Oman - Current economic position and prospects

Report No. 934a-OM c 0 Current Economic Position and Prospects of Oman February 10, 1976 Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY 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 Currency Unit - Omani Rial (oR.o) Before August 15th, 1971 o.R. 1 = U.S. $2.40 UoSo$l = OoB. 0.hJ7 1972 0. R. 1 = IT.S. $2.60 U. S.$1 = O.P. 0.385 1973 O.Ro 1 = U.S. $2.89 u.s.$l = o.R. 0.346 Since 1974 O.R. 1 = U.S. $2.895 UoS.$l = OP. 0.345  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Pa&e No. COUNTRY DATA 'AP SUMMIARY AND CONCLUSIONS ......... ..................... i-tv I. INTRODUCTION ........................................ 1 II. RECENT ECONO'iTC TRENDS .............................. 3 III. PUBLIC FINANCE ...................................... 12 IV. BALANCE OF PAYMENTS ................................. 17 V. MONFY AND BANKING ................................... 21 VI. PROSPECTS FOR DEVELOPMENT ........................... 24 iAPENDIX I: STATISTICAL NOTE STATISTICAL AtNNEX This report- is based on the findings of an economic mission which visited Oman in JnTe 1975. The Mission was composed of Messrs. Michel Marto (Chief), Hiwhoa Moon and Boris Blazic-Metzner (general economists). 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.  List of Tables Table 1: GDP by Industrial Origin Table 2: Oil Production Table 3: Production of Major Crops, 1971-1974 Table 4: Use of Resources Table 5: Government Revenue Table 6: Summary of recent Budget Trends Table 7: Summary of alance of Payments, 1971-1974 Table 8: Summary of ''ecent Trends in Monetary Developments  Page 1 of 2 pages COUNTRY DATA - OMAN AREA 1/ POPULATION 21 DENSITY 300,000 knf- 0.75-1.5 million (mid-1974)- 3-5 per km sqZ/ Rate of Growth: 3% (from l966 tol174) .. per km sq of arable land POPULATION CHARACTERISTICS (1970) HEALTH (1973) Crude Birth Rate (per 1,000) 50 Population per physician 4,918 Crude Death Rate (per 1,000) 20 Population per hospital bed 727 Infant Mortality (per 1,000 live births) INCOME DISTRIBUTION (year) DISTRIBUTION OF LAND OWNERSHIP (year) % of national income, highest quintile .. eI owned by top 10% of owners lowest quintile %.. 7 owned by smallest 10% of owners ACCESS TO PIPED WATER (year) ACCESS TO ELECTRICITY (year) % of population - urban *- % of population - urban - rural *- - rural NUTRITION (year) EDUCATION (1973) Calorie intake as % of requirements .- Adult literacy rate % 20.0 Per capita protein intake *- Primary school enrollment % 23.7 GNP PER CAPITA in 1974:1-/ US$1250 GROSS NATIONAL PRODUCT IN 197ii ANNUAL RATE OF GROWTH (7.. constant prices) US $ Mln. % 1960-65 1965-70 1971 GNP at Market Prices 1,395 100.0 Gross Domestic Investment 504 36.1 Gross National Saving 682 48.9 Current Account Balance -55.6 -4.0 Exports of Goods, NFS/ 1,138 81.6 Imports of Goods, NFSZ4 711 51.0 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1974 Value Added Labor Force V. A. Per Worker US $Mln. 7 1000 . US % Agriculture 50 3.0 124 83 4O3 3.7 Oil 1,126 68.5 3 2 375,333 343.2 Services 469 28.5 5 3 23,450 213.8 Unallocated . 18 12 . _ Total/Average 1,64 5 100.0 1O0 100.0 10,967 100.0 GOVERNMENT FINANCE General Government Central Government (US Mln.) % of GDP ( Mln.) % of GDP 1971 1974 1970-74 197 197 196 -7 Current Receipts 878 53.3 46.6 Current Expenditure 597 36.3 32.1 Current Surplus Mr r7-. 7gC75* Capital Expenditures 517 31.4 23.5 External Assistance (net) 83 5.0 2.9 L/ Government estimate (Statistical Yearbook, 1973, Sultanate of Oman). 2/ In the absence of a population census, population estimates for 1974 range from 0.75 million (U.N.) to 1.5 million (most recent Government estimate). Unless otherwise indicated, data in this report refers to the U.N. estimates of population and derived figures for the labor force, GNP per capita, etc. 3/ World Bank Atlas, 1975 (based on 0.75 million population.) 4/ National accounts basis, including oil company share. 5/ Estimates of active population. not available not applicable  Page 2 of 2 pages COUNTRY DATA - OMAN MONEY, CREDIT and PRICES 1965 1969 1970 211 197 1973 1974 (Million tialsoutstanding end period) Money and Quasi Money 35J4 65.5 4.8 L6.6 87.3 Bank Credit to Public Sector 7.2 6.6 68$5 Bank Credit to Private Sector .. 3.7 463 6.5 18.9 65.1 (Percentages or Index Numbers) Money and Quasi Money as % of GDP . .. 33.8 36.4 31.8 27.5 15.4 General Price Index (1963 = 100) Annual percentage changes in: General Price Index Bank credit to Public Sector (1974=100) .. .. . . 16.8 13.6 100.C Bank credit to Private Sector(1974=100) .. .. 5.7 6.6 10.0 29.0 100.0 BALANCE oF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1972-7L) 1972 1973 1974 US$_Mln XO (Millions US $) Exports of Goods, NFS-~ 130.2 176.9 7314.5 cil 403 99.8 Imports of Goods, NFS 260.5 233.9 711.1 Resource Gap (deficit = -) -30.3 T 23. Interest Payments (net) - 0.2 - 1.2 - 3.2 All other comnodities 1 0.2 Workers' Remittances -18.2 -60.6 -82.2 Total 4M 10Wo Other Factor Payments (net) Net Transfers .. .. .. EXTERNAL DEBT, DECEMBER 31. 1974 Balance on Current Account -48.3 -94.4 -55.6 US $ Mn Direct Foreign Investment .. Net MLT Borrowing * Public Debt, incl. guaranteed 173.2 Disbursements . 10.6 195.2 Non-Guaranteed Private Debt Amortization . . 35.9 Total outstanding & Disbursed iT732 Subtotal . 10.6 162.3 Capital Grants (net) -2.0 10.0 81.8 DEBT SERVICE RATIO for 197h2 Other Capital (net) .. .. .. 3 Other items n.e.i 8.6 -8.9 -161.3 Increase in Reserves ) B-o2.7 7.2 Public Debt, incl. guaranteed 6.2 Non-Guaranteed Private Debt Gross Reserves (end year) 164.0 208.0 220.0 Total outstanding & Disbursed .2 Net Reserves (end year) 206.0 147.0 154.0 RATE OF EXCHANGE IBRD/IDA LENDING, _jan. 31. 1976) (Million US$): Average - 1973 _IBRD IDA US $ 1. 00 0.3h60 Rial 1.00 US $2.890 Outstanding & Disbursed 0.01 Undisbursed 8.44 Average- Since 1974 Outstanding incl. Undisbursed 8.45 US $ 1.00 = 0.3456 Rial 1.00 = US $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 January 30, 1976  F _ >4a . D by O ~ ~ . '5 N~~~~~~~~~~~~~~~~~~~ ~- >~~~ ~ ~ ~~~ 0+ Ea,r LU > < < > ;f t f s \;' , Y,1~~~~~  SUMMARY AND CONCLUSIONS i. The objectivcs and pattern of Government have been drastically transformed since July 1970, when Sultan Qahoos Bin Said came to power and launched a drive towards economic development. The Sultan pressed ahead with investments in infrastructure, effected a number of political and social re- forms and removed many of the restrictions formerly imposed on his people. These reforms have attiacted back a number of Omanis who have hitherto lived abroad, some taking senior positions in the Government. Guerrilla activities in the southern Province of Dhofar have been a major preoccupation of the Government and constituted a significant drain on Oman's resources. In November 1974, a major Government reorganization took place as a result of which the power of the Ministers was substantially increased and three coun- cils were established to deal with matters falling within their purview: Development; Finance; and Hydrocarbon, Natural Gas and Petroleum. ii. Prior to the commercial exploitation of oil. Oman's economy was at a subsistence level, based entirely on agriculture, fishing, and some minor handicraft activities. While there is scant statistical information avail- able for the pre-1967 period, the outptut probably merelv kept pace with the growth of the population. Since 1967, with the emergence of oil as a major export. Oman's economy witnessed a period of significant growth and struc- tural change. iii. Real CDP betw(een 1Q67 and 1Q73 is estimated to have increased be- tween 4-6 Percent annually and approximatelv 40 percent From 1973 to 1974. Oil was the leading sector; apart from its direct contribution to CDP, the growth of oil revenues Provided the basis for an exceptionallv rapid growth of public expenditure including development. This, in turr., is reflected in the expansion of construction, public administration and trade sectors. The share of the oil sector has risen from an estimated 37 percent to over 68 per- cent of GDP in 1970 and thereafter; the share of construction, almost negligi- ble prior to 1967, grew to 20 percent in 1970 and subsequently leveled out in the 8-10 percent range. Public administration expenditure has continued to increase in importance. from 1.4 percent in 1967 to 8.2 percent in 1974. The share of agriculture, which has grown very slowly, if at all, fell from 34 percent in 1967 to just over 3 percent in 1974, whiereas services sector has now groxn to about 10 percent. Using the tUN population estimate of 750,000, GNP per capita according to the World Bank Atlas issued in 1975 is estimated at $1250 for 1q74. iv. Annual oil production is expected to reach 128 million barrels in 1975 and 139 million barrels in 1976, compared to 