of Omanis living abroad. The nature of prevocational preparation at lower secondary level, the equipping of schools and training of teachers need to be given urgent attention. Accelerated training programs for school leavers should be con- sidered, along with the possibility of mobile skill training programs. There is an urgent need to establish an organization to stimulate and coordinate all skill training activities of the different agencies. Special Training for Rural Programs 56. There is a need to improve and expand rural health, social welfare, community development and agriculture services as well as rural schooling. Although agriculture still provides the major source of livelihood for the bulk of the population, farmer and agricultural education and training have been neglected and extension services need development. Similarly, rural health services are thinly spread, health staff are largely expatriate and there are no Omani facilities for training health staff. For other rural programs, the Department of Social Services is currently experimenting with three community development schemes, but is constrained by staff shortages. Only three university graduates are employed in the department and there are no local facilities for staff training. Planning and Management Capabilities 57. Planning and management capabilities in the main ministries involved in educational activities (Education, Agriculture, Health, Labor and Social Services) should be strengthened. The formal school system is evolving with- out an educational development strategy and the Development Plan (1976-1980) was drawn up without a formal planning input from the Ministry of Education. The proposed capital program for the period simply consists of annual finan- cial allocations without any adequate project specification. The Ministry's Planning Department is just beginning to function with the assistance of for- eign expertise. Experts in education planning and finance are included in a Unesco task force established to assist in education, through the World Bank's education project, but their effect has yet to be felt within the Ministry. The other ministries are similarly placed and require help in developing education plans and staff development programs.  - 20 - CHAPTER FOUR DISTRIBUTION OF INCOME 58. The development benefits derived from sustained high oil incomes over the past decade do not appear to have been shared equally by the various socio-economic groups in Oman. Given Oman's extremely limited availability of data for this kind of analysis, most figures and statements should be regarded only as indicative. Rough estimates based on national accounts statistics and a 1976 employment study made by the Development Council, indicate that the average 1975 per capita income in the modern sector was perhaps over ten times higher than that in the traditional sector, and that the average per capita income earned by expatriates was three times higher than that earned on average by Omani nationals in the modern sector. This seriously imbalanced income distribution has been the result of many factors. The most important was the disparate growth of different sectors. While the modern sector registered substantial growth due to rising oil income and expan- sion in Government's development expenditure, production in the traditional sector consisting of agriculture and fishing, stagnated, if not actually de- clined., This stagnation was due to the combined effects of plant pests and diseases, the continued application of traditional methods of farming and the migration of ablebodied farm labor to higher paying jobs. Secondly, the high reliance on expatriates and the high remunerations paid to them have been another major factor. 59. The per capita income in 1975 was estimated at $1,980 1/, based on the UN population estimate. Different population estimates and computation methods would give varying numbers for average income in Oman. Whatever figure is used, it grossly overstates the living standard of the average Omani, given the extremely skewed income distribution. Since a significant part of the income generated through oil, construction and other activities accrues to the State and foreigners, the personal incomes of Omani nationals are substantially less than per capita income estimates would suggest. 60. The average income in rural areas, where 60 percent of the total population live (70 percent of the Omani population) is likely to have been less than $200 per year in 1975. This includes the sizeable transfers of in- come from family members working abroad or in the urban areas in Oman. (See Table 18 in Chapter 9 for estimates of such transfers). The transfers to rural areas are likely to have been more substantial around the Batinah coast in 1/ This estimate is based on the Bank's Atlas method and the UN estimated population of 750,000 in 1974 and a population growth rate of 3 percent per annum. In current prices and exchange rates and the UN population estimate, per capita GNP in 1975 would be $2,290. Using the Government's figure of a population of 1.5 million, the per capita GNP would be $1,180.  - 21 - North, where relatively greater outmigration takes place because of the prox- imity to the Capital area and other Gulf States. After allowing for incomes accruing to foreigners and the oil income accruing to the State, the personal incomes of the Omanis living in non-rural areas (30% of the Omani population) was roughly estimated at about $1,250 in 1975 in current prices and exchange rates. 61. The regional distribution of income is also very uneven. The Capi- tal Area, which accounts for 27 percent of the total population and 21 per- cent of the Omani population, and to a lesser extent major centres like Sur, Nizwa and Salalah, have considerably higher incomes than the Interior. Apart from the oil producing areas, the modern sector is essentially represented by the Capital area, where most of the expatriate community is concentrated. Amongst the rural areas, the Batinah coast probably has the highest average income, both because of better farm incomes and higher remittances from family members who migrated to better paying occupations. 62. The per capita incomes discussed above do not take account of the free or subsidized services provided by the Government, which tend to reduce income disparities to some extent although most of the services, with a few exceptions, are provided to all nationals at the same terms. 63. the Government has allocated increasing amounts to education, health and housing. In 1975, the total allocated to these sectors amounted to 10 percent of public investment and it is budgeted at 12 percent for 1976. Education and health facilities are provided free of charge. The low-cost housing program and vocational training program have been accorded high priorities lately, although the scale of material inputs and human resources allocated to them still remain at relatively small levels. In the Capital Area and in the Interior, some 300 low-cost housing units have been so far constructed, and an additional 400 new units are to be constructed during 1977. More direct measures undertaken by the Government to remedy income imbalances are the minimum-wage legislation and cash subsidies to the poverty- income level group. Minimum wage legislation, which became effective in 1974, guarantees workers a monthly minimum wage of OR 35 (OR 45 in case of Govern- ment employees) plus OR 12 for food and accommodation allowances per month. The Government was reviewing this scheme in late 1976 and some upward adjust- ments in amounts are soon expected. Under the direct cash subsidy program, which guarantees a minimum household income of OR 35 per month, some 2,400 families were receiving benefits from the Government, as of December 1976.  - 22 - CHAPTER FIVE PUBLIC FINANCE 64. Although the Government has a laissez-faire and non-interventionist philosopohy, the public sector plays a major role in the economy. The share of Government expenditures in GDP rose from one fifth in 1970 to three fifths in 1975. Oil revenues which account for 96 percent of total revenues (exclud- ing grants) are the main source of financing expenditures. In 1975, the Gov- ernment employed over 40 percent of the Omani labor force (excluding agricul- ture and fisheries and expatriates), and accounted for over four-fifths of the economy's consumption expenditures and over three-quarters of the capital formation. The Government's fiscal operations have a major impact on monetary developments and are a major factor accounting for the inflationary pressures on prices, wages and rent. 65. Due to the increasingly large amounts of expenditure requirements resulting from the Government's rapid development drive, the maintenance of a relatively large defense establishment and the very limited tax base, the budget in recent years has had to rely increasingly on foreign loans and grants. 66. In addition to the accounts of the Government, Oman's budget incor- porates the Post, Telegraph and Telecommunications Department, the Directorate of Water, the Directorate of Power and the regional administrations and munic- ipalities. Prior to the preparation of the first budget in 1971, there was little distinction or separation between the finances of the Sultan himself and those of the state, and no clear procedures for budget preparation. Budgetary data pertaining to the pre-1971 years consequently need to be treated with great caution. As a result of budgetary preparation procedures initiated in 1971, draft budgets are prepared by the Director General of Finance on the basis of the submissions from ministries and presented to the Sultan. Since legislation in Oman takes the form of Sultanate decrees, the Sultan issues a decree after he has approved the budget. Recent Developments 67.. Oman's overall budgetary situation has undergone far reaching changes since 1967. The conservative expenditure policies between 1967 and 1970 in the face of rising oil revenues was reflected in sizable surpluses (Table 4). Despite rising oil revenues, the then Sultan spent little on improving conditions in the country, because he was opposed to modernization and kept the country insulated from the outside world. In the sixties the only money spent on development was a small annual grant provided by the British Government specificaly for development purposes.  - 23 - Table 4. SUMMARY OF BUDGET TRENDS (In millions of Omani rials) 1967 1970 1974 1975 Amount % of GDP Amount % of GDP Amount % of GDP Amount % of GDP Revenues 2.8 7.2 45.4 42.5 311.5 54.8 459.4 62.2 Oil Receipts 1.9 4.9 44.4 41.6 291.5 51.3 373.1 50.5 Other Revenues 0.9 2.3 1.0 0.9 11.7 2.1 14.6 2.0 Grants - - - - 8.3 1.4 71.6 9.7 Expenditures 1.7 4.4 20.6 19.3 376.0 66.1 502.3 68.0 Current 1.7 4.4 18.5 17.3 186.6 32.8 322.5 43.7 Defense (1.2) (3.1) (12.4) (11.6) (117.7) (20.7) (241.0) (32.6) Civil (0.5) (1.3) (6.1) (5.7) (63.2) (11.1) (71.2) (9.6) PDO - - - - (5.7) (1.0) (10.3) (1.5) Development - - 2.1 2.0 183.3/1 32.2 173.0 23.4 Other 6.1 1.1 6.8 0.9 Surplus (+) or 1.1 2.8 24.8 23.2 -64.5 11.3 -42.9 5.8 Deficit (-) /1 Of which OR 35.9 million represents acquisition of 60 percent in PDO and OR 4.5 million net lending and equity participation in domestic enter- prises. Source: Table 5.1, Statistical Appendix. 68. As the ambitious development program was implemented and the rate of growth of oil revenue declined in 1971 and 1972, there was a deterioration in Oman's fiscal accounts during the 1971-73 period. Since 1972, the budgets have shown an overall deficit has steadily increased to OR 65 million in 1974 despite the near quintupling of oil revenues in that year. The Government fi- nanced the deficits in 1972 and 1973 partly by running down accumulated reservei and to a lesser extent by borrowing from commercial banks and suppliers. But in 1974, when the deficit was more than three times as large as in the previous year, in addition to running down reserves, Oman had to turn to extensive bor- rowing from supliers, contractors and foreign banks. The borrowing require- ments would have been larger but for the grants received from Abu Dhabi and Saudi Arabia. The cash flow crisis and deficit of 1974 caught the government somewhat by surprise, since it was mainly due to the surge in new projects started by the ministries on the basis of authority they had to sign new con- tracts with little central coordination. Major expenditure commitments were made, sometimes outside the budget. 69. In response to the financial difficulties of 1974, and to restore confidence in the economy, the Government undertook a program of fiscal stringency with curbs on spending. Few new projects were initiated since the  - 24 - financial crisis of 1974/75 and the Government reorganized its institutional framework for project evaluation and control of expenditures, to achieve a more orderly process of budgeting and financial decision making. By the second half of 1975 immediate cash problems had largely been solved, and there was a slowing down in growth of expenditures from more than 250 percent in 1974 to 50 percent in 1975. Notwithstanding this slowdown, the burden of projects already commenced and the slower growth in revenues, resulted in a budget deficit of OR 43 million, which was financed by foreign borrowing from Governments, commercial banks and contractors undertaking capital projects for the Government. The deficit would have been larger but for the inflow of OR 72 million in grants from neighboring Arab countries. Revenues 70. Oil revenues dominate total revenues and accounted for 96 percent of total revenues in 1975 (excluding grants); the rest are minor direct and indirect taxes. Direct taxation consists of corporate income tax and Zakat. Indirect taxes consist mainly of custom duties and a municipal tax. Other revenues include income from public services and utilities, police revenue generated from traffic fines and visa charges, income from Government's investments, proceeds from the sales of Government land and receipts of the Government printing house, and since 1973 grants from neighboring Arab coun- tries.  - 25 - Table 5. GOVERNMgNT REVENUE (Millions of Omani Rials) 1967 1970 1972 1974 1975 % of X of Z of % of % of Amount Total Amount Total Amount Total Amount Total Amount Total Oil Receipts 1.9 67.9 44.4 97.8 49.6 93.6 291.5 93.6 373.1 81.2 Other Revenue 0.9 32.1 1.0 2.2 3.4 6.4 11.7 3.7 14.6 3.2 Customs 0.8 0.9 1.6 2.3 0.5 Corporate income tax 0.5 0.5 2.1 Interest 0.1 4.3 1.7 Municipal tax 0.5 1.2 Income from public services and utilities 1.1 3.9 Other 0.1 0.1 1.2 3.0 5.2 Grants - - - 8.3 2.7 71-.6 1i~ TOTAL 2.8 100.0 45.4 100.0 53.0 100.0 311.5 100.0 459.4 100.0 Source: Table 52, Statistical Appendix. 71. Since 1967 revenues have sharply increased from only OR 2.8 million in 1967 to OR 45 million and OR 388 million in 1970 and 1975 respectively. Revenues increased moderately in the early seventies, averaging 16 percent per annum between 1970-73. However, as a result of the quintupling in oil prices in 1974 and the Government's acquisition of a 60 percent share in the oil company (PDO), total revenues increased by 365 percent and 28 percent in 1974 and 1975 respectively. In 1973 a grant totalling OR 3.5 million was received. Grants became important in 1975, amounting to OR 72 million about 16 percent of total revenues. Oil Revenues 72. Prior to 1974, Government oil revenues consisted of royalties and taxes paid by PDO. Since then an increasing part of Government oil revenues has consisted of proceeds from the sale of its share in the oil output. There is no oil refining in Oman and all crude oil production, which started in August 1967, and amounted to 20.9 million barrels during that year has been exported. Production increased up to 1970 (121.3 million barrels) and then  - 26 - declined through 1974 (105.9 million barrels), due to technical difficulties, before rising to 124.6 million barrels in 1975 due to the coming on-stream of new fields (Table 7.1). 