106 million barrels in 1974. Without ad-ditional discoveries, production is expected to decline gradually thereafter. During 1973 and 1974, the Government acquired a 60 percent in- terest in Oman's only oil producing company, Petroleum Development (Oman) Limited (PDo). Althouglh Oman is not a member of the Organization of Petro- leum Exporting Countries (OPEC), it has generally followed OPEC's decisions on prices. The PDO is Dresently engaged in exploration activities mainly in the central part of Oman, while Elf/ERAP (French) is exploring on the Musandam  - ii - Peninsula and offshore in the Straits of Hormuz and Sun Oil offshore south of Masira Island. There are indications thbt the Sun Oil group has located an oil-bearing strata in the Arabian Sea. v. Although oil in commercial quantities was originally discovered in Oman in 1964, oil exports on a commercial scale began in August 1967. Oil receipts have risen from OR 44.4 million in 1970 to OR 291.5 million in 1974, as a result of recent oil price increases and Government's acquisition of shares in PDO. Revenue from oil is the dominant component of GoverTr-ent rev- enues providing over 97 percent of the total. Non-oil revenues are small, contributing less than 3 percent of the total and accruing mainly from mii,or direct and indirect taxes, income from public services (including utilities), as well as investment income on Government assets placed abroad. vi. Since 1970, there was a sharp increase in Government expenditures, which increased by more than seven-fold between 1971 and 1974, with the major increase occurring in 1974. Total Government spending in 1974 rose to OR 385.6 million as compared to OR 92.8 million in 1973. Between 1971 and 1974, current expenditures increased from OR 26.0 million to OR 206.9 million, de- fense expenditures from OR 16.1 million in 1971 to OR 138.0 million in 1974, and development expenditures rose from Or 20.0 million to OR 178.7 million. The latter accounted for over 46 percent of total expenditures in 1974. Be- cause revenues have been inadequate to cover Government outlays, annual budget deficits have increased since 1972. Despite the qluintupling of oil revenues in 1974, the overall budgetary situation worsened, and resulted in a record deficit. causing a deterioration in Oman's financial position. vii. Partly in resoonse to the situation, the Government undertook a major reorganization of institutional framework for economic planning, seeking to hring greater order and coordination into decisions involving financial com- mitments. Not onlv has the Government been active in tightening financing dis- cipline (including a temporarv freeze on new projects tntil 1976), but it has undertaken to define a longer term and broader approach to development. The Development Council has alreadv designed and issued a development strategy whose main guidelines .re: (a) attempting to restore a better balance be- tween income-generatins and infrastructure projects with the aim of diversify- ing the production bast, of the economv; (b) keeping spending within the re- sources of the countrv: and (c) aiming towards a more equitable income dis- tribution bv encouraging investments outside the Capital area. viii. Oman's non-oiL exports remain insignificant. amounting to a little over $1 million a year. Commodity imports have shown sharp increases from about $10 million in 1967 to more than $700 million in 1974. Private and contractors' imports conbined increased from about $9 million in 1967 to almost $400 million in 1974. Imports by the Government rose from about $1 million in 1967 to an e,timated $319 million in 1974. The sharp increase is mainlv attributed to four factors. First, increasing personal incomes (largely of expatriates in Oman) resulting from the surge of public expenditure raised private consumption and in turn, necessitated more imports of consumer goods. Second, the vigorous Government drive to develop the economy -- especially the  - iii - heavy investment in infrastructure -- necessitated large imports of capital and intermediate goods by contractors, to carry out these works. Third, sharp increases in defence imports in view of the continuing warfare in Dhofar. Fourth, the increase in prices of most imported goods and services. ix. There have been significant developments in banking legislation. The Government issued a banking law in November 1974, governing various as- pects of banking operations. On April 1, 1975, the Central Bank of Oman was established. Commercial bank credit has been growing rapidly since 1970. Credit to the private sector which amounted to OR 18.9 million in 1973, jumped to OR 65.1 million in 1974, while credit to the Government witnessed a still larger increase from OR 6.6 million to OR 48.4 million. Although there is no official sectoral breakdown of credit to the private sector, it is estimated that the bulk of credit was channeled to trade (75 percent), followed by construction (17 percent), industry and services (5 percent), and transportation (3 percent). x. Oman's medium-term development prospects depend to a significant extent on the preparation of sound projects and on the volume of financial resources available for development. These resources are governed by the growth of Government revenue from oil, the amount of future foreign assis- tance, especially in the form of grants from neighboring countries, and the ability of the Government to control the level of non-development expenditures. xi. The future growth of Government revenue will broadly depend on the behavior of oil output and prices. The output from existing oil fields is expected to peak in 1976 and decline gradually thereafter. Although the situation is uncertain, there is some optimism that a new oil deposit may be firmlv confirmed in the coming two years and become onerational thereafter, in which case the Government could maintain output from the present fields at the 1Q76 level. There are promising signs for major oil discoverv, but this is far from confirmed. Even if sizable new reserves are established, exploitation in significant commercial quantities is unlikely hefore the early eighties, given long deliverv times for oil exploiting and related equipment. xii. As the scope of Government activities expand, non-development ex- penditures are also like.ly to increase. Civil current exDenditures will rise as ongoing projects are completed, and operational and maintenance costs are incurred. Defense exDendituires are difficult to predict. Although the Gov- ernment has recently announced the end of the guerrilla operations in Dhofar, there are as yet no indications that the level of defense spending will be cut back significantly from the present level. Nevertheless, it needs to be em- phasized that the level of non-developmental spending is a crucial element determining the availability of development resources. Tn view of the many uncertain elements in the picture, it is difficult to make confident forecasts of the financial resources likelv to be available for development.  - iv - xiii. The physical resources of Oman other than oil do not seem to he extensive. The major opportunities would appear to lie in the expansion and improvements of agricultural production involving better exploitation of water, the regeneration of the fishing industrv, development of viable natural gas based industries tied to guaranteed export markets, the exploitation of petroleum by-products, some import-substitution industrial projects (e.g. for construction materials), and the possible exploitation and refining of such minerals as copper. xiv. A full evaluation of the country's development prospects will have to await until the details of the Development Plan under preparation are avail- able. It would appear though that both on the grounds of resource availability and of the relative lack of well worked out productive investments, the growth of production is unlikely to be as fast as in the last three years. A more modest pace of development would also be to the long-term advantage of the economy, as this would allow better prepared projects to be implemented and reduce the need for extensive overseas borrowing, thus removing the strain on the budget and balance of payments. This calls for a high degree of fiscal discipline and a determined effort to improve the efficiency of planning and implementation of projects. Provided that this can in large part be achieved, and assuming that oil output can be kept at current levels, Oman's debt service ratio will remain about 6 to 7 percent of the export earnings in the medium- term, thus making Oman creditworthy for borrowing on conventional terms.  I. INTRODtJCTION 1. The Sultanate of Oman occupies most of the southeastern corner of the Arabian Peninsula covering an area estimated at 300,000 square kilometers.1/ 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 largelv desert of which a part is rugged moun- tainous terrain with deep sunken valleys. 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 catch the summer Monsoon rains, with a number of perennial springs reaching the coastal plain. 2. The objectives and pattern of Government have been drastically trans- formed since July 1970, when Sultan Qaboos Bin Said came to power and launched a drive towards economic development. The Sultan pressed ahead with invest- ments in infrastructure, effected a number of political and social reforms and removed many of the restrictions formerlv imposed on his people. These reforms have attracted back a number of Omanis who have hitherto lived abroad, some taking senior positions ir. the Government. The Sultan, wlho is also the Prime Minister, rules the countrv through the Cabinet which is the highest executive body in Oman. In November 1974, a major Government reorganization took place as a result of which the power of Ministers was substantially expanded and prospects for coordination between them increased, through the establishment of three councils - Development; Finance; and Hydrocarbon, Natural Gas and Petroleum - each headed by the Sultan. 3. Guerrilla activities ir 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 guerrilla action known as the Popular Front for the Liberation of Oman (PFLO). Military operations against this movement constituted a maior and growing drain on the resources of Oman, but the strain has been eased to some extent by the military and financial aid from friendly neighboring countries. The Government recently announced the successful com- pletion of the anti-guerrilla operations. 4. There has been no reliable population census in Oman. Hence little is yet known about its size, characteristics, or the detailed geographical distribution of its population. In the absence of a population census, esti- mates of total population in 1974 range from 750,000 2/ to 1.5 million, which 1/ This is the Government's most recent official estimate. Different sources at different times, have used varied figures; the UN Statistical Yearbook (1974) showed that 212,457 sq kms and the Bank's last economic report at 260,000 sq kms. 2/ In the absence of a census, the Government placed Oman's population for 1966 at about 565,000; assuming an average annual growth rate of 3% over this figure, the UN Statistical Office estimated the 1974 population at 750,000.  is the most recent estimate made by the Government 1/. More reliable figures would be available, once the population census, which is now under considera- tion, is undertaken ancd completed. The Batinah coast and a few oases in the interior are relativelv densely populated. Agriculture provides employment for the majority of the people, with the remainder engaged in fisheries, trades and handicrafts. The UN Economic Commission for West Asia (ECWA), has recently conducted a sample census of the five major cities and its results are awaited. This shouild provide better data on the distribution of the population. 5. Arahle land and water constitute Oman's main knowqn natural resources, besides oil. Total area under cultivation is estimated at about 36,000 ha (only about 0.15% of the total area of the country). Forty Percent of this is on the Batinah coast and the rest ir the interior of Oman and in Dhofar 2/. The Batinah region rel;es upon wells for its water supply, while the interior uses both falaj 3/ and well water. 6. Little is known about mineral resources other than oil and non- associated natural gas. although copper, silver and other minerals have been mined in the past. Until recently, only cursory exploration had been under- taken. In 1973, the Government contracted with two foreign firms to survev the mineral resources. Preliminary results are reported to have indicated the existence of coppe- deposits in commercial quantities, but details are not vet easily available. 1/ It might be noted that unless otherwqise indicated, the population figures in this report an,' figures derived therefrom, e.g. the labor force, per caplta CNP, are h-sed on the 1974 UNT estimate of population. 2/ Ministry of Information and Tourism, Muscat, Oman, 1974. 3/ The falaj is of arcient construction; it taps the water near its source, transports it part of the way underground and then overground to its destination.  - 3 - II. RECENT ECONOMIC TRENDS Outputp Growth and Structure 7. Prior to the commercial exploitation of oil. Oman's economy was at a subsistence level based entirely on agriculture, fishin7, and some minor handicraft activities. While there is scant statistical information avail- able for the pre-1967 period, the otutput probably just kept pace with the growth of the population. Since 1967, with the emergence of oil as a major export, Oman's economy witnessed a period of significant growth and struc- tural change (Table 1 on page 4). 8. Given the absence of basic statistical information, economic growth - particularly in real terms - cannot be accurately determined, except for the oil sector. However, on a rough estimate, real GDP between 1967 and 1973 is estimated to have increased between 4-6 percent annually, and approximately 40 percent from 1973 to 1974. Oil was the leading sector: apart from its direct contribution to GDP, the growth of oil revenues provided the basis for an exceptionally rapid growth of public expenditure, including development. This, in turn, is reflected in the expansion of construction, public adminis- tration and trade sectors. 9. The impact of the oil-boom on the rest of the economy has, however, been quite limited: (a) most of the public sector developmental activity has been confined to the capital areas; (b) a large part of the additional income generated as a result of oil, has accrued to expatriates working or operating in Oman: and (c) much of the demand for goods and services (including labor) from the "growth sectors" has had to be met by imports partly because of the lack of domestic resources of the requisite quality and partly because of severe constraints on the expansion of indigenous output in agriculture. There is some indication that migration of voung Omanis from rural areas to the capital has risen sharply, but little is known about its magnitude. Ex- cept for the remittances of migrant labor, the incomes and living standards of people in the traditional activities have probably experienced little, if any, measurable improvement. 10. Differences in the real growth of various sectors, combined with disparate movements in relative prices (and in particular that of oil) have led to a sharp change in the composition of Oman's GDP valued at current prices: the share of the oil sector has risen from an estimated 37 percent in 1967 to over 68 percent in 1970 and thereafter; the share of construction, almost negligible prior to 1967, grew to 20 percent in that year and leveled out in the 8-10 percent range thereafter. Public administration expenditure has continued to increase in importance, from 1.4 percent in 1967 to 8.2 per- cent in 1974. The share of traditional agriculture which has grown very slowly, if at all, fell from 34 percent in 1967 to just over 3 percent in 1974. Table 1 below summarizes GDP by origin.  Table 1: GDP BY ORIGIN (In current price percentages) 1967 1970 1974 Agriculture 34.0 15.9 3.1 Oil 37.0 68.4 68.4 Construction 20.0 8.1 10.2 Public Administration 1.4 2.2 8.2 Services 7.6 5.4 10.1 Total GDP 100.0 100.0 100.0 Source: Table 2.1 of the Statistical Annex. 11. As new economic activities have grown, Oman's dependence on foreign workers, contractors and consultants has multiplied many times over. The out- flow of factor income payments - mainly in the form of remittances of the oil company's profits and expatriates' earnings - has consequently increased rapid- ly from negligible levels in 1967 to OR 29 million in 1972 and OR 87 million in 1974. GNP growth has, therefore, been significantly slower than GDP. GNP at current prices in 1974 has been estimated by the Bank at almost OR 482 mil- lion. Using the UN population estimate of 750,000 for the same year, and based on the latest World Bank Atlas methodology 1/, GNP per capita in 1974 has be~en estimated at $1250 in 1974, as compared to $840 in 1973. Oil Sector 12. Although oil in commercial quantities was orioinally discovered in 1964, the oil era in Om;in began in August 1967 when regular commercial exports of crude oil were established. The oil sector currpntlv accounts for some two- thirds of total Gl)P, 99 percent of foreign exchange earnings, and 97 percent of government revenues. Until December 1973, Oman's onlv oil producing company, Petroleum Development (Oman) Limited (PDO) was jointly owned by Shell (85 per- cent), Compagnie Francalise des Petroles (10 percent), and Partex (5 percent). Following two agreement-s signed in December 1973 and July 1974, respectively, the Government acquiredl a 60 percent share in the PDO, effective January 1, 1974. A joint management committee has been established consisting of two government and four comnany representatives to operate the company. 