73. Government revenues are derived almost wholly from oil production (Table 7.4). Total oil payments to the Government amounted to OR 1.9 million in 1967, rose sharply in 1968 and 1969 and then leveled off in the next three years as oil production began to decline. In addition to the trends in pro- duction, these developments in Government receipts have mainly reflected the concurrent changes in oil prices resulting from OPEC 1/ agreements. In 1973, although oil production increased by only 4 percent, receipts increased by 24 percent as posted prices more than doubled by the end of the year, compared to a year earlier. 74. In 1974, average per barrel payment to the Government exceeded five times the 1973 level, reflecting the sharp rise in the posted prices on January 1, the increase in tax and royalty rates during the year, and the sale by the Government 2/ of its 60 percent participation oil at a substantially higher price than it received as Government take on the 40 percent equity crude. As oil output further increased in 1975 (18 percent) and buy-back payments speeded up, Government oil receipts further increased by 28 percent in 1975 or to OR 373.1 million, compared to OR 291.5 million in 1974 (See Chapter 10 for a fuller discussion of oil). Non-oil Revenues 75. Non-oil revenues, although still small in absolute and relative terms, contributing less than 4 percent of the total revenues in 1975, in- creased rapidly from OR 1 million in 1970 to OR 14.6 million in 1975. 76. Most important of the non-oil revenues until 1974 were custom duties which in 1974 increased by 35 percent to OR 2.3 million (about 1 per- cent of total revenues). Prior to 1972 an ad valorem tax of 7 percent was levied on almost all private imports except liquor which was subject to a 40 percent tax. Several changes in rates were made during 1972 and 1973, and with the substantial increase in oil revenues in 1974, the Government further reduced custom duties in August 1974 (See Chapter 7 for details). 77. The corporate income tax, paid only by foreign companies or compa- nies with foreign shareholders, is the most important of the direct taxes, although it raised only OR 2.1 million, or about 0.5 percent of total revenues 1/ Although Oman is not a member of OPEC, it has generally followed OPEC's decision on prices. 2/ In December 1973, the Government signed a participation agreement pro- viding for the acquisition of a 25 percent share in PDO effective January 1, 1974; in July 1974, the share was increased to 60 percent retroactive to January 1.  - 27 - in 1975. The Government introduced this income tax on January 1, 1971. Only five companies paid corporate taxes in 1972, amounting to OR 0.5 million. With the establishment of new banks and other corporations, the number of taxpayers increased to 20 in 1975, although 500 companies were registered in the Commercial Register. It is expected that 80 companies will pay taxes in 1976. The tax rates 1/ are graduated rising from 5 percent on taxable income equal to or exceeding OR 5,000 to 50 percent on income equal to or above OR 500,000. Zakat, the traditional religious tax levied on agricultural produce, has been of minor significance from a revenue point of view as it yielded less than 0.1 percent of revenues and its collection has almost completely stopped. 78. Oman has no individual income tax or any property tax on land or improvements, though property values have been increasing sharply in the capital area. Land ownership records are not complete, but a program has been established for registration of all land. In 1973, however, a tax of 2 percent was imposed on rental income and a 4 percent tax on the transfer of property was introduced, but neither has been applied. Other revenue sources in 1975 comprised interest earnings on government foreign investments which declined to OR 1.7 million (OR 4.3 million in 1974) due to a reduction in hold ings and lower average'returns. Offsetting decline in customs duties and interest earnings were increases in municipal tax receipts reflecting the increase in motor vehicle registration and the number of business establish- ments, and a large increase in income from public utilities and services whicI amounted to OR 3.9 million compared to OR 1.1 million in the previous year. 1/ The following are the rates of corporate income tax: OR % 0-5,000 nil 5,000-18,000 5 18,000-35,000 10 35,000-55,000 15 55,000-75,000 20 75,000-100,000 25 100,000-200,000 30 200,000-300,000 35 300,000-400,000 40 400,000-500,000 45 500,000 and over 50 The tax is computed (a) by applying the percentage of the bracket in which the taxable income falls, or (b) by applying the percentage of the bracket for taxable income immediately below that in which the taxable income falls and adding the excess of taxable income to the result. The lesser of the two amounts is the tax payable.  - 28 Expenditures 79. Government expenditures increased from OR 1.2 million to OR 20.6 million between 1967 and 1970, with the defense expenditures accounting for the major proportion of the increase (Tables 4 and 6). After July 1970, al- though military expenditures continued to increase, funds were committed on a large scale to the promotion of economic development in the country. By 1974, Government expenditures had increased to OR 329.5 million of which development expenditures were the single largest item, accounting for 43 per- cent of total expenditures. 1/ However, due to the financial difficulties encouhitered in 1974, the cautious attitude adopted by the Government resulted in slowing down the growth of expenditures in 1975. Table 6. GOVERNMENT CURRENT EXPENDITURES (Millions of Omani Rials) 1967 1970 1974 1975 Amount % Amount % Amount % Amount % Defense 1.2 70.6 12.4 67.0 117.7 63.1 241.0 74.7 Civil 0.5 29.4 6.1 33.0 63.2 33.9 71.2 22.1 PDO - - - - 5.7 3.0 10.3 3.2 Total 1.7 100.0 18.5 100.0 186.6 100.0 322.5 100.0 Source: Table 5.3 Statistical Appendix. 80. Current Expenditures. Between 1967 and 1970 current expenditures increased from OR 1.7 million to OR 18.5 million, with a tenfold increase in defense spending. Total current expenditures increased more than sixfold from OR 26 million to OR 186.6 million between 1971 and 1974, with the major in- crease occuring in 1974 (200 percent). The largest part of this increase was again due to defense spending, primarily as a result of new equipment pur- chases, construction of new installations and increases in wages of armed forces personnel, which include a number of expatriates. Civil current expend- itures rose from OR 9.9 million in 1971 to OR 20.2 million in 1973 and OR -63.2 million in 1974, on account of public sector wage increases, recurrent expend- itures relating to a growing list of completed projects and increase in the scope of government activities, e.g., creation and strengthening of government departments, embassies abroad, government buildings. In 1975, the cautious attitude adopted by the Government resulted in slowing down the growth of current expenditures to 73 percent from 200 percent in 1974. Although civil expenditures increased by only 13 percent in 1975 compared with 213 percent in 1974, defense spending more than doubled from OR 117.7 million in 1974 to OR 241 million in 1975, the bulk of which was due to an increase in defense capital outlays. 1/ Excluding OR 35.9 million paid for the acquisition of 60 percent owner- ship in PDO.  - 29 - 81. Development Expenditures. Development expenditures were relatively small until 1970. While some development projects were initiated and a few were completed during the period 1967-70, for a total amount of about OR 3 million, it was not until July 1970 that oil revenues were committed on a large scale to promote economic development in the country. Development expenditure increased rapidly from OR 2.1 million in 1970 to about OR 30 million in 1973. The accelerated development effort concentrated mainly on urgently needed infrastructural and social facilities. The major projects included a deep- water port at Mutrah (Mina Qaboos) and a new airport at Seeb. The Government has also placed considerable emphasis on highway construction. In the field of social services schools have been built, hospitals have been constructed, and clinics and health centers have been established in rural areas. The development of the Ruwi Valley was also started and aimed at providing expan- sion for Mutrah. A Government assisted project in the Valley provided housing units for civil servants in the Capital Area. Government office buildings were completed. Also in Dhofar a special department was set up to promote a number of projects in the province including a road network, a telephone ex- change, a power station, schools, hospitals, airport and a new port. Resource investigation and institution building until 1973 were accorded a somewhat lower priority. Capital expenditures increased to OR 143 million in 1974 (385 percent over 1973) with the major items being the cost of communications proj- ects (television, radio, and telephone), a vastly expanded roads program, urban expansion and development and a desalination and power plant. In 1975, devel- opment expenditures increased by a further 21 percent to OR 173 million. These development expenditures reflect the substantial efforts made by the Government to improve the quality of life and demonstrate to the people that the Govern- ment is determined to bring them immediate benefits through the emphasis on social and economic infrastructure.  - 30 - Table 7. GOVERNMENT DEVELOPMENT EXPENDITURES (Millions of Omani Rials) 1970 1972 1974 1975 Roads 4.3 20.6 39.6 Harbor, ports and airports 10.4 4.4 5.2 Dhofar 5.3 15.6 8.3 Health 2.3 7.2 7.9 Education 1.6 1.3 2.4 Public buildings and housing 4.9 5.9 16.8 Communications 1.0 38.5 16.2 Public utilities - 5.3 56.7/2 Other 0.1 29.2 3.7 PDO - 14.9/3 16.2 Total 2.1/1 29.9 142.9 173.0 /1 No details available. /2 Includes desalination plant. /3 Excludes acquisition of 60 percent ownership in PDO. Source: Table 5.4 Statistical Appendix 1976 Budget Estimates 82. The 1976 budget forecast oil revenues at OR 470 million, a 26 per- cent increase over 1975 reflecting a projected 8 percent increase in the volume of oil output and an improvement in Government revenue per barrel fol- lowing the increases in posted prices. Non-oil revenues (other than grants) were budgeted at OR 25 million, a 71 percent increase over the 1975 level on account of increased incomes from public utilities, collection from the cor- porate profits tax and customs duties. Grants from neighboring countries were budgeted for OR 46 million resulting in total revenue of OR 541 million, 18 percent higher than the revenues in 1975. Defense outlays were put at OR 274.5 million compared to actual expenditures or OR 241.0 million in 1975, the slowest rate of increase since 1970 reflecting the improved situation in Dhofar. Civil current expenditures were budgeted at OR 98 million, a 38 per- cent increase over 1975, reflecting the expansion in number and benefits of civil servants and coming into operation of recently completed projects. Development expenditures were budgeted at OR 203 million compared with OR 173 million in 1975, the increase reflecting mainly expenditures for rural elec- trification and further expansion of the road network. Total expenditures were budgeted to increased by 19 percent over actual expenditures in 1975, with an overal.l deficit of OR 50.5 million. In addition to financing this deficit, the Government will need to raise OR 44.5 million for repayment of short-term external financing. Total deficit was budgeted at OR 95 million, OR 64 million of which was forecast to be financed by domestic and foreign credits and loans.  - 31 - 83. Based on provisional estimates for the first nine months of 1976, the Government expects revenues for the full year to exceed the budget figure by OR 10 million, while expenditures are projected to be OR 10 million lower than the budgeted figure mainly as a result of delays in project implementa- tion. Total deficit will therefore amount to about OR 75 million of which OR 64 million will be financed by short-term foreign and domestic credits from suppliers, contractors and banks, and an advance of OR 11 million from the Central Bank of Oman. However, during the first nine months, total grants of about OR 20 million were received compared to a budgeted amo,unt of OR 46 million for the year as a whole. Unless a large inflow of grants took place in the last quarter of 1976, further deficit financing would have been needed. Government Administration 84. Prior to 1970, there were no government civil services in the modern sense, and only a few government units. All decisions regarding state affairs, including public investments and appropriations for current civil expenditures were made by the Sultan who had the advice and services of a few expatriates. Since 1970, Sultan Qaboos gave top priority to the establishment of an effi- cient administration by creating new ministries and departments, and appointed many nationals, many of them returnees, to some top positions to carry out the adminstrative and executive functions of government. This organizational and and administrative reform was effected gradually and the Government strulctulre is still'undergoing changes. 85. Prior to 1973, development was programmed in the course of the annual budget exercise and responsibility for project implementation was shared by the Department of Planning and Development and the various ministries and Gov- ernment departments. In 1972, it was decided to strengthen the organization responsible for planning, and a decree promulgated in September 1972 created a Supreme Council for Economic Planning and Development, chaired by the Sultan. The Council was to formulate a planning strategy and an overall economic policy for the country. With the Supreme Council, a Center for Economic Planning and Development was established to carry out the more detailed preparation of plans and projects. The Center absorbed the former Ministry of Economy and the Department of Planning and Development. In late 1973, the Omani authori- ties streamlined and consolidated the structure and operations of the finan- cial agencies of the Government, and the Department of Financial Affairs was replaced by a Department of Finance. The General Development Organization, which was set up in earlvr 1973 to administer, under the Supreme Council for Economic Planning, the Center for Economic and Development Planning, was re- placed by the Ministry of Development. 86. Decisions concerning budgetary e'penditures in Oman'constitute the Government's main economic policy instrument. In 1974, Oman's budgeting and fiscal control system was put under heavy strain with the dramatic increase in oil revenues and pressures to adopt new projets increased considerably, which caused a record deficit in the budget. This was the direct consequence of a system which permitted contracts to be made and major expenditure com- mitments (somne outside the budget) to be undertaken by various Government agencies acting independently, and with little central coordination or control.  - 32 - 87. Partly in response to the deteriorating situation of 1974, the Gov- ernment undertook in November 1974, a major reorganization of the institu- tional framework for economic planning to reflect a more orderly process of budgeting and financial control. Under the reorganization, the Sultan dele- gated greater authority to the ministers and sought to bring greater order and coordination into decisions involving financial commitments. In order to remedy the inadequacies of the budget accounting and control system, regulate and coordinate contract signing by various Government agencies, make the best use of oil revenues and impose tighter criteria on the selection of projects, three councils were established: Development, Finance, and Hydrocarbon, Natural Gas and Petroleum. They are chaired by the Sultan, and include in their membership six ministerial representatives, representatives from the Department of Finance and the Southern Province of Dhofar and the Secretary General of the Development Council. 88. In February 1975, the "Economic Development Law" was issued defining the terms of reference of the Development Council and making it responsible for establishing the objectives and strategy for economic development, propos- ing policies and measures to carry out the objectives and preparing develop- ment plans. The Council is also responsible for preparing an annual develop- ment budget, for setting and approving priorities for development projects submitted by ministries and for coordinating the activities of ministries in- sofar as the implementation plans are concerned. The Planning Team, envi- saged under the Bank's 1974 Technical Assistance Project, became part of the Technical Secretariat of the Development Council and its head was named the Secretary General of this Council. The Law also provided for the establish- ment of a Development Bank to finance investment in agriculture, fisheries and industry. 89. The Government realized that the cost of ongoing projects had been unduly high, since contracts were negotiated rather than arrived at through tenders and bids, that it was handicapped by the limited number of trained negotiators. To improve negotiating procedures, the Government acquired the services of legal experts and started negotiations with more than one firm. A decree established limits on expenditure per transaction undertaken by any individual ministry, with all amounts in excess of OR 15,000 to be handled by a tender board. A contract signing decree established procedures for undertaking current expenditures and further obligations by government units. 1/ The Government also drafted in 1974, with assistance from the IMF, 1/ All undertaking requiring expenditures in excess of OR 100,000 must be signed by Deputy Chairman of the Financial Council, the Undersecretary of Finance and the responsible minister and if over OR 500,000 then the approval of the Legislative Diwan is required. Undertakings re- quiring expenditure between OR 15,000 and OR 100,000 must be signed by both Undersecretary of Finance and the responsible minister. Only undertakings of less than OR 15,000 are the sole responsibility of any minister or agency head.  - 33 - a Financial Decree, an Audit Decree, an Annual Budget Decree and Financial Regulations which it hopes to issue soon to strengthen budgetary control and supervision. An international firm of accountants was retained to aid in the introduction of an improved system of fiscal reporting and coordination, and financial management specialists were hired. Much work lies ahead in gradually implementing such new procedures and controls and for carefully screening projects and deciding on the most rational sizes and designs of priority projects. However, an encouraging beginning has been made and the Government should follow up the effective implementation of these procedures and improve them over time.  - 34 - CHAPTER SIX MONEY, CREDIT AND PRICES Institutional Banking Developments 90. Until 1970, Oman's currency requirements were met by the Indian monetary authorities and the Indian rupee was the main currency circulating in Oman. Widely used in the interior was the Maria Theresa Thaler, a full- bodied silver coin. In April 1970, Currency Decree 1390 was promulgated which provided for the introduction of an Omani currency and established the Muscat Currency Authority (MCA) whose management was assigned to the British Bank of the Middle East (BBME). MCA's functions were limited to the issuing and re- deeming of Omani currency against designated foreign currencies since it was required to maintain a 100 percent backing in gold and convertible foreign exchange for the currency issued. It was also responsible for managing the foreign assets held as currency cover but was barred from undertaking any commercial activity or credit extension. On May 7, 1970, MCA issued the rial Saidi which became the sole tender in the Sultanate. In March 1972, Currency Decree 1392 was issued which replaced MCA with the Oman Currency Board (OCB). The rial Omani was introduced and kept on par with the previous rial Saidi. A Board of Directors to manage OCB was appointed with a respon- sibility to promote monetary stability and a sound financial system and to issue licenses to commercial banks. One hundred percent backing in external assets was still required for the currency issued and OCB had no power to extend credit. BBME was entrusted with the responsibility to manage OCB. Some modifications to OCB's structure and role were made in March 1974 by establishing an administrative staff for the Board, terminating the manage- ment role accorded to BBME, and organizing a clearing house. 91. Significant developments in banking legislation took place in November 1974, when the Government issued a Banking Law providing for the establishment of a Central Bank with full powers to issue and manage the currency, supervise the commercial banks and regulate credit. On April 1, 1975, the Central Bank of Oman (CBO) replaced OCB and assumed its assets, liabilities and reserves. One hundred percent foreign asset backing of currency issued was not required and the Central Bank was empowered to advance funds to the Government provided that the total advances made do not exceed 10 percent of the estimated current revenues of the Government, and have a maximum maturity of three months. CBO was also permitted to discount export bills on Government direct oil sales and to purchase Gov- ernment Treasury Bills and Securities 1/ with a maximum maturity of ten years. It could also grant advances to the commercial banks and buy, sell, discount and rediscount various kinds of domestic commercial papers. CBO also became responsible for the management of Oman's foreign assets. 1/ The Government has not so far introduced Treasury Bills or Securities.  - 35 - 92. Under the new Banking Law, the CBO retained the licensing powers over commercial banks, and increased the scope of its regulatory and super- visory controls over the banking system. In addition to the initial capital required by a commercial bank, reserve requirements and loan-deposit ratios, 1/ each bank was required to maintain with CBO an interest-bearing capital deposit whose size is one-tenth of one percent of the total resources of the banking entity, including, in the case of foreign-owned banks, the total assets of the parent bank; the deposit is to be not less than OR 50,000 and not more than OR 500,000. The interest rates paid on these capital deposits by the CBO were required not to fall below interest rate paid on time deposits held by commercial banks. The capital deposit scheme was designed to restrain the growth in the number of banks. The Central Bank has been gradually assuming its responsibilities and as the recruitment of skilled personnel proceeds, it will more fully assume its central banking functions. The Central Bank needs to build up its economic research capability in a systematic and continuing manner. 93. Up to 1972, there were only four commercial banks operating in Oman, the oldest one being the British Bank of the Middle East (BBME) which opened its Muscat office in 1948. The commercial banking sector experienced a rapid expansion starting in 1973 and the number of operating banks rose to 16 by the end of 1976, together with three more banks which have been given licenses to begin operations. Total number of bank branches are 67, 52 of which are con- centrated in the Capital area despite the continuous encouragement for the growth of branches outside the Capital area. All but five of the banks are subsidiaries of foreign-owned banks (Table 6.5). 94. Banking has developed essentially as commercial banking and while there may be some "rolling over" of credit, banks have not moved into term financing. So far there is no market for paper as CBO does not yet offer discount facilities and bank's lending operations are such that very little discountable paper has come into existence. In June 1976, it was decided to limit the number of banks operating in Oman to 20 in order to avoid excessive competition and evaluate the results of the rapid expansion, and restrictions were placed on the opening of new branches. To help develop the interior of the country, banks are required to open two branches outside the Capital area for each additional branch in the Capital area (after the first three). 95. There are no financial institutions other than commercial banks and insurance companies 2/ with the exception of the Oman National Housing Devel- opment Association Ltd. which was established in 1974 to improve the living conditions of lower income Omanis. It is*a joint venture formed by the Gov- ernment and the BBME each of whom holds half of the OR 1.5 million equity 1/ The maximum levels for reserve ratios are 40 percent for demand deposits and 30 percent for time deposits. 2/ No information is available on insurance companies and Government does not collect data from them.  - 36 - capital. The Association provides mortgages with a 20-year maturity and 10 percent interest rates with the Government subsidizing mortgage holders with low income by paying the interest on such loans. 96. A Decree was issued in August 1976 to establish the Development Bank of Oman (DBO), capitalized at OR 10 million, with 40 percent Government, 20 percent private Omanis and 40 percent foreign shareholding. DBO, which is still not operational, is designed to aid the private sector by assisting Omani firms in projects related to oil, minerals, agriculture and fisheries or industry by extending or underwriting loans, taking equity participation or providing technical assistance. A Fishermen Encouragement Fund is proposed with a capital of OR 2 million to help local fishermen and detailed studies are being carried out for its operations. A pilot fund for fishermen has been operating in Salalah since 1974 and the new proposed fund is to insti- tutionalize credit facilities to fishermen. Recent Trends in Credit and Money 97. The Omani economy experienced rapid monetary and credit expansion in the seventies reflecting the Government's budgetary operations which have been the main source of liquidity injection in the economy. Till October 1972, banks operated under an interbank agreement governing interest rates, exchange rates, and the general conduct of commercial banking. However, increased com- petition among the banks and increased capital mobility in the Gulf area as a whole resulted in the suspension of the agreement in late 1972. 98. During the period 1970-73, money supply rose from OR 3.5 million to OR 25 million with the high annual rate of increase declining with each suc- cessive year (Table 8). Money supply further rose to OR 50.5 million and OR 72.5 million (102 percent and 44 percent) in 1974 and 1975 respectively. The factors influencing movements in money supply changed since 1972. In 1970 and 1971 there were large increases in net foreign assets, which were only par- tially offset by the contractionary impact of the growth in Government deposits. Since 1972, net foreign assets declined with reserves being used to finance balance of payments deficits and net domestic assets of the banking system expanded fast, reflecting the change in the fiscal situation (the Government's sizeable net recourse to the banking system) and the large increase in private sector credit. The increase occurred partly in currency in the hands of the public but mainly in demand deposits (47 percent of the money supply in 1975 compared to only 35 percent in 1970), reflecting the development in banking habits. The increase in money supply appears to have decelerated, rising by about 27 percent by September 1976 from the level at the end of 1975 compared to 47 percent over the same period in the previous year.  - 37 - Table 8.2 FACTORS AFFECTING CHANGES IN DOMESTIC LIQUIDITY September 1970 1971 1972 1973 1974 1975 1975 1976 Changes in (In Millions of Omani Rials) Money and Quasi-Money 6.4 10.1 -0.7 1.9 40.6 30.6 28.5 31.5 Money 4.1 5.8 5.6 6.0 25.5 22.0 23.5 21.2 Quasi-money 2.3 4.3 -6.3 -4.1 15.1 8.6 5.0 10.3 Foreign Assets (net) 32.5 13.5 -16.1 -29.2 -3.9 -12.9 -39.5 -25.4 Domestic Assets (net) -26.1 -3.3 -15.3 31.0 44.7 43.6 68.1 56.9 Credit to private sector 1.4 0.6 2.2 12.4 36.9 30.2 45.1 23.5 Net Government deposits (increase -) -24.8 -3.3 12.8 22.6 25.6 1.4 9.5 35.8 Other items (net) - 2.7 -0.6 0.3 -4.0 -17.8 12.0 13.5 -2.4 (Growth Rates in Percent) Money 117 76 42 32 102 44 47 29 Quasi-money 9 15 -20 -16 70 23 14 23 Credit to private sector 61 16 51 191 195 54 81 27 Source: Table 6.1 Statistical Appendix. 99. Commercial bank credit has been growing rapidly since 1970 and ex- panded sharply since 1974. Credit to the private sector which, amounted to OR 3.7 million in 1970 and OR 18.9 million by 1973, jumped to OR 86.0 million in 1975, while credit to the Government increased from OR 6.6 million in 1973 to OR 62.1 million in 1975 (Table 6.3). Although deposits during the same period also rose, a large part of the increase in credit extended was made possible by drastically increasing foreign liabilities of foreign banks from OR 3.2 million in 1973 to OR 72 million in 1975. This was facilitated by the absence of exchange control and free convertibility of the Omani rial so that foreign-owned banks in Oman have easy access to funds from their head offices and therefore readily granted credits to the Government and local merchants and contractors. By September 1976, credit to the Government totaled OR 81.9 mil- lion (31 percent increase over December 1975), and credit to the private sector amounted to OR 109.5 million (27 percent increases), a more modest growth rate reflecting a leveling off of trade and construction activity. The Central Bank in March 1976, increased the loans to deposits ratio from 82 percent 1/ to 85 percent and resorted to some moral suasion to encourage lending. 1/ In November 1975 it was raised from 80 percent to 82 percent.  - 38 - 100. In September 1975, the Central Bank introduced a new banking return calling for greater detail on the activities of the commercial banks to be submitted by December 1975. Prior to that there was no data on the sectoral breakdown of credit to the private sector. Available data indicate that the major part of the credit 1/ in 1975 has been provided for trade (58 percent) and construction activity (20 percent), followed by personal loans (12 percent). Some credit was extended to industry, mining and quarrying (2 percent) and the remainder to services sector (8 percent) (Table 6.4). Interest Rates 101. The rapid increase in Government spending coupled with inelastici- ties in the supply of domestically produced goods and services permitted high returns in trade, construction and housing. Commercial banks were thus faced with increased demand for credit while at the same time the number of banks competing to attract deposits increased rapidly as has the attractiveness of investment outside Oman. This caused a general upward movement in lending and deposit rates. Given the lack of controls on the flow of funds and interest rates, the rates were decided by domestic supply and demand for loanable funds as well as LIBOR. During 1976, rates of interest paid by commercial banks on savings and time deposits have been in the range of 5-9.5 percent, depending on the amount, maturity and the size of the commercial bank itself, 2/ and the prime lending rate has been about 9.5 percent with another 2-3 percent service charges. Customers can borrow in foreign exchange at 2-3.5 percent above LIBOR, depending on the customer's credit rating. Most credit facilities are made for the large established merchants. Price Trends 102. No price indices are available in Oman. However, a monthly survey monitoring the market prices of selected imported food items in the Capital area (rice, wheat flour, powdered and evaporated milk, pure ghee and other cooking fats, sugar, tea and coffee) has been prepared based on average price for the last quarter of 1972. An overall index is then calculated by weight- ing the individual commodity index numbers according to the relative value of imports of each commodity. The results of family expenditure surveys con- ducted during 1974 provided evidence which supported the weights 3/ used in ltnking the individual index numbers. However, the survey covered a small 1/ Loans are categorized according to items for which loans were secured, so that although a large amount of credit was given for property development, it is probably included under trade and personal loans, etc. 2/ The five- largest banks in Oman do not compete for funds of small deposi- tors and usually offer lower rates. 3/ Rice 30.3 percent; wheat flour 18.2 percent; milk powder 6.0 percent; evaporated milk 10.5 percent; pure ghee 8.7 percent; other cooking fat 6.4 percent; sugar 9.9 percent; tea 3.2 percent; and coffee 6.8 percent.  - 39 - sample of Government and PDO staff only, and monitored items which accounted for only about 20 percent of total family spending. The development of an. overall cost of living is extremely important to monitor inflationary pres- sures, although the development of such an index is not possible until detailed population, income and expenditure data are available. 103. Since 1970 Oman has experienced substantial inflationary pressures as a result of the rapid growth of public expenditures in an economy ill- equipped to meet the sudden increase in demand. The high rate of growth of money supply in relation to the limited productive capacity of the economy, scarce skilled manpower and limited housing facilities led to high demand pressures, which were only partly relieved by the growth of imports due to limited transport and handling facilities. The rising prices of imported goods, particularly since 1973, also contributed. Prices rose sharply in 1970-72 especially for foodstuffs and rents. It has been estimated that during this period the rental rates for the few rooms and apartments availa- ble in the Capital area jumped in many cases over 400 percent, and food items registered price increases ranging from 30 percent to over 100 percent. Also prices for cement and other imported building materials increased sharply partly due to rising handling costs as most imports came overland from Dubai or were off-loaded at the old Muscat jetty prior to the opening of the new Port Qaboos in late 1972. 104. Prices soared in 1973 and increased considerably in 1974. Price indices of imported food commodities (see Table 6.6) showed increases of 78 percent and 26 percent in 1973 and 1974 respectively. These inflationary pressures were due to sharply rising aggregate demand, slow growth of domes- tic output and some services, and physical limitations on rapidly expanding imports. The inflation can also partly be attributed to large markups by local merchants reflecting monopolistic practices and other market imperfec- tions which tended to push up consumer prices. 105. Available data indicate a decrease in the price indices of selected food commodities in 1975 and 1976. Food prices declined by 20 percent in 1975 and by a further 17 percent in the first 8 months of 1976. This resulted mainly from the Government's intervention in the rice market to mitigate the infla- tionary impact on the principal staple through the direct importing of rice and selling at cost under a rationing system. Wheat flour prices also started declining in early 1975. Since 1975, demand pressures also eased as a result of the slowdown in the growth of Government spending and a deceleration in the growth of bank lending to the private sector. Resource availability was fur- ther improved as port facilities permitted large increases in imports. The slowing down in the rate of international prices in 1976, the lowering of import duties in late 1974, the increase in the supply of housing facilities in Oman due to the construction boom, and the increased competition among merchants partly due to earlier overstocking also contributed to the easing of pressures on domestic prices during the past two years.  - 40 - CHAPTER SEVEN BALANCE OF PAYMENTS 106. From 1967 to 1971, the trend in the overall balance of payments was favorable in general, due to rising oil exports and relatively small imports of goods and services. Thereafter, however, the balance swung into deficits due to rising imports, and there has been a continuing depletion of accumu- lated reserves. The exchange and trade system remained liberal throughout the period. Exchange and Trade Policies 107. Oman has pursued a policy of a liberal exchange and trade system for a long time, following the pattern of neighboring countries in the Gulf Area. Import and export licenses have been given freely and there were also no con- trols on transactions in foreign exchanges, except that the rates have been administered recently. Until the introduction of rials saidi in May 1970, the main official Omani currency was Gulf rupees, supported and administered by India. For the period 1967 through July 1971, the exchange rates between Omani currency and US dollars were held stable at OR 1 = $2.40. However, between August 1971 and February 1973, the rial appreciated by about 20 per- cent, reflecting the strength of the Omani economy and depreciation of the US dollar. Since February 1973, the rate has been fixed at OR = $2.895. The strong and stable values of the rial could be maintained mainly due to the fact that each rial Omani has a 100 percent foreign exchange cover held by the Central Bank and Government and oil income was increasing rapidly. 108. Although buying and selling of foreign exchange were freely allowed at all commercial banks, the central rates for these transactions expressed in US dollars have been fixed since 1973, and no reviews of the rates took place since then. Any changes in rates are subject to review by the Central Bank, which was established in 1974, but fluctuations are permitted for daily rates for buying and selling within given percentages from the central rate. 109. There were almost no quantitative restrictions of imports, and only marginal import duties were levied on most commodities. The only exceptions to these rules were that (i) all imports from Israel and Rhodesia were pro- hibited and (ii) import duties on liquor were quite heavy (40 percent between December 1970 and August 1974 and 75 percent since August 1974). Prior to 1970, the previous government had maintained somewhat restrictive trade poli- cies: considerably higher duty rates were imposed on imports, ranging between 7-76 percent ad valorem; a license was required for motor vehicle imports; and the basis for assessing import tariffs was values in local markets rather than import costs at Omani ports. 110. Further reduction of import duties were made in August 1974: com- plete elimination of duties on imports of most agricultural goods, fertilizers, seeds, some consumer goods including refined petroleum products, and some  - 41 - intermediate goods such as cement; and reduction of duties on other goods to an average of 2 percent from an average of 7 percent previously. However, stringent controls were adopted for imports by contractors carrying out de- velopment projects: duties would be imposed on imports of goods not directly used for implementing development projects. Current Account 111. Only limited information is available on Oman's external transactions before 1967. Trade in small amounts was mostly limited to neighboring coun- tries and the United Kingdom. Trade deficits were covered mainly by British aid to the Sultanate as well as by Government borrowings. 112. Beginning ir 1967, the current account movements were dominated by oil and oil-related activities (see Table 9). Earnings from oil exports pushed up imports of commodities and services. However, imports were still much below oil revenues until 1970, and the current account balance registered surpluses during this period, causing substantial build up of foreign exchange reserves. After 1970, however, the balance swung sharply into deficits, mainly due to increased government spending on development and defense. Table 9. SUMMARY OF CURRENT ACCOUNT /1 (Million Omani Rials.) Items 1967 1968 1970 1971 1973 1974 1975 Oil Sector (Net) 2 26 44 48 61 235 347 Non-oil Sector Exports 1 1 - - 1 - 1 Imports -4 -6 -16 -40 -77 -203 -360 Private Sector -4 -4 -9 -26 -45 -125 -240 Public Sector -1 -2 -7 -14 -32 -79 -120 Invisibles (Net) - -1 -2 -9 -24 -73 -103 Net investment income - - - - 3 2 -2 Workers remittances - -1 -2 -3 -18 -37 -54 Construction profits - - - -6 -9 -38 -47 CURRENT ACCOUNT BALANCE -2 20 28 -1 -38 -41 -116 /1 Due to rounding, components may not add up to totals; oil sector treated as nonresident. Source: Table 3.1, Statistical Annex.  - 42 - Oil Exports 113. Due to the difficulty of obtaining adequate and accurate data on all external transactions of the oil sector, this sector was treated as non- resident, i.e., the net surplus shown in the balance of payments reflects only those receipts and payments shown in the Government budget. Consequently, commodity imports shown in the non-oil sector underestimate total gross imports and Government oil revenue underestimates gross oil export receipts. Oil pro- duction costs, profits of the foreign shareholders and other private oil trans- actions are excluded from the net oil sector accounts. 114. Exports of oil accounted for almost all export earnings of Oman and over 90 percent of Government revenues since 1968 with the only exception of 1975, in which foreign grants accounted for more than 15 percent of total Gov- ernment revenues (see Chapter 10 and Table 7.4). Revenues from oil increased steadily from OR 26 million in 1968 and OR 61 million in 1973, and an estimated OR 470 millin in 1976. Japan has been the largest importer in all years since 1967 and other industrialized countries like the Netherlands, United States, and Canada have been the other major importers. Japan's share was about 30 per- cent of total oil exports in 1975, and combined shares of the above four coun- tries represented about two-thirds (Table 3.4). Non-Oil Trade 1/ 115. Oman's traditional non-oil exports remained insignificant, amounting to a maximum of only OR 1 million in any one year. Due to Oman's narrow pro- duction base, no major exportable commodities were available. The most impor- tant non-oil exports are farm products, including dried dates, dried limes, fruits, vegetables and tobacco, exported mainly to the Gulf states, Iran, Iraq and India. Re-exports from Oman are also small. 116. Estimates of private imports (Table 3.1 and Table 9) include all imports by private firms, expatriate construction firms and by private persons residing in Oman, but exclude imports by oil companies which produce, explore or drill oil in Oman. Private imports grew rapidly, reaching OR 125 million in 1974 and OR 240 million in 1975, as compared to OR 9 million in 1970. This rapid growth in private imports followed the increasing oil revenues. The vigorous government drive to develop the economy, especially large investments in infrastructure since early 1970's, pushed up imports of capital and Inter- mediate goods. Increasing personal incomes resulting from the surge of public expenditures raised private consumption and in turn, raised imports of con- sumer goods. The rising prices of imported goods, particularly after 1973 was also a factor. 1/ Since even the Customs Office trade data (on which non-oil exports and private imports data are based) was incomplete until 1973 and public sec- tor imports and services data are estimated from various sources, figures presented here are only estimates, subject to wide margins of error. More- over, sizeable private imports may not be recorded in the Customs Office at all.  - 43 - 117. Table 10 below presents a rough classification of total private imports by end-use, which should be interpreted to indicate broad orders of magnitude only. While the share of intermediate goods imports remained more or less unchanged, the share of capital goods imports has increased steadily at the expense of consumer goods imports. In spite of this trend, consumer goods imports, which were approximately OR 110 million in 1975, compared to OR 6 million in 1970, still have the largest share. The rising share of investments gQods imports reflected increasing development expenditures. Motor vehicles, various types of machines, foods, cement and other building materials and electrical appliances were the most important of the imported commodities. Table 10. CLASSIFICATION OF PRIVATE IMPORTS BY END USE (percent) /1 Jan-Sept. End-Use 1970 1971 1972 1973 1974 1975 1976 Consumer Goods 73 62 56 58 51 48 46 Intermediate Goods 10 13 16 11 10 11 14 Capital Goods 17 25 28 31 39 41 40 Total Private Imports 100 100 100 100 100 100 100 /1 Due to insufficient data, particularly for early 1970s, only the following broad criteria were used for this classification: consumer goods, SITC 0, 1, 5, 6, 8; capital goods, SITC 7 only; and intermediate goods, all the rest. Source: Table 3.3, Statistical Annex. 118. Most of Oman's private imports were from industrial countries. Since the beginning of the 1970's the United Kingdom exported the most to Oman, followed by Japan, Germany, Gulf countries (UAE, Kuwait, Bahrain, Qatar), the Netherlands and the US. There were large recorded imports from the Gulf countries, but they were mostly believed to be re-exports originated from industrialized countries. Due to the unavailability of detailed informa- tion, it is not possible to discuss trends in the real growth of imports or in terms of trade changes. 