13. As a result of recent discoveries, annual oil production is expected to reach 128 million barrels in 1975 and 139 million barrels in 1976, compared to 106 million barrels In 1974. However, without additional discoveries, pro- duction is expected to decline gradually thereafter. The main oil fields are 1/ The methodology uses 1972-74 as the base period for weighing prices and exchange rates.  located in Al-Rub-Al-Khali, about 250 kilometers southwest of Muscat. Oman crude oil is good quality, with a low sulphur and wax content. The PDO is presently engaged in exploration activities mainly in the central inland area, while Elf/ERAP (French) is exploring on the Musandam Peninsula and offshore in the Straits of Hormuz, and Sun Oil offshore south of Masira Island. There are indications that the Sun Oil group has discovered oil-bearing strata in the Arabian Sea, but nothing is known as yet about the extent and quality of these deposits. The data on oil production is summarized in Table 2 b?low. Table 2: OIL PRODIUCTION /1 (In millions of barrels) Production 1967 (August-December) 20.9 1968 87.9 1969 119.7 1970 121.3 1971 107.4 1972 102.8 1973 107.0 1974 105.9 1975 (forecast) 128.0 1976 (forecast) 139.0 1977 (forecast) /2 132.0 1978 (forecast) 118.0 1979 (forecast) 106.0 1980 (forecast) 95.0 /1 Forecasts are based solely on proven reserves. /2 Includes 7 millior barrels from the Lekhwair field, development plans for which have not been finalized. Source: Petroleum Development (Oman) Limited. 14. The posted price of Oman crude, the basis of computing tax and royalty payments, has increased from $3.04/bbl to $12.30/bbl between October 1, 1973 and January 1. 1974. Actual f.o.b. export prices are about 7 to 15 percent below the posted price. From 1973 to 1974, total government receipts from the oil sector roso by approximatelv OR 230 million, i.e. from OR 61.3 to OR 291.5, partly as a result of the revised tax and royalty rates -- cal- culated from higher posted prices -- and partly in the form of profits accruing to the government from its direct participation in the PD)0. Although Oman is not a member of the Orpyanization of Petroleum Exporting Countries (OPEC), it has generally followed OPEC decisions on prices and as a result the terms of most of the agreements concluded between producers and international oil com- panies have been applied in Oman.  -6- Agriculture 15. Agriculture (including fishing) used to be the largest economic sector before the discovery of oil, accounting for over a third of the GDP in 1967 and employing about 80 percent of the total population of Oman. Fruits including dates, limes, mangoes and bananas, and vegetables such as onions as well as alfalfa are grown in the area along the Batinah coast, while the interior produces dates, wheat, onions and limes. Significant quantities of dates and limes are exported, along with some potatoes, onions, beans, peas and lentils. Agricultural exports on the whole, however, are insignificant -- about $1.2 million in 1974. Although reliable data on crops are scarce, estimates of the Ministry of Agriculture indicate that wheat production has increased measurably in recent years, while all other major crops have essentially stagnated. There are indications of significant growth in the livestock sector. Overall, the output of agriculture has prob- ably risen but at a rate considerably lower than in other sectors, thereby resulting in a sharp decline in its share of total GDP. However, it would seem that the bulk of the indigenous population depends, as before, on agri- cultural occupations. Table 3 below summarizes the data on production by major crops. Table 3: PRODUCTION OF MAJOR CROPS, 1971-1974 (metric tons) 1971 1972 1973 1974 /1 Limes 1,500 1,500 1,600 1,660 Mangoes 14,000 14,000 14,000 14,560 Bananas (bunches) 666,000 666,000 670,000 700,000 Onions 6,000 6,000 6,500 6,760 Wheat 2,000 2,500 3,000 3,120 Alfalfa 111,000 115,000 120,000 124,800 Dates 47,000 50,000 50,000 52,000 /1 Estimates. Source: Statistical Yearbook and Ministry of Agriculture. 16. Total area under cultivation in Oman is estimated at about 36,000 ha and has not changed significantly during the past few years. Agriculture in Oman has been, and still is, of a subsistence nature. with the farmer at- tempting to grow most of his basic food requirements and marketing surpluses. There is little farm mechanization with the farm work relying mostly on hand labor. The average size of farm holdings is about 1.6 ha, and it supports an average of 6-9 persons. As many young adults migrate to the urban centers,  -7- rural settlements in some areas are increasingly poptulatpd by children and old people. This is reported to have had adverse effects on agricultural labor productivity. 17. The two main constraints on agricultural development are the scar- city of water and the scattered location of the few arah]e areas. In some areas, uncontrolled pumping of water from wells has reduced the ground water levels and increased soil salinitv may threaten the fertilitv of the arable soil in the future. The scattered location of the few agricultural areas, compounded by the scarcity of transport and storage facilities, makes for high marketing costs and impedes the flow of agricultural produce to poten- tial consumers. Due to the relatively low prioritv accorded to agriculture by the government, this sector continues to suffer from the lack of invest- ment capital, farm credits, and extension services. Some efforts are now beine made to improve the rural infrastructure, within the given constraints of resources. 18. There is very limitedl krowlPdge of water resources in Oman. Four contracts were awarded bv the Government in 1972/73 for livdrological stuidies and preliminary results were given to the Covernment. Hlowever, these con- tracts have since been suspended. The reasons given for suspension were that the contracts were badlv written. their cost was too high and the re- ports presented had to be investigated and appraised. It is, hiowever, of utmost importance that further hydrological studies are carried out as agri- cultural prodtuction will ultimately depend on water availability, which is essentiallv the limiting phvsical factor for agriculture in Oman, and the extent of new land and water resources will not become known with any degree of certainty until proper survevs are carried out. The potential agricultural areas include the Nizwa area, Batinah coast, the Sumail-Sur re-ion (locally known as the Sharqiya), and Dhofar. The Nizwa area currently growing fresh produce and the Batinah coast currently growing dates and lime orchards, have been surveyed. It is understood that the problem in the l,atinah area is one of regulating the indiscriminate Pumping of groundwater -- a process which has already resulted in an increase of salinity at least in somle parts of the coast. In this context, the task is not so much of investment, as one of organization, regulations and extension services. It appears that there may be appreciable reserves of untapped water resources and of cultivable land away from the coast and near the foothills. The Sharqiya area has also been surveyed and preliminary findings suggest that the potential water availabil- ity is larger than is currently being used, and that there is scope for im- proving the efficiency of water use. However, in all these areas, further drilling is considered essential for firming up estimates of water availability and their precise locations. The recent Government decision to suspend drill- ing contracts, delays the process of getting sufficiently reliable data on water resources to provide a basis for properly designed projects. Although little is known of the development potential in Dhofar, indications are that it has some scope for agricultural development, including livestock develop- ment, provided the nomadic tribes can be settled and taught the techniques of agriculture as well as forage cultivation.  - 8 - 19. The Gulf of )man and the Arahian Sea are relatively rich in fish. Fishing of a traditional nature has long been an important occupation in Oman. Although catches have recently declined, there apnears to be considerable po- tential for increasing catches. Exports of fish have declined significantly over the last decade. In order to explore the potential and to promote fish- ing industry, the Government had engaged a foreign consultant to undertake in- vestigations and studies; these studies have confirmed substantial fisherv resources in the seas surrounding Oman. The Government has recently gigrn'd a contract to initiate the development of fisheries infrastructure, inclu'ding cold storage in Muscat. 