119. Public sector imports are mainly defense-related, including weapons and payments for services. Between 1967 and 1970, public sector imports remained small. However, as the Government stepped up its military operations in Dhofar these imports sharply increased to OR 120 million in 1975, compared to OR 7 million in 1970.  - 44 - Invisibles 120. Invisibles account always registered deficits since 1967, reflect- ing Oman's reliance on foreign labor and technology. Major elements in the invisible account include remittances of expatriate workers, remittances of profits by foreign construction firms and investment income payments. Trends of all these invisibles combined showed that only minor deficits (below OR 2 million) had been recorded before 1971, but the deficits grew quickly, from OR 9 million in 1971 to OR 73 million in 1974 and OR 103 million in 1975, mainly due to the heavy participation of foreign construction firms and ex- patriate labor in the development effort. 121. The number of expatriate workers (including those in the Omani defense force) were estimated to have increased from less than 3,000 in 1970 to more than 71,000 in 1975, while their average remittances per worker are estimated to have risen from about OR 50 to OR 65 per month over the same period. In early 1970's, the majority of expatriate workers were in the oil sector and in defense forces, but in later years the predominant number of workers were found in construction, government, and services sectors. There are a large number of Omanis working in nearby Gulf countries, who earn attrac- tive incomes and send remittances to their families in Oman. However, there are no data available for these inflows of Omani remittances. 122. In the absence of any better information, the profit remittances of foreign construction firms were roughly estimated at 30 percent of Govern- ment's non-oil development expenditure, as the trend in recent few years appears to show. Since there were only minor amounts of development expendi- ture before 1970, such remittances were negligible. However, as the Government stepped up investments in infrastructure, a large number of foreign construc- tion firms participated in contract works each year and their remittances became increasingly larger, estimated at OR 47 million in 1975, compared to OR 6 million in 1971. 123. Until 1970 a substantial portion of government's oil revenues had been accumulated, which raised foreign exchange reserves and interest earnings on these reserves, in particular since 1970. On the other hand, interest pay- ments in recent years on foreign borrowing have been rising and after the high borrowing in 1974-75, interest payments exceeded interest receipts for the first time, in 1975, by OR 2 million. Capital Movements, External Debt and Reserves External Resource Flows 124. Since the current account was in surplus until 1970, the need for financing of deficits started only in 1971. Since then the current account deficits have risen sharply and the need for financing correspndingly rose to OR 38 million in 1973 (30 percent of GNP) and to OR 128 million in 1975 (21 percent of GNP). In the early seventies, drawing down of reserves was the main method of financing the deficits, but as the reserve level fell, grants and loans were increasingly resorted to.  - 45 - Table 11. FINANCING THE CURRENT DEFICIT (Million Omani Rials) 1968 1970 1972 1973 1974 1975 Current Account Deficit -20 -28 25 38 41 116 Amortization - - - - 13 12 Total Financing Requirement -20 -28 25 38 54 128 Drawings on Public Loans - - - 11 48 67 Grants - - - 4 8 72 Reserve Drawingdown -22 -33 16 29 4 13 Other (Net) 2 5 9 -6 -6 -24 Total Financing Resources -20 -28 25 38 54 128 Source: Table 3.1, Statistical Annex. 125. Between 1967 and 1973, all official aid to Oman was in the form of small-scale technical assistance by international and governmental agencies including British Government, UNICEF, WHO, and FAO. However, as the Govern- ment's budget position became strained due to ambitious spending during 1972-73, the Government successfully obtained commitments of two commercial loans totaling OR 21 million as well as a military grant (OR 3.5 million) in 1973. Since then a number of loans and grants were received from various sources. The disbursement of these loans increased from OR 11 million in 1973 to OR 67 million in 1975. All grants were from neighboring Gulf states including Saudi Arabia, Abu Dhabi, and Qatar. Total grants jumped from OR 4 million in 1973 to OR 72 million in 1975. However, actual receipts in 1976 seem much lower than before, with only about OR 20 million received in the first nine months, partly due to slow implementation of projects to which grants were committed. 126. Due to the liberal exchange and trade system and until recently the lack of an appropriate monitoring authority, transactions of private capital (except inter-bank transfers) have not been registered in Oman's balance of payments. Since Omani rials have been freely convertible, it is almost im- possible to trace private capital flows under the present setup of rules and regulations that govern foreign exchange transactions and domestic banking activities. 127. Although the legal framework in Oman permits, and to some extent encourages, private foreign investment, such investment has not played any significant role in the country's development except in the case of oil. The small domestic market, shortage of skilled and unskilled labor, and limited natural resources endowment other than oil have been the important constraints.  - 46 - 128. Main ingredients of the commercial law in which the present incen- tive package is contained includes: (a) a five year exemption from corporate income tax for all investments in those sectors that have been declared as development target sectors, which is extendable for an additional five years; (b) access to the result of feasibility studies, undertaken on some strategic investment projects at government's expense; and (c) provision of rent-free land for foreign investors to set up plants and offices. In addition, foreign investors have negligible duty on imports of all inputs and investment goods plus unrestricted remittances of investment profits. 129. There were some recorded outflows of official capital since 1972. Most of them were in the form of purchases of IBRD bonds and contributions to the oil facility of the IMF, but others included a $2 million donation to a neighboring country in 1972 for budget support, contributions to the Islamic Bank ($6 million in 1974) and the Arab Bank for Economic Development in Africa ($1 million in 1974). In 1974 all these outflows totaled OR 17 million, but in other years they amounted to less than or slightly over OR I million. 130. The level of net foreign exchange reserves rose until 1971, but thereafter continued to fall, reflecting the increasing current account deficits. At end 1975, net reserves stood at OR 33 million, approximately 3 months' imports equivalent, as compared to OR 46 million at end 1974, and OR 82 million at end 1970. However, this level fell further to OR 8 million at end September 1976, less than 1 month's imports equivalent, mainly due to increased liabilities of commercial banks. Foreign liabilities of commercial banks jumped to OR 54 million at end 1974 and to OR 95 million in September 1976, from OR 3 million at end 1973. Most local banks are branches of foreign banks. As Government's net liabilities with commercial banks increased from OR 7 million in 1973 to OR 58 million in 1974 and to OR 81 million in Septem- ber 1976, these local banks had to obtain transfers of funds from their head offices abroad to meet Government demands for credits. External Debt 131. There were almost no foreign debts outstanding up to December 1972, except for small suppliers credits in 1971 totaling less than OR 1 million, incurred by the Muscat Power Authority for equipment imports. However, since 1973 there have been sizeable commitments of external debts each year. As a result, the officially reported external debt outstanding and disbursed, stood at OR 78 million ($226 million) at end 1975 as compared to OR 48 million at end 1974 (see Tables 4.1-4.5). 1/ 1/ Figures for debt service from budgetary sources differ from the debt data, mainly because of the difficulty of differentiating external and domestic debts due to the transfer of funds to the bank branches from their head offices abroad. External and domestic debts combined shows that at end 1975 the total outstanding and disbursed amount was about OR 120 million as compared to OR 56 million at end 1974.  - 47 - 132. The structure of external debt was heavily biased towards commercial loans. Some 20 percent of outstanding debts was in suppliers credits, 60 per- cent in commercial bank credits, and the remainder mainly in Government loans. Data for domestic and external loans together shows that some 16 percent was in suppliers credits, 69 percent in commercial bank credits, and the remaining 16 percent in concessional loans, mainly from Governments. The majority of external debts carries medium-term maturities of 3-7 years with 6-9 percent interest rates. External debt service payments in 1975 amounted to OR 13 mil- lion ($38 million), which accounted for about 3.5 percent of Oman's export earnings. These debt service payments were stable for 1974-75, but are pro- jected to rise slightly in 1976 with a similar debt service ratio.  - 48 - CHAPTER EIGHT THE DEVELOPMENT PLAN AND PROSPECTS Plan Objectives and Targets 133. As part of the growing awareness of the need for rationalization discussed in Chapter 5, the Development Council was charged with the respon- sibility of preparing the first Five Year Plan (FYP) for 1976-80. The FYP was approved in the second half of 1976. It was, however, discussed by the Development Council in 1975 and the 1976 budget was influenced by these discussions. 134. The main objectives of the Plan are: (a) To shift the concentration of investment from infrastructure to income generating projects in order to supplement and eventually replace oil revenues; (b) To develop local human resources with the aim of increasing "Omanisation" of the labor force to replace expatriates; (c) While maintaining and developing the existing population centres, to effect a wider geographical distribution of investment with the objective of improving the distribution of income and reducing the rate of migration to major centres; (d) To achieve the basic requirements of a free, market economy, with the private sector playing an increasing role through the provision of an appropriate legal and incentives frame- work; (e) To pay more attention to the development of water resources; (f) To improve the efficiency of government administration. 135. The Plan projects a GDP growth rate of 1.6 percent p.a. and a GNP growth rate of 3.1% p.a. in real terms over the period 1976-80 1/. Oil pro- duction is expected to decline from 135 million barrels in 1976 to 122 mil- lion barrels in 1980, leading to a 2.2 percent p.a. decline in real terms in the value added in the mining sector (See Table 12). However, the fast growth 1/ Data for the base year in the Plan, 1976 was estimated in the Plan. In some cases, these estimates are different from the projected estimates made by the mission. Growth rate comparisons for the period 1976-80 should therefore be made with caution. The extent of the difference can be seen in Table 12, particularly in investment, consumption, exports and imports.  - 49 - forecast for the other sectors more than offsets the expected decline in oil production. Agriculture is expected to grow by 13.7 percent p.a. Although no separate estimates are available, rapid growth in fisheries is implied. Manu- facturing is targeted to grow by 71.5 percent p.a. from a low base of OR 3 mil- lion in 1976. In line with the expected decline in overall economic activity and investment, construction is projected to decline by nearly 10 percent p.a. The rest of the sectors taken together are targeted to grow by 11.5 percent p.a., with the major increases expected in the ownership of dwellings, public administration, internal trade and to some extent banking. 136. In line with the declining oil revenues, total investment is targeted to decline by about 10 percent p.a., with public investment showing a 19 per- cent p.a. decline and private investment increasing sharply by nearly 15 per- cent p.a. Total consumption is forecast to grow moderately at 2 percent p.a. However, private consumption shows a fast growth of 12 percent p.a. and public consumption is stagnant over the period, mainly as a result of the sharp drop expected in defense expenditures to nearly half their 1976 level. 137. The Plan expects the balance of payments to swing sharply into a current account surplus of OR 77 million in 1980 compared to a substantial deficit in 1976. This sharp reversal projected in the Plan is largely due to the projected decline in imports by nearly 11 percent p.a. Import projections are based on a sharply declining share of investment goods imports in total investment from an estimated 80 percent in 1976 to 60 percent in 1980 and of consumer good imports in total consumption from 56 percent to 44 percent. The decline in the share of imports in investment is based on the expected cement production to replace imports and a slowing down in the construction sector and also due to diversification of the domestic production structure. In the case of consumer goods, saturation of consumer demand, particularly for luxury goods is expected to decrease the share of imports in total consumption. In line with the expected reduction in expatriates, remittances abroad are also projected to decline from OR 135 million in 1976 to OR 102 million (in constant 1976 prices) in 1980. 138. As a consequence of the improving current account situation, loans and grants are forecast to decline sharply to a level of only OR 19 million in 1980. Of the total amount of loans and grants of OR 404 million during 1976-80, the Plan estimates that OR 278 million of loans have so far been secured, while the rest remains to be secured as loans and grants (Table 13). The forecast decline in grants and loans is due to the government's policy to keep its borrowing within narrow limits and the uncertainties involved in the future availability of grants. In fact, grants have been intentionally left out in the Plan's projections and they have been considered as a contin- gency source of funds which could be used for any shortfalls in resources or to meet higher expenditures. 139. The planned expenditures and revenues in the public sector are shown in Table 13. In line with falling oil production, oil revenues are expected to decline by about 2.5 percent p.a. Non-oil revenues show a fast increase mainly due to rising receipts from customs duties and sales of electricity, water and other public services. Together with the decline in  - 50 - external resources, total resources available for public expenditures decline from OR 650 million in 1976 to OR 484 million in 1980. On the expenditure side, investment and defense expenditures are forecast to decline, while current expenditures grow by about 12 percent p.a., mainly as a result of greater outlays on wages and salaries and expanding administrative needs. 