20. Although crops are dominant, livestock plavs an important role in Oman's agricultural sector. Each farm household raises a small number of goats and sheep to meet its owqn protein requiirements, while donkeys and camels are widely used for farm work and transportation. Meat consumption of the urban population has been met mainly by imports: in 1974, about $3 million worth of meat was imported. Major constraints to further expansion of the livestock sector are the scarcity of feed, which may largely be attributedl to minimal rainfall, and the prevalence of cattle diseases such as caprina, and pleuro pneumonia. Industrv 21. Before 1970. the manufacturirg qector consiste(d mainly of traditional small-scale handicrafts, such as metal i-yorks, jewelry, and pottery. Its outnut is still negligible, contributinr harelv one percent to GDP. The importance of manufacturing is gradual lv 1beinc recognized by the Government which appears to regard the sector as potentially nromisirn for income-generation in the future. In an effort to promote industrv, a Departrient of Industry was established in September 1972 within the Ministry of Deviplonment. The .Ministry of Industry and Cormerce, which replaced the Department in November 1974, has wlde respon- sibilities for matters related to indust'rv. commerce, international trade and tourism. During the past three years, some measures lhave been taken to promote manufacturing, especially medium- and large-scale industries. Feasibility studies have been carried ouit or initiated on potential projects such as a cement pl-ant, a fertilizer plant, a refinerv, and other petro-chemical indus- tries. In addition, le2al statutes are being redrafted to provide better in- centives for foreign irvestments. These measures, however, have been carried out ad hoc rather than within an integratedl overall development plan. 22. Nevertheless, the small size of the domestic market and the shortage of labor, constrain industrial development in Oman. Despite the rapid growth of demandl since 1970, there has been no striking development of domestic in- dustry. The size of the domestic miarket is still too small to support eco- nomical production in most branches of manuifacturing. Tndustrial projects should, therefore, be examined as to their economic viability and availability of domestic and export markets, and not contemplated without adequate feasibil- ity studies to ensure that unit size is economic and guaranteed markets are available. The high cost of labor, reflecting the severe shortage of local labor, especially in the skilled categorv, and the consequent high degree of dependence on imported labor, is another serious constraint. So is the high cost of power and other public utilities that comnetitive industries require.  - 9 - 23. The construction sector has benefitted most from the increased gov- ernment oil revenues. Prior to 1970, Oman had very little socio-economic infrastructure. BeRinning in 1973, the Government embarked on an ambitious development program, concentrating mainly on construction of roads, public housing, Government offices, hospitals, schools, ports and airports. The construction work is almost entirely performed by foreign contractors, and all materials, capital goods, and most of the labor are imnoorted, constituit- ing a heavy drain on Oman's foreign exchange resources. Use of Resources 24. As indicated in Table 4 below, the rapid expansion in Oman's resources has been accompanied by far reaching changes in the pattern of resource use. Table 4: USE OF RESOURCES (In percent of GDP at current prices) 1967 1970 1972 1973 1974 Gross domestic fixed investment 30 13 30 26 31 Government ( 1) ( 11) ( 21) ( 18) ( 25) Private ( 29) ( 2) ( 9) ( 8) ( 6) Consumption 53 32 55 61 43 Government ( 4) ( 13) ( 30) ( 37) ( 34) Private ( 49) (19) (25) (24) ( 9) Resource Surplus 16 55 15 12 26 Exports of goods & NFS ( 37) ( 75) ( 59) ( 60) ( 69) Imports of goods & NFS ( -21) (-20) (-44) (-48) (-43) GDP at market pyices 100 100 100 100 100 Net factor pavment -1 -17 -21 -24 -15 GNP at market Lprice,s 99 83 79 76 85 Gross Domestic Saving 47 68 45 39 57 GDP Index 100 120 135 162 543 Source: Table 2.2 of the Statistical Annex. These changes have occurred in three phases. During the first phase, covering the period between 1967 and 1970, the rising oil revenues helped Government to eliminate its dependence on British fiscal supnort which was an important fac- tor prior to 1967, and left large and growing surpluses for other uses. Fiscal policies duiring this phase were distinctlv conservative in that the growth of public exDonditures for both development and consumption was kept much below the expansion of Government revenues, thus resulting in large and growing budget surnluses.  - 10 - 25. The second phase. from mid-1970 to late 1473, was marked hy a rapid rise irn public expenditures which far exceeded the growth of revenues. As a result, the share of the public sector in consumption as well as capital forma- tion increased sharply and by 1972 became larger than that of the private sector. Total private and public consumption more than douibled (in current prices) and its share in total GDP rose from 32 percent in 1970 to 61 percent in 1973. Government consumption increased rapidly due to increased spending for both defense and civilian putrposes. Defense expenditure accounted for 12 percent of GDP in 1970 and 25 percent in 1973. Gross domestic savings (in current orices) declined between 1970 and 1973 due to the marked increase in overall consi ip- tion. Gross domestic fixed capital formation expanded more thar three-fold in current prices betwcen 1970 and 1973, consistinp mainly of infrastructure improvements by the government; the share of gross domestic fi-<ed investment in GDP rose from 13 percent in 1970 to 26 percent in 1973. 26. W4hile Governrment investment since 1970 has concentrated on develop- ment of infrastructurp, private investment wTas concentrated on oil exploration and production and on housing. PDO has been the major private investor. Since early 1974, the companv's investment in exoloration and drilling and in the construction of oil-related structuires have been stepped un. Furthermore, the increasing number of f(reign workers attracted to Oman by the f'rowing economic opportunities and income has aggravated the shortage of houses and apartments. Investments in housing. therefore, brought high returns within a short period of time, and a large portion of private investment funds has been directed into this sector. 27. The third ph;8se of Oman's recent economic history, which began in January 1974, is marke(! by a sharp increase in oil prices, and by an even bigger surge in public expenditures which in turn stimulated expansion of non-traditional econom-c activities (construction, public administration, trade and services). n current prices, GNP increased almost four-fold, and domestic fixed capital formation nearly quadrupled within a year. Government investments in infrastructure accelerated; estimates indicate that government investment has expanded over four times in current prices, rising from 18 per- cent of GNP in 1973 to 25 percent in 1974. Private investment more than doubled in value, but :ts growth did not keep pace with the overall expansion of GDP. 28. With the con!-inuing rise in oil revenues and in the number of for- eign expatriates, private consumption increased by abotut 21 percent between 1973 and 1974 to almost OR 50 million, and imiiports of constumer goods rose sharply. The share of private consumption in total GDP declined, however, from 24 percent to 9 percent. Government consumption more than tripled, reaching nearly OR 200 million ($570 million) in 1974, i.e. over 34 percent of GDP. The number of public emplovees excluding military andl police personnel, has increased from abotut 9,000 to 12,000 and the government's total wage bill is estimated to have riseni by as mtuch as 70 percent betweer 1973 and. 1974. Total private and public consumptien (in currert nrices) increased by almost 150 percent, although its share in total GDP fell, from 61 prrcent in 1973 to 43 nercent in 1974.  29. Very little information is availahle on Drices. Pwetail Drice serievs for some imported foodstuff commodities consumecd in the CaDital. area have been built tip since 1971: the commodities covered. however, are not representative of a typical consumptioit pattern of the nmani population. In addition, some sketchv data on wages In public administration show an increase of 20 percent in 1974.  - 12 - III . PUBITC FINANC1E 30. Although the Government pursues the model of a market economy, the public sector plays a major role in the economy. Its inunortance as measured by the proportion of bcth revenues and expenditures to GODP (58 and 68 percent respectively in 1974) , is large. In addition to the accounts of the Govern- ment, Oman's budget incornorates the Post Office. the Power Corporatiun, the Water Board and the municipalities which are subsidized bv the Government- Government budgets have only recently been prenared in Oman, tl.e first beirng that of 1971. In earlier years there was little distinction or separation between the finances of the Sultan himself and the Sultanate. and no clear nrocedures for budget preparation. Revenues 31. Oil revenues increased moderately between 1970 and 1973 but rose sharplv from OR 61.3 million in 1973 to OP 291.5 million in 1974 as a con- sequence of increased oil prices and increased profits attributable to the Government's acquisition during the year of a 60 percent share in the oil company. 32. Non-oil revenues are small in absolute and relative terms contri- buting less than 3 percent of the total and accruing mainly from minor direct and indirect taxes, income from public services includin' public utilities as well as investment incomne on Government assets placed abroad. These revenues nonetheless increased from OR 2.2 million in 1971 to OR 11.7 million in 1974 (Table 5.2 of the Statistical Annex). Direct taxes consist exclusively of an income tax on corporate bodies, which yielded about OR 0.3 million in 1971 and about OR 0.5 million in 1974. Indirect taxes consist mainly of custom duties levied on imports, which yielded OR 1.1 million in 1971 and OR 2.3 million in 1974, reflecting the large increase in imports in spite of a reduction in cus- tom duties in August 1974 from about 7 percent to 2 percent. Although rela- tively small, non-oil revenues are expected to grow at a high rate, mainly as a result of the growth in imports and the expansion of the commercial sec- tor. Because oil is depletable, it would be prudent from the longer term viewpoint, to widen the tax base by introducing personal income and property taxes to tap part of the increase in personal income and property values accruing to certain seg-nents of the Omani population. The data on oil and non-oil revenues is sumnarized in Table 5 below.  - 13 - Table 5: GOVERNMENT REVFNUE (In millions of Omani rials) Draft Actual Budget 19i )1972 1973 )4 1975 Oil receipts 47.9 49.6 61.3 291.5 387.1 Oil royalties 12.1 121 1 4.5 Income tax 35.8 37.2 46.1 89.7 Sale of buy-back oil to PDO - - - 178.5 -- Sale of equity crude abroad - - - 22.9 -- Oil installation port dues - 0.3 0.7 0.4 Other revenues 2.2 3.4 7.2 40.3 80.6 Customs 1.1 1.6 1.7 2.3 -- Corporate income tax 0.3 0.5 0.7 0.5 - Interest 0.2 0.1 0.4 4.3 -- Municipal tax - - 0.3 0.5 -- Income from public services and utilities - - - 1.9 -- Other 0.6 1.2 4.0 30.8 -- Of which: grants from other countries (- (-) (3.5) (28.6) (69.6) Total 50.1 53.0 68.5 331.8 467.7 Source: Department of Finance, Oman. Expenditures 33. Government expenditures increased by more than seven-fold between 1971 and 1974, with the major increase occurring durinp 1974. Total Govern- ment spending in 1974 rose to OR 385.6 million as compared to OR 92.8 million in 1973. Between 1971 and 1974 current expendituires ircreased from OR 26.0 million to OR 206.9 million (Table 5.3). Defense expenditures increased from OR 16.1 million in 1971 to OR 138 million in 1974, primarily as a result of new equipment purchases, construction of new installations and increases in wages of armed forces personnel, which include a large number of expatriates. Civil current expenditures rose from OR 9.9 million, i.e. about 20 percent of total revenues in 1971, to OR 63.2 million (19 percent) in 1974. The increase in expenditure was due to public sector wage increases, rising recurrent ex- penditures related with a growing number of completed development projects, and the payment by the Government of OR 7 million as its share of the operating costs of PDO in 1974.  - 14 - 34, Development expenditures which had. been relatively small until 1970 (OR 2.1 million) increased sharplv to OR 20.0 million in 1971. In 1974 they totalled OR 178.7 million, or nearlv 54 percent of total revenuies. They ac- counted for over 46 percent of total public expenditures as compared to 36 percent for defense and 18 percent for civil expenditures in 1974. Develop- ment expenditures reflect the substantial efforts being made bv the Government to improve the quality of life and demonstrate to the people that the Govern- ment is determined to bring immediate benefits by investing in r.,ad-,,uilldng, communications, ports, airports, education, health and housing facilitie- and more recently in hotels, a desalination and power plant, and rural electrifica- tion. The emphasis has been largelv on infrastructure. 35. (man's overall budgetary situatinn has thuis undergone far-reaching changes since 1967. The conservative expenditure policies between 1967 and 1970 in the face of rising reverues is reflected in sizable overall surplus which reached a record level of OR 25 million in 1970. hlereafter, as can be seen from Table 5.1 of the Statistical Annex, the growth of public ex- penditures has outstripped the rise in revenuies and consequently, the budget surplus was sharply reduced in 1971. Since 1972, the budgets have shown an overall deficit which has steadily increased, reaching OR 54 million in 1974 despite the quintupling of oil prices. The Government had sufficient accumulated balances from the past, to finance the deficits in 1972 and 1973 without re- course to large scale foreign credits. But in 1974, when the deficit was more than twice as large as in the previous year, as shown in Table 6, Oman had to borrow externally nearly OR 32 million (net) compared to a total of around OR 11 million in 1973. The borrowina reqtlirements would have '1een larger, hut for the sizable grants from Abu Dhabi (OP. 25.5 million) an! Saudi Arabia (OR 3.1 million). Table_6: sqIr,17ARY OF RECENTT BIIJDGFT TRENDS (Millions of Omani Rials) 1973 1974 1975 Revenues 68.5 331.8 467.7 Oil] receipts 61.3 291.5 387.1 Other reventues 3.7 11.7 11.0 Crants 3.5 28.6 69.6 Exnenditures 92.8 3P5.(, 521.4 Current 63.0 20(.9 329.n Defense (42.9) (138.0) (238.0) Civil (2?.1) ( 63.?) ( 84.0) /1 Oil Comnpanv operations ( -- ) ( 5.7) ( 7.0) novelopment 29.0 179.7 jq?.4 Of which equity payment to the oil companv ( -- ) ( 35.9) - l Defirit (-) -24.3 --53.8 53.7 /I Tnclud nr} nO 19 mi]i-)'n for debt fiinancin-. Sonrce: Departmert of Vinarnc., O(h.,n.  1975 Budget Estimates 36. Although the projected oil revenue for 1975 shows a substantial increase over 1974, reflecting an increase in the volume of oil output, budget estimates for 1975 indicate that expenditures would also rise substan- tially, mainly for nor-development items. Development expenditures, on the other hand, will increase by 8 percent to an estimated OR 192.4 million. This increase is largely due to projects committed in 1974 and carried over into 1975. Many projects will also spill over into 1976 and 1977, though the Government is currently reviewing projects for possible modification or postponement of some of them. The 1975 budget estimates project oil revenue at OR 387.1 million, as compared to OR 291.5 million in 1974. Non-oil reve- nues are put at OR 11 million, a slight decrease from the 1974 level due to the decrease in custom duties. As a result, the 1975 deficit is likely to be as large as in 1974 (OR 53.7 million), although two new grants amounting to $100 million each have been received from Saudi Arabia and Abu Dhabi. To finance part of the 1975 budgetarv deficit, Oman also received a $100 million seven-year interest-free loan from Saudi Arabia. With grants and loans from Saudi Arabia and Abu Dhabi, the liquidity shortage has been alleviated, as funds received were used for immediate cash obligations. During the second half of 1975, the financial situation seems to have improved. Government Develooment Policy 37. Decisions concerning, budgetarv expenditures in Oman constitute the Government's main economic policy instruiment. In 1974. the Government's fi- nancial operations registered a record deficit cauLsing instituitional arrange- ments for fiscal control to come under increasing strain. This was the direct consequence of a svstem which permitted contracts to be made and major expend- iture commitments (some outside the budget) to be undertaken bv various Gov- ernment agencies acting indenendentlv, and with little central coordination or control. 