140. In line with the basic objectives of the Plan, the share of infra- structure in public investment falls, with economic infrastructure declining from about 69 percent in 1976 to 42 percent in 1980 and social infrastructure remaining at around 16 percent in the two years (although it declines in the intervening years). The main increases over the period are agriculture and fisheries (from 1 percent to about 12 percent) and manufacturing (1 percent to 14 percent). Despite its forecast decline, infrastructure investment still accounts for about 70 percent of total public investment over the Plan period. Details of investments by sector are shown in Table 12.1. The share of pri- vate sector investment is forecast to rise from an estimated 18.5 percent in 1976 to 47 percent in 1980. The Plan attempts to redress the existing con- centration of economic activity in the Capital Area by reducing its share of public investment from an estimated 40 percent in 1976 to 27 percent in 1980. On average, during the Plan period, the shares of public investment are 32 percent in the Capital Area, 41 percent in the Interior and 27 percent in the Southern Region. 141. The Development Council has prepared a background paper to discuss the manpower and educational implications of the Plan with a special emphasis on "Omanization". In the Plan document, however, investment allocations to stimulate Omanization have been made to increase the number of schools and training centers. 142. The main policy measures discussed in the Plan are (i) the estab- lishment of the Development Bank of Oman to encourage private sector develop- ment; an Agricultural Development Fund to provide research, extension services, capital goods and production inputs and to facilitate marketing of products and a Fund for Fisheries development; (ii) the setting up of an industrial area and (iii) increased customs duties as local industries develop rather than the present 2 percent duties that apply to most products. Evaluation and Prospects 143. Planning as a separate exercise from the executive functions of ministries was started only in November 1974. Consequently, the planning staff in the Technical Secretariat of the Development Council and in the individual ministries is limited and needs strengthening. Together with limited data availability, the uncertainties on oil production and the short period over which the country has experienced rapid economic development, this has resulted in a rather simple Plan. The macro-targets of the Plan were projected on the basis of simple assumptions taking into account that the projects apart from some major ones, were in preliminary stages of preparation. Although efforts have already been made by the Government, partly with assis- tance from the World Bank, further emphasis on project identification and preparation is needed.  - 51 - TABLE 12: PLAN PROJECTIONS 1976-80 1976 1980 Annual Average Growth Rate (%) Value Added (In 1976 ORm) Agriculture (including Fisheries) 18 30 13.7 Mining (oil) 505 461 -2.2 Manufacturing 3 25 71.5 Construction 76 49 -9.7 Others 156 241 11.5 GDP m.p. 758 806 1.6 GNP m.p. 623 704 3.1 Uses of Resources (In 1976 ORm) Investment 314 201 -9.9 Private 58 95 14.6 Public 256 106 -19.1 Consumption 384 426 2.7 of which: Public 315 316 0.2 Gross National Savings 239 278 3.8 Balance of Payments (In 1976 ORm) Exports (goods + nfs) 526 487 -1.9 Imports (goods + nfs) -466 -308 -10.7 Resource surplus 60 179 Factor Payments (Net) -135 -102 -7.2 Current A/C Balance -75 -77 Grants and Loans 155 19 -49 Amortization -44 1/ -47 1/ 1.7 Debt Service Ratio (%) 8.4 9.7 1/ Including interest payments and some repayment of domestic loans Source: Five Year Plan  - 52 - TABLE 12A: MISSION PROJECTIONS 1976-80 1976 1980 Annual Average Growth Rate (%) Value Added (In 1976 ORm) GDP m.p. 806 673 -4.5 of which: oil 526 412 -6.1 GNP m.p. 634 547 -3.6 Uses of resources (In 1976 ORm) Investment 247 193 -6.0 Private 57 48 -4.1 Public 190 145 -6.7 Consumption 403 400 -0.2 Gross National Savings 231 147 -11.5 Balance of Payrnents (In current ORm) Exports (g + nfs) 471 492 1.1 (-6.4) Imports (g + nfs) -370 -393 1.5 (-6.0) Resource surplus 101 99 Factor Payments (Net) -156 -152 -0.5 (-8.2) M Current A/C Balance -55 -53 Grants and Loans 51 1/ 126 1/ 25.3 Amortization -11 -72 58.7 Debt Service Ratio (%) 3.1 17.8 * Plan and mission projections should be compared with caution because of conceptual differences. (See para. 156) 1/ Excluding domestic borrowings, which amounted to OR 32.6 m for 1976 and OR 27 m for 1980. 2/ ( ): Percentage change in real terms.  - 53 - 144. In a period when the prevailing political and social mood was to rapidly transform the society from the isolationist and conservative philo- sophy prevalent until 1970 and speed was a keynote in official Omani thinking, the introduction of planning and its concommitant discipline had to be a gradual process. Every effort should now be made to expand the technical staff in the Technical Secretariat in order to gradually develop the process of planning. 145. In the drive for rapid development, the Government realizes that the cost of some past and on-going projects may have been unduly high, partly be- cause contracts were negotiated rather than arrived at through bidding, partly because of limited trained staff to prepare and negotiate projects and partly because of inappropriate design standards in some cases. As a result of the serious cash flow problems in 1974-75 and the expected decline in oil revenues, the Government now fully apppreciates the need for a more careful preparation of projects and has hired legal expertise to help in designing proper tenders and bidding procedures for procurement. As discussed in Chapter 5, various improvements have taken place in the administration and decision-making process in the last two years. As a result the system of budgetary and financial moni- toring has considerably improved. Given the fact that Oman has only recently emerged from economic backwardness, the Government should be commended for the rapid advaices in administrative developments. However, these represent the beginnings of administrative reform, and Oman will still need to go through a long period of improving controls, budgetary and accounting procedures before it can fully and effectively utilize its limited resources. The need for proper preparation of projects, with appropriate feasibility work, to study the design, cost, markets and overall technical and financial soundness can hardly be overemphasized. Especially in view of declining oil income and investment, the Government needs to be extremely prudent in the use of its resources. 146. The main objectives of the Plan seem to be in line with the needs of the economy and address the critical constraints to development. Since economic and social infrastructure was the main focus of investment since 1970 and given the expected decline in oil production, the Plan correctly emphasizes the need to implement income generating projects and the develop- ment of water resources to raise agricultural production. It also highlights the need to develop local human resources, which represent probably the most important constraints in developing the economy of Oman. The need to redress regional and personal income differences is also fully recognized by the Gov- ernment. A striking feature of the Plan is the explicit recognition of the limitations on available financial resources, and the projected decline in public investment expenditures, which shows the change in the mood that has occurred in the short period since the cash flow crisis of 1974/75.  - 54 - Table 13: FIVE YEAR DEVELOPMENT PLAN - OVERAUL RESOURCES AND ITS USES (Inl M.illionq 1.976 R1.01 R) 1976 1977 1978 1979 1980 Total Resources Oil Revenue 470 458 447 436 425 2236 Other revenue 25 27 30 35 40 157 Loans and grants 155 135 66 28 19 404 Total resources 650 621 543 499 484 2797 Uses Defence and national security 1/ 275 219 179 154 144 971 Civil current expenditure 103 115 129 145 163 655 Government share of PDO's current expenditure 12 15 15 15 15 72 Civil capital projects 192 190 140 96 82 700 Joint investment projects with the private sector 6 5 4 4 4 23 Government share of PDO's capital investment 18 20 20 20 10 88 Repayment of loans and interest 44 53 46 51 47 241 General reserve - 4 10 14 19 47 Total Uses 650 621 543 499 484 2797 1/ Including construction program of a civil nature estimated at 40, 40, 21, 15 and 10 million Omani Rials in 1976, 1977 ..... 1980 respectively. Lource: Five Year Development Plan, Development Council  - 55 - Feasibility of the Targets 147. Although the overall Plan targets cannot be considered high, ques- tions regarding the feasibility of the targets arise, mainly in the following areas (i) feasibility of overall growth targets (ii) balance of payments (iii) forecast current expenditures in the public sector (iv) "Omanisation targets". 148. Given the dominance of oil in output and balance of payments (about 65 percent of GDP and practicaly total exports), prospects depend crucially on the output and price expectations for oil. Although the Plan document forecasts a decline in oil production from 135 million barrels in 1976 to 122 million barrels in 1980, PDO technicians forecast a decline to 90 million bar- rels in 1980. The PDO estimates may be too pessimistic because they exclude (a) production from the Dhofar fields (b) any further production from existing fields due to intensive secondary recovery methods or (c) production from the field in the Straits of Hormuz or other areas being explored. 149. The actual outcome is likely to lie somewhere in between these two estimates. Two alternative assumptions on future oil production have been made (See Chapter 10 for details): (i) a decline to 106 million barrels in 1980 as a result of the compression problems that PDO has been battling with and no additional production, except from the Dhofar fields, coming onstream and (ii) a slower decline to about 115 million barrels as a result of new wells coming into production by about 1979 either at other exploration areas. The sharper decline to 106 million barrels has been used as the basic case for our projections, mainly because of the long lead times required to bring new fields into production. 150. In agriculture, fisheries have good prospects. Substantially, raising agricultural production, however, may pose greater difficulties. In the past decade, agricultural production has been stagnant, if not actually declining. One of the reasons for this stagnation has been the migration from rural areas, which is expected-to continue in the future. Plant pests and diseases have been other contributory factors and in the case of dates and citrus, the major crops, little research has been undertaken to control the incidence of disease. The availability of new land for development, which is known to have the appropriate combination of water resources and appropriate soils, is likely to be less than 10,000 ha. Moreover, the capacity for project preparation and implementation is quite limited. As discussed in Chapter 9 on agriculture, in addition to the limited possibilities of expanding the cultivated area, significant gains can be made in crop yields per ha. because present yields are about half of their potential in Oman. However, to achieve these potential gains in yields on a nation-wide basis will require time, patience, farmer education and extension services. Consequently, widespread results cannot be expected over the Plan period. However, with sustained efforts, significant gains in crop yields are possible over the longer term. In addition,' the potential for fisheries is good, as shown by the rapid in- creases in catch in 1976 with the use of modern fishing methods in collabora- tion with foreign firms. Bearing these factors in mind, it may be difficult to achieve an average annual growth rate of 13.7% over the Plan period.  - 56 - 151. In the case of manufacturing, although the Plan forecasts a very high growth rate, it is from a very low base in 1976 (Table 12). The major projects in the Plan are the gas pipeline, oil refinery, copper, cement and flour milling. There is a much larger list of 51 projects (which does not include the gas pipeline), which was provided to the mission by the Minister of Industry and Commerce (Table 9.1), which is much more detailed than the Plan. However, most of the projects on this list are in preliminary stages of preparation or represent no more than project ideas for consideration. Practically all of the major projects were supposed to start construction in 1976 and 1977 but some of them were delayed compared to the Plan schedule. However, by 1980, some of the major projects, though delayed, would have been completed. Hence, the distribution of investment over the plan period could be a bit more even, showing a less sharp rate of decline than projected in the plan. If a few projects are completed, e.g. cement, gas pipeline and oil refining, value added in this sector in 1980 would be a multiple of that in 1976. 152. Given the projected growth rates ini the productive sectors, a declining oil production and government revenues, services are unlikely to grow by the 11.5 percent per year assumed in the Plan. As a result of these differences, our projections therefore imply a decline in GNP of over 3 percent per year compared to the Plan's forecast of an increase of 3 percent per year. If oil production declines to only 115 million barrels by 1980, then GNP would decline by only 2% per year. Beyond 1980, if the concerted efforts of the government at using advanced secondary .recovery methods and the aggressive exploration program prove to be successful, the decline in both oil production and overall growth could be arrested. 153. The mission's projections as compared to the Plan projections are shown in Table 12A. These projections should be interpreted to indicate broad trends and orders of magnitude only. They were prepared on the basis of very simple assumptions and are intended only to highlight the major questions that arise regarding the feasibility of the Plan targets. In many cases, the striking differences in growth rates between the Plan's and the mission's projections are largely due to the difference between the estimated 1976 base used in the Plan and the projected estimates used by the mission for 1976 e.g. value added in construction, investment, consumption and to some extent in the balance of payments. 154. The projected investment levels for manufacturing and agriculture have already been discussed above and in greater detail for individual sectors in Chapters 9-12. In economic and social infrastructure, achievement of projected investment levels will depend partly on the availability of funds and partly on the ability of the various ministries and agencies to prepare and implement projects. As in the case of manufacturing, the start of public projects in other sectors seems to be delayed and the detailed content of the Plan in terms of projects has still to be worked out in many cases. Moreover, the costs of projects may turn out to be higher than assumed. Overall, public investment may be lower than projected in the earlier years and higher than projected in outer years. Hence, although the total public investment over  - 57 - the five years may be comparable to the Plan, the rate of decline may be some- what slower. In the private sector, given the indicative nature of planning, the very early stages of project preparation and the natural inclination of Omani businessmen to concentrate on commerce, private investment may turn out to be lower than projected. However, for the private sector, projections are even more subject to uncertainty than in other cases in Oman. 155. Public consumption may have been conservatively projected. The Plan assumes that military expenditures will decline from OR 275 million in 1976 to about half that level in 1980 in constant 1976 prices as a result of the end of the Dhofar war and the reduced need for new equipment as a result of past purchases (Table 13). Given the high level of military expenditures (33 percent of GDP in 1975), their reduction is highly desirable. The Govern- ment needs to be highly commended for its decision to reduce military expendi- tures; however, such a sharp reduction may be difficult to achieve. Secondly, as the scope of government activities expands, as ongoing projects are com- pleted and operational and maintenance expenditures increase, the need for recurrent expenditures will increase. As a result, current expenditures of the government may rise faster than the 12 percent per year projected. 