38. Partlv in response to this situation, the Government undertook in November 1974, a major reorganization of the institutional framework for economic planning. Under the reorganization, the Sultan delegated greater authority to the ministers. At the same time, the Government sought to bring greater order and coordination into decisions irvolving financial commitments. In order to remedy the inadequacies of the budget accounting and control system, and regulate and coordinate contract signing by various Government agencies, three councils were established: Development; Finance; and Hydrocarbon, Natural Gas and Petroleum. They are chalred by the Sultan, ani include in their membership six ministerial representatives, representatives from the Department of Finance and the southern proviince of Dhofar and the Secretary General of the Development Council. In February 1975, the "Economic Develop- ment 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, proposing policies and measures to carrn out the objec- tives and preparing development plans. The Council is also responsible for preparing an annual develoDment budget, for setting and approving' priorities for development projects submitted by miristers and for coordinating the activities of ministors insofar as the implementatior plans are concerned.  - 1 6- The Planning Team. envisaged under the Bank's 1974 Technical Assistance Project, which was originallv attached to the Planning ?!inistry, has now be- come part of the Technical Secretariat of the Development Council. The head of the Planning Team, has been named the Secretary General of this Council. The Law also provides in prircTlne for thr establishment of a Development Bank, to finance inv'-stmert i.n apriculture, fisheries ard industry. 39. The Government also realizes that the cost of past and onr.cng pro- jects has been induly high, some hiTher than in other oi1.-producing countries. Contracts were reqotiat-d rather than arrived at through tenrders and bids, and the Government has been handicanneo bv the limited number of trained nego- tiators and development staff. It is esseTntial that imorovements b;e made in the prenaration of projlcts. in particular in cutting do,m the uinit cost bv better design, the negotiation of more favorahle terms and the relationship of projects to the immediate future rpqiuirements. The Government is serious in its e-fforts to improve nepotiatirn procedures by getting better legal exnertise. negotiating with more than one firm and preparing a standard model contract. The Government also drafted in 1974, with assistance from the TMF, a Financial Decree, an Audit Decree. an Annual Buds'et Decree and Financial Pegullations which the Government will formallv issue to strengthen budgetary control and super- vision. The Government intends to retain an international fini of accountants to aid in the introduction of an improved system of fiscal reporting and co- ordination, and has hired a financial management specialist. 40. The Government has not onlv been active in tightening financial discipline (including a temporary freeze on new contracts) , but it has under- taken to define a longer-term and broader approach to development. The De- velopment Council has alreadv designed and issued a development strategy approved by the Sultan, whose main puidelines are: (a) attempting to restore a better balance between income-generatirn and infrastructure projects with the aim of diversifving the production base of the economy: (b) keeping spend- ing within the financial resources of the countrv, by reducing and controlling inessential and non-development expenditures; and (c) aiming towards a more equitable income distribution, by encouraging investments outside the Capital area. IJnfortunatelv, m.anv projects have already been initiated and the avail- able resources in the next year or two mav therefore be pre-empted by ongoing project whose carried-over commitments exceed OR 100 million. In preparing a five-year development plan (1976-1980), the Council. is tllerefore focusing on the pattern of new projects for 1977 and beyond. The planning process sup- ported by the Bank, has only recentlv started in Oman. The acuite shortage of capable people within the ministries and the absence of already well-defined ready projects are the major impediments in the way of speeding progress of planning.  - 17 - IV. BALANCE OF PAYM4ENTS 41. The evolution of Oman's balance of payments 1/, like that of its Government budget, has been mostly a ftnction of oil export and public ex- pendi.ture policy. Aggrecate exDort earnirgs rose by some 60 percent between 1971 and 1973, and again nearly quadrupled in 1974 2/, all of it due to oil. The share acquisition in PDO cost the Government $110 million in foreign ex- change and the operational support to the company cost another $60 million in 1974. Japan has consistently been the biggest importer of Omani oil ac- counting for about 35 percent of total exports in 1974. France and Canada are the next biggest importers, each accounting for about 12 percent. Oman's non-oil exports remain insignificant, amountirg to a little over $1 million a year. Traditional agricultural products such as dried limes, dried dates, fruits and fresh vegetables are the major exports. 42. Comanodity imports have shown sharp increases frorn about $10 millior in 1967 to more than S700 million in 1974. 3/ Private and contractors' im- ports combined increased from about $9 million in 1967 to S95 million in 1972 to almost S400 million in 1974; this equals 86 perrent, 59 percent and 55 percent of total. imniorts in these resnective vears. Tn the meantime, im- ports by the Government rose from about S1 mlllion in 1967 to f65 million in 1972. and to an estimated $319 million in 1974. Breakdoxm of ror-Government Imports in 1974 reveal,; that imports of canital. goodls accounted for approxi- matelv 40 percert of th1e total. consumer goods 35 parcetnt and intermediate ooods 25 percent as coirinared to 30 percent. 45 percent and 25 nercent in 1973. Ulnited Kingdom mas the leadin- exT)orter irn 1974. accounting for 17 percent: it was follo-7ed by Gulf states, Japan, Netherlands and WJest Germany. 43. The share increase is mainlv attributed to four factors. First, increasir.g personal incomes (largely of expatriates in ()man) resulting from the surge of pxiblic expenditure raised private consiimntion and in turn, ne- cessitatecl larger imports of consumer goodls. Second, the vigorous Government drive to develon the economv -- esnecial-lv the heavy investment in infra- structure -- necessitated large imports of capital and intermediate goods by contractors, to carry out these works. Third, sharp increases in imports of traditional and sophisticated weaponry. Fourth, the increase in prices of most imported goods. 1/ Oman d1oes not compile official estimates of its balance of payments. This chapter is based mainly on estimates prepared by IBRD and IMF staff. 2/ In principle, PDO's entire revenues from oil shlould be treated as exports since the company is located within the boundary of Oman and hence treated as. resident. However, due to insufficient information, only the Govern- ment revenues from royalties, taxes and the buy-backs have been accounted for as export earnings from oil. 3/ Statistics on private imports compiled by the Customs Office are subject to a large margin of error since substantial amounts of imports appear unrecorded; data on Government imports contain wider margin of error by natture since public imports have been predominantly defense goods, which are kept confidential.  - 18 - 44. Oman's investment income increased from about $0.5 million in 1971 to over $5 million as the official holding of interest-bearing reserves in- creased. Due to the increased external debt, approximately $2 million was paid out as interest payments during 1974, and larger amounts of interest payments are expected during the next several years. Remittances sent abroad by expatriate labor have been rising substantially from an estimated $18 mil- lion in 1972 to $72 million in 1974. Foreign exchange earnings of foreign consulting firms operating in Oman amounted to approximatelv $10 million in 1974. 