156. The balance of payments projections of the Plan and the mission pre- sented in Table 12A are not directly comparable. The Plan's projections are in constant 1976 prices, whereas the mission's are in current prices. Moreover, the oil sector is treated as a "resident" in the Plan but consistent with the balance of payments estimates of the Central Bank, the mission treats it as "non-resident", so that the base year export and import figures of the Plan are much higher. However, despite these factors, there is a sharp difference between the current account surpluses for 1980 projected in the Plan and the continuing deficits expected in our projections. 157. The first major reason is the lower oil exports, due to a decline of production of 6 percent per year as compared to the 2 percent per year in the Plan. The second reason is the decline in imports expected in the Plan. As stated earlier, it is partly based on a sharp reduction in the ratio of imports to total investment and consumption. However, the production sectors are not likely to expand as fast as projected and hence the share of imports in total investment and consumption is likely to be higher than the Plan anticipates. Moreover, if the military expenditures do not decline as fast as assumed, public sector imports would be correspondingly higher. Mainly as a result of these factors, the mission projects that the current account of the balance of payments is likely to remain in deficit over the Plan period. 158. The need for external financing will be concommittantly higher. The Plan assumes a sharp decline in loans to only OR 19 million in 1980. As dis- cussed earlier (para. 138), the Plan intentionally does not include grants in its projections because of their uncertain nature and consequently the likely availability of grants represents a contingent source of funds to partly meet the higher need for external resources. Moreover, the low debt service ratio, estimated at about 3 percent for 1976, gives a margin of borrowing in Oman significantly greater than that assumed by the Plan. Con- sequently, although the mission projects a high level of external financial  - 58 - needs and a rising debt service ratio, the burden of debt service remains well below 20 percent up to 1980. If some new oil production comes on stream around 1980, the debt service ratio should peak at around 1980 and decline after that. Manpower and Education 159. While the "Omanisation" targets are not spelt out in the Plan, a background paper prepared by the Technical Secretariat of the Development Council highlights the implicit targets of the Plan. The employment projec- tions for 1980 are shown in Table 1.2. In line with the decline in activity, total non-rural employment is forecast to fall from about 123,000 in 1975 to about 114,000 in 1980', with the main drop taking place in construction and a marginal drop in transportation services. The other sectors are expected to show small increases. Although total employment falls by about 9,000, the employment of Omanis is projected to increase by over 22,000, with a sharp reduction of expatriates from about 71,000 in 1975 to about 39,000 in 1980. The reduction of expatriates is mainly in construction and partly in transport and financial institutions. 160. The main methodological approach followed in these projections is to translate the Development Plan estimates of GDP growth by sector into employ- ment estimates by using constant GDP-employment ratios calculated on the basis of 1975 statistics (with adjustments made in a few sectors if the results were clearly unreasonable). In the circumstances of limited data, it is difficult to question the approach or specific sectoral employment projections. In general, since the mission's GDP estimates are lower than the Plan, a sharper fall in total non-rural employment can be expected compared to these projec- tions. Moreover, in cases like manufacturing, one should expect some gains in labor productivity and hence the size of new employment generation in manufacturing is likely to be smaller than expected. 161. For the "Omanization" targets to be met, of about 22,000 Omanis that enter the labor force between 1976 and 1980, about 14,000 would have to gain employment in the private sector (over 10,000 in the construction industry). The extent to which the replacement of expatriates by Omanis can occur depends on the level of the skills and qualifications generated by the Omani education system, supplemented to some extent by educated Omanis returning from abroad. 162. On the basis of the assumptions used in the background paper of the Technical Secretariat, 1/ a rough estimate was made of the average annual.edu- cation requirements for the projected increase in Omani employment (excluding armed forces). Although the numbers shown in the table below are fairly crude, they do serve to point out the educational implications of the "Omanization" targets. 1/ The assumptions were that (i) the Omani labor force would grow at 12 percent per year; (ii) proportion of Omanis in total labor force would rise from 30 percent in 1976 to 57 percent in 1980; and (iii) existing distribution of Omanis by level of qualification is constant.  - 59 - Average Annual Education Requirements Government Private Total Higher education 103 45 148 Secondary plus technical training 75 423 498 Preparatory plus technical training 70 616 686 Primary plus technical training 260 1,030 1,290 Primary education and lower 670 1,570 2,240 1,178 3,684 4,862 These numbers compare with the following figures for the academic year 1975/76: total number of pupils in upper secondary schools was 200, in lower secondary schools was about 1,100, in primary was 54,000 and there were no facilities for higher education. Vocational and technical training facilities in Oman are extremely limited (Chapter Three). 163. Forecasts of expected increases in the school population are diffi- cult to make, given the extremely rapid expansion in the educational system which has left the system in an ill-organized state requiring a large number of improvements. Nevertheless a team of UNESCO experts made two alternative forecasts for the Ministry of Education. The lower of the two alternatives, which is considered to be the more realistic of the two, projects primary school population rising to about 83,000 in 1980/81 from the 54,000 in 1975/ 76, preparatory would rise to about 27,000 from 1,044 and secondary would rise from 200 to about 700. Even these are likely to be difficult to achieve, be- cause they would generate a need for an extra 3,500 teachers compared to the Ministry's plans for teacher training in Oman for about a total of about 400 over the period 1977/81. Secondly, the Plan allocates only OR 26 million (2.8 percent of the development budget) for investments in education. Ministry of Education estimates show that they would need OR 34 million to meet more modest targets than the UNESCO forecasts. 164. Of more crucial importance will be the requirements of technical and vocational training for about 2,500 Omanis implied by the targets. At present there is only one Vocational Training Center (apart from smaller activities) with a capacity of about 500 students, although some expansion is now underway. Although no higher education facilities exist, the government intends to con- tinue financing students for higher education abroad. There were about 400 students in higher education abroad in 1975/76 and hence meeting the need for 148 annually should not pose a serious problem. 165. Overall, although the return of Omanis studying or staying abroad should help to relieve the shortages of skilled Omani manpower, the replacement of skilled foreign workers may take somewhat longer than anticipated and the reliance on expatriates is likely to continue at a higher level than assumed. 166. The government should continue to stress education. After the rapid expansion in the last five years or so, in addition to further expansion, attention should be given to consolidating and improving the existing facili- ties in an effort to solve the problems discussed in Chapter 3. The Minister  - 60 - for Education has stated the education priorities for his ministry to include (i) a primary school building program to replace existing unsatisfactory buildings; (ii) nine years of basic education for all; and (iii) practically- oriented primary and lower secondary curricula. Other broad educational goals commonly accepted in the Ministry of Education include (a) improved planning, administration and education supervision at national and regional levels; (b) development of modern national curricula; (c) introducing agricultural subjects into the system; (d) development of adequate teaching methods, materials and physical facilities; (e) universal primary education by mid-1980s; (f) produc- tion of adequate numbers of qualified local teachers; and (g) development of secondary education with an emphasis on agricultural and technical education. At present, there are no plans for the development of higher education and reliance is being placed on training abroad for the foreseeable future. These are guidelines for educational development, and as such are reasonable. How- ever they require to be translated into action programs. In view of the critical need for trained manpower, the emphasis on vocational training should be increased and if limited financial resources do not permit this, the spread of basic education should be slowed down to accommodate such an emphasis. 167. The absence of essential and basic population and manpower data impedes effective and detailed planning for national education development. Nevertheless, the education system is at a crucial stage of growth and requires expert planning assistance to ensure its sound development. Assis- tance for this should have a higher priority and will remain a continuing, long-term need. External support to industrial, technical and vocational preparation and training should include assistance for providing a practical orientation to lower secondary level programs, including mobile training units for the Department of Labor, and to secondary technical education and higher level programs. A coordinated development of vocational preparation and training should be a condition for such assistance. The development of Government staff training structures, in particular for special types of middle-level manpower to assist in planning and executing local development projects for the Ministries of Agriculture, Health and Labor and Social Services, should be a priority area for external aid support. A high priority is being placed by the Omani government on developing the agricultural sector, but the Ministry has yet to develop the manpower to plan and execute programs to meet these goals. In basic education, financial and technical assistance will continue to be needed to support the current school building program and to develop the government's school construction capability. In addition, external assistance could be usefully provided for improving curricula, ex- panding teacher preparation, in particular for girls, and preparing teaching materials locally. Prospects for Diversification 168. As argued in the previous section, Oman's economy faces a downward trend in the next few years, unless substantial new oil reserves are dis- covered. Although the oil sector will remain dominant, in view of the expected decline in oil production and revenues, it is imperative for Oman to develop its non-oil sector, while income from oil is still available.  - 61 - 169. The development of Oman as a "service" economy for the neighboring countries, either as a kind of warehousing and intermediate station for neigh- boring countries or as a centre for export-oriented services, entrepot trade or duty free zone, offers limited prospects. The substantial lead that neigh- boring countries already have in these directions, the shortage of skilled labor and partly the geographical location of Oman will not permit any large scale development of Oman along these lines. 170. Consequently, the major thrust of the development strategy, as spelt out in the Plan, has to be towards development of the non-oil, income generating activities. Despite the constraints of natural resources and limited manpower that have been discussed earlier, and despite the fact that some of the Plan targets may not be fully achieved, Oman has opportunities for diversification which can and should be exploited. However, in view of the limited financial and other resources and the high cost of some projects in the past, reducing the unit cost of projects should be a major aim of policy. This is fully appreciated by the Government and some procedures have been adopted to prepare project choice, design and implementation. These procedures need to be strengthened with the aim of reducing the cost of projects through better, more economical design standards in line with future needs, negotiation of more favorable terms with contractors through interna- tional competitive bidding and generally improved bidding procedures. 171. In agriculture, more rapid growth requires a combination of increased yields from already cropped areas and new land development and a major policy issue is the relative emphasis to be placed on the two. Relatively large increases in crop yields appear to be technically feasible. Actual national average yields for major crops are about 50 percent of potential under Omani soil, water and climatic conditions. Improved fertilizer application, plant spacing, time of planting, weeding and pest control are relatively simple, low-cost techniques which would lead to higher yields rather quickly. The economics of these innovations are attractive. At present wheat and fertilizer prices, recommended application rates of ammonium sulphate promise incremental benefit-cost ratios of 4:1 or higher and yield increases of 30-50 percent. Benefits from new land development involve much greater uncertainty. Addi- tional water resources appear to be limited and need further research, and soil suitability in new areas must be confirmed by detailed surveys. Support- ing infrastructure would have to be provided. Nevertheless, there is need to continue a limited program of water resource exploration and development to determine if suitable areas can be identified of a size required to realize the necessary economies of scale. 172. The major effort in increasing the yields on already cultivated lands should be in dates and limes. Despite the incidence of pests and diseases, little research work has been done for these crops. There is an urgent need to concentrate on controlling the decline in the quantity and quality of their production through focussed research and action. In addi- tion, in view of the number of studies already done in agriculture, there is a need to review the overall research program to assess the priorities of the research effort. New land development should be devoted to a large extent to  - 62 - the production of high value fruits and vegetables, which would lead to sub- stantial foreign exchange savings, both in terms of substitution for imports and exports to neighboring countries. Efforts to raise agricultural produc- tion would not only help to partly offset the decline in oil income but also a per capita income of less than $200 per year. It may also help in reducing the rate of migration. The Government's decision to set up two date process- ing plants will help in increasing the value added in exports. 173. The Plan correctly emphasizes the need to expand and improve agricul- tural extension. Backstopping efforts should be strengthened, including the timely provision of inputs to extension centres, demonstration and teaching materials and other supplies. The selection process of expatriate personnel needs to be improved to ensure that they can effectively work with farmers. Moreover, the use of government facilities to distribute fertilizer and tractor services preempts limited staff available for technical advice. The use of the private sector to take over the distribution services should be investigated although the volume may still be too small to interest private merchants. 174. In the livestock sector, progress in raising output depends heavily on the success of efforts to increase feed supplies. These in turn relate to broader issues of agricultural research, extension and the provision of basic inputs. Indigenous alfalfa varieties are well-adapted and have good yield potential. Relatively simple cultural practices such as seed inoculation with nitrogen-fixing bacteria could greatly increase yields. Special development efforts are warranted to improve the productivity of one of Oman's richest livestock' resources, the 30-40,000 Jebeli cattle on Dhofar's Qara range. Recent development of more than 30 watering points on the range and plans to improve animal health services in the area establish the basis for larger livestock numbers but are likely to result in increased pressure on the grass- lands. Control of livestock numbers and measures to increase forage produc- tion are increasingly important priorities for this area. While the sale of young animals for fattening on the plain is a useful outlet, there is need to examine the economics of the fattening program and determine whether it is the soundest approach to utilization of the land and livestock resources on both the mountain range and the Salalah plain (see Chapter 9 for a more detailed discussion of agriculture). 175. Prospects for fisheries development differ markedly from those in agriculture. The fisheries resource is large and can be exploited efficiently with presently available technology under various labor supply conditions. A major strategic consideration in this sector is the future role of tradi- tional fishermen. Modern fishing methods, such as those employed in joint ventures now operating in Oman, will not produce widely distributed benefits to traditional fishermen or generate a significant number of new jobs. With- out proper control, operations of this type could disrupt domestic markets for traditional fishermen and reduce their incomes. With careful planning, the simultaneous development of both systems could contribute to the country's growth and income distribution objectives. The joint venture arrangements in commercial fishing, which focus on export markets and are carried out over restricted fishing areas, seem appropriate in this regard. In traditional  - 63 - fisheries, the objectives should be to assist fishermen, first, by expanding market outlets, then providing the equipment, facilities and supporting ser- vices to supply those markets. 176. In the case of mining and manufacturing, the main possibilities for diversification are in the productive use of the hydrocarbon and limited mineral resources: oil refining, the possible development of downstream products derived from natural gas in addition to using gas as a fuel and the development of some industries for import substitution, largely in simple food and consumer goods. The Government has already decided to build a gas pipe- line and a cement plant is under discussion. 177. In addition to the associated gas, Oman has substantial reserves of non-associated "dry gas", which would last for about 80 years at a delivery rate equal to the capacity of the gas pipeline (without compression, and about 40 years if the gas is compressed to increase the capacity of the pipeline). Because the pipes were bought some time ago and the Government had decided to go ahead with construction, from an economic point of view, they represent sunk costs and the gas should be utilized whenever an economically viable project is available. The Government has already decided to use gas for power generation at the Ghubra power plant and the cement plant when it is con- structed. The use of gas in the power plant is desirable because it would replace expensive, imported oil which is presently being used. Due to limited oil reserves, the appropriate use of the valuable gas reserves is very impor- tant and priority should be given to the use of gas for downstream industries based on natural gas (see Chapter 10). 178. The main projects that have been or are being considered and would use gas as a fuel or are based on natural gas, apart from power generation and cement, are the liquefaction of natural gas (LNG), fertilizer, crude oil refining, copper and a sponge iron project. In most of these cases, it is difficult to be very specific at this stage, because very little detailed work has been done regarding their feasibility and economic justification. The Government seems to have at present dropped the LNG and fertilizer proj- ects from their priority list. In view of the inherent problems of LNG, high investment cost and marketing problems, and the various LNG projects under consideration in other Gulf countries, the Government's decision is probably justified. On the basis of the mission's preliminary findings, it seems that the construction of a "topping plant" for oil refining of about 30,000 barrels per day should be given further consideration although a full scale refinery may not be justified. In the case of iron ore, there are a number of compet- ing iron and steel projects under consideration in the Gulf area. There is an urgent need for cooperation among the Gulf States to avoid duplication of plants like iron and steel and others, which would be mutually beneficial and reduce market risks. It may be worth adding to the list of possible projects for further consideration and study a calcium carbide furnace using local limestone, anthracite and natural gas. 179. An "Industrial Area", which would provide sites and services is under consideration. Various small scale industries, especially for the production of simple food and consumer goods and simple engineering goods may be feasible  - 64 - in Oman. However, the limited domestic market would preclude large scale plants and the appropriate size of the plants would have to be carefully con- sidered. Examples of such projects being considered are tobacco products, vegetable oil, soap, soft drinks, industrial gases, footwear, nails and screws, brick, cinderblock and porcelain. 180. A major constraint in the development of manufacturing activities will be the inadequate quantity and quality of management and skilled labor. Considering the high cost of expatriates, extensive training must be ini- tiated parallel to project preparation and implementation. To avoid over- taxing the project implementation and management capacity, a carefully phased program of investment with concentration on a few high priority projects is needed. Despite all efforts, the reliance on expatriate management and labor is likely to continue for sometime. Other Issues 181. In view of the limited oil revenues, the Government should consider increasing non-oil revenues. The direct and indirect tax efforts have been very limited. It would be prudent to gradually widen the tax base to tap part of the income and wealth in the country. Consideration should be given to tax in accordance with the extent of benefits accruing to different parts of the population in an attempt to improve the distribution of income. Efforts should be made to increase revenues from income taxes through more vigorous enforcement and collection. In terms of increasing the coverage of income taxes, the Government could reactivate land and urban property taxes. Gov- ernment revenues may also be augmented through higher indirect taxes. In particular, there is considerable scope for increases in import duties, especially on non-food consumer goods. The Government is already reviewing duty rates. There is also need for reconsideration of the rates charged on publicly provided services as revenues fall far short of costs, particularly in the case of power rates. The Government should also consider the intro- duction of gasoline taxes. It is important that the Government finances its expenditures in a non-inflationary manner. Hence demand management through use of appropriate fiscal and monetary policies will be important. 182. The banking system should play a more important role in mobilizing domestic savings so as to reduce the economy's reliance on external assis- tance and thereby restrain liquidity growth. There is scope for the Central Bank to become more active in its use of monetary policy instruments such as reserve requirements and discounts, which are of crucial importance for con- taining domestic inflation, even in the context of the open economy adhered to in Oman. Since term financing has not yet developed in Oman, the shortage of medium-term finance for industrial ventures is likely to be felt sharply as private investment activity develops during the Five-Year Plan. A more active policy aimed at further developing financial intermediation in Oman should include measures to increase the variety and attractiveness of the financial assets offered to the private sector, to redirect the flow of savings and improve the credit allocation by influencing the distribution and cost of credit to different sectors of the economy and adopting measures and institutional arrangements to extend preferential treatment to priority  - 65 - sectors. The establishment of the Development Bank of Oman and the Fishermen Fund will help remedy the situation. The development of a "credit risk" system to control and limit credit to large borrowers, is now urgently needed, especially since credit seems to be concentrated among a few merchants and some banks have been drawn into financing 100 percent of Che funds needed for property development. 183. The Central Bank is to be commended for the concerted efforts to organize itself efficiently and its success in collecting data from banks. In 1976, it initiated a comprehensive bank examination scheme and has pro- ceeded to examine a number of banks. Through this scheme, CBO has been able to assess the quality of commercial banking in Oman, and is designing a plan for strengthening and developing banking institutions through improved in- ternal auditing, training, and management competence, and is considering the introduction of a deposit insurance scheme to encourage and protect depositors. However, if the Central Bank is to play a more active role in the development of Oman through the introduction of proper policies, it should fully assume its function as banker to the Government, further strengthen staff and re- search capabilities and increase the scope of its data collection. 184. Despite Government efforts, the distribution of income has been very uneven. Although the Government's policy of cash grants to the really destitute, the minimum wage legislation and food subsidies is in the right direction, it is unlikely to have a significant impact on income distribution. Limitations on financial resources prevents such policies from being applied more widely and minimum wage legislation is difficult to enforce. Disparities in income are likely to continue in the future, particularly as between the modern and traditional sector. As the proportion of Omanis employed in the modern sector rises, income distribution would improve. The allocation of investments in the Plan favors the Interior and the Southern Regions, which should help to redress some of the regional imbalances. Concerted efforts to raise agricultural productivity would be desirable from this point of view. Continued emphasis on existing policies to expand the beneficiaires of invest- ments in health, education and low-cost housing will also help. Improving the tax structure to expand the coverage of direct income taxation would help to redress the income disparities. However, given the low taxation in the Gulf States as a whole and the free mobility of capital and labor, taxation can only be gradually increased and cannot go far out of line from that applied in neighboring states. 185. Another area where the Government should redouble its efforts is to improve the data base. The Statistical Department attached to the Development Council is making a valuable contribution in this area. Apart from the need for a population census, the quality and quantity of data needs to be improved in all areas. Without good data, rational planning and implementation is dif- ficult. In agriculture, for example, there is a need to improve information on production and prices, labor utilization and the ownership of land. The on-going agricultural sample survey and the planned farm management surveys deserve strong support by the Government. There is a need to extend the registration of lands being carried out by the Ministry of Land Affairs and Municipalities from the urban areas to rural areas also. A cadastral survey would be very useful.  - 66 - 186. The balance of payments forecasts of the mission imply a rising debt service burden. However, the debt service ratio remains manageable. The country has in recent years started to rely on commercial borrowing with rela- tively hard terms. While the cushion of accumulated reserves lasted from the early seventies, foreign exchange reserves were drawn down to partly finance the current account deficits since 1971 and commercial borrowing remained limited. However, with reserves equivalent to only one month of imports in September 1976, there will be an increasing need for external borrowing. Oman is creditworthy for borrowing on commercial terms. However, in view of the likelihood of continuing deficits on the current account, Oman will need to carefully husband its foreign exchange resources and attempt to gain as much access as possible to concessional long-term assistance from bilateral and multilateral sources.   l BRD -12915 5? Sr ~~~~~~~~~~wSvr-ra aIk,z H- 66 Pers,o r u/f (haspq tvkho a X nI R A N & bo PAKISTAN QATAR Al j /O bh,ro GCu/f of Om o n Abs Dhob. a Zl' \ '~~~~~~~~~~~~~~~~~~~~- I ' ps hoabrot, -\ e 1 A * ~~~~~~~~~Noa b,o6 S A U D I A R A B I A z ~ ~~~~~~ , -J No A ,i 5AjMadas,, (at + Aad ) 0dsvdae