45. The overall current account balance has shown deficits since 1972, mainly due to the rapid expansion of imports. The balance has changed from a surplus ($19.5 million) in 1971 to a record deficit ($94.4 million) in 1973. In 1974, however, despite the sharp increase in oil export earnings, there was still a deficit (S55.6 million) in the current account. Table 7 below summarizes the balance of payments for the period 1971-1974. Table 7: SUMMARY OF BALANCE OF PAYMENTS, 1971-1974 (Millions of US dollars) 1971 1972 1973 1974 Current Account Filance 17.1 -48.3 -94.4 -55.6 Oil Sector (net) 114.5 129.2 177.2 733.3 Non-oil (net) -97.4 -177.5 -271.6 -788.9 Non-oil exports 1.0 1.0 1.7 1.2 Imports -96.5 -160.5 -233.9 -711.1 Net factor income 0.5 0.2 1.2 3.2 Transfers -2.4 -18.2 -40.6 -82.2 Capital Movements (net) 15.3 6.4 11.7 62.8 Net official transfers -0.1 -2.0 10.0 81.8 Loans and credits - - - 198.2 Amortization - - - -35.9 Capital, n.e.i. 15.4 8.4 -8.9 -181.3 Changes in Net Reserves = increase) -32.4 42.9 82.7 -7.2 Sources: Central Bank, Department of Finance, and IMF and IBRD staff estimates. Capital Movements and Peserves 46. Oman has contributed significant amounts to other countries and international development institutions. It purchased 2-year World Bank bonds for $2 million in 1972, $1 million in 1973 and a 15-year issue for $35 million in 1974. It has also *-ontributed $13.4 million to the IMF oil facility.  - 19 - Other official transfers from Oman include a $2 million grant to Jordan in 1972 and a $1 million contribution to the Arab Bank for Economic Development in Africa in 1974. Nevertheless, because of its deteriorating budgetary situation, Oman has itself received an even larger amount in loans and grants, including a military assistance grant of $10 million received in 1973 and an- other grant of $82.8 million received in 1974 from Saudi Arabia and Abu Dhabi. At the same time, to make up for budgetary deficits, Oman had to borrow $100 million on short-term, from a local branch of a leading foreign bank in 1974. Some of the grant monies received in 1975 from Saudi Arabia and Abu Dhabi, were used to pay off this short-term borrowing. Official net reserve holdings decreased during 1972 and 1973, but the trend was reversed in 1974 as a result of heavy capital inflows. Net reserve holdings registered only a slight in- crease in spite of a large increase ($111 million) in gross reserves, mainly due to a sharp rise in foreign liabilities held by commercial banks, which financed much of the domestic credit expansion in 1974 with loans from abroad. Net reserves held by Oman at the end of 1974 stood at $153.7 million, equiva- lent to about two and a half months of imports. Prospects for 1975 47. The balance of payments forecast 1/ for 1975 rests broadly on three major factors: the revenue from oil exports, imports including contractors' imports, and possible capital flows. The overall economic activity in 1975 is expected to be more vigorous than any time in the past as the budget es- timates total expenditure to increase significantly. 48. During 1975, Government imports are estimated at $510 million and those of contractors are projected at $310 million. Private sector imports are estimated at $398 million and expatriate remittances may reach $113 mil- lion. This will result In a deficit of $260 million in the current account balance compared to $56 million in 1974. 49. As mentioned earlier, Oman received in mid-1975 a SlO million grant each from Saudi Arabia and Abu Dhabi and an additional interest-free loan of $100 million from Saudi Arabia. Disbursements from loans previously contracted (including those contracted through June 1975) will amount to approximately $155 million in 1975 (Table 4.1 of the Statistical Annex). Summing up, the capital account results in a net capital inflow of $174 million. The overall balance of payments, therefore, shows a deficit of $86 million, and foreign exchange reserves will decline unless additional foreign capital becomes available. External Debt 50. Until 1972, Oman had no official external borrowing. But due to widenin! gaD bhett4een revenues and expenditures, the Covernment has resorted 1/ Forecast by mission: no official estimate for 1975 is available at the time this report is issued.  - 20 - to external borrowing. By the end of 1974, Omar's external public dpbt otut- standira and disbursed amounted to S173 million 1/, mostly medium-term loans and suppliers' credits whose maturities range between 4 to 6 years with in- terest rates varying between 6 and 10 percent. External debt service payments in 1974 amounted to $38 million and represented about 4 percent of exports qf goods and non-factor services. This will rise to $46 million in 1975, but will remain at the same 4 percent of exports of goods and non-factor services. During the first half of 1975, S202 million consisting of 5 meditlm-term loans have been contracted. The total service pavments on external debt contracted to date is estimated to rise to a peak of $90 million by 1977, and would represent 6-7 percent of the expected export earnings in that year. 1/ Excluding a short-term loan for $100 million from a local branch of a leading foreign bank, mentioned in paragraph 46, whiich is regarded as a domestic loan.  - 21 - V. MONEY AND BANKING New Banking Law 51. There have recentlv been significant developments in banking legisla- tion in Oman. The Government issued a banking law in November 1974, governing various aspects of commercial banking operations and providing for the estab- lishment 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, capitalized at OR 2 million, replaced the Oman Currency Board (established in March 1972) and assumed all its assets, liabilities and reserves. The management of the Central Bank was entrusted to a Board of Governors appointed by the Sultan with full authority to perform all acts required for the management and operations of the Central Bank and the super- vision of commercial banking. This is a most salutary development. 52. The requirement under the Currency Board of 100 percent foreign asset backing of currency issued, was not included in the new law. Under the law the Central Bank may advance funds to the Government in respect to tem- porary deficiencies in recurrent revenues provided that the total advances made do not exceed 10 percent of the estimate recurrent revenues of the Govern- ment, and can have a maximum maturity of no longer than 90 days and to pur- chase Government Treasury Bills and Securities with a maximum maturity of ten years. It can also grant advances to the commercial banks and buy, sell, discount and rediscount various kinds of domestic commercial papers. The Central Bank is also responsible for the management of Oman's foreign assets. The Central Bank now has a skeleton staff and is headed by an experienced expatriate Saudi national. However, as the recruitment of skilled personnel proceeds, it will more fully assume its role as Oman's central banker. 53. As a result of the development of the banking system, there are at present 12 commercial banks operating in Oman with 43 branches, 30 of which are concentrated in the Capital area. All but two are subsidiaries of foreign-owned banks. Four other banks hold licenses, two of which are ex- pected to start operations later this year. Under the new banking law, in addition to the initial capital required by a commercial bank (OR 500,OO0) and reserve requirements (5 percent on all kinds of deposits), each bank is required to maintain with the Central Bank an interest-bearing capital de- posit on which current rate of interest is the interbank rate (8.5 percent). The size of the deposit is one tenth of 1 percert 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 Central Bank has also instituted maximum loan- deposit ratios (80 percent) and retains other entry controls via the licensing system. 54. There are no financial institutions other than commercial banks in Oman, although detailed studies are being carried out for the establishment of a Development Bank to extend credit to industry, agriculture and fisheries.  - 22 - Recent Trends in Credit and Mtonev 55. Commercial bank credit has heen growing rapidly since 1970, but expanded very sharnly in 1974. Credit to the private sector which amounted to OR 18.9 million in 1973, jumned to OR 65.1 million in 1974, while credit to the Government witnessed a still larger increase from OR 6.6 million to OR 48.4 million. Although deposits durinr the same period also rose sharply from OR 56.5 million to OR 90.9 million, with the private sector and Government deposits increasing from OR 31.4 and OR 25.1 million to OR 58.4 million and OR 31.6 million resnectively, a large part of the increase in credit exte.ded was made possible by drastically increasing foreign liahilities of the com- mercial banks from OR 3.2 million in 1973 to OR 54.2 million in 1974 (Table 6.3). The major reason for the sharp increase in domestic credit was that commercial banks readily granted credits to the Government to finance part of its increased spending; and to the larger local merchants mainly for financing imports. 56. Although there is no official sectoral breakdowm of credit to the private sector, it is estimated that the bulk of the credit was channeled to trade (75 percent) and construction (17 percent), including property develop- ment. Some credit was extended to transportation (3 percent) and the re- mainder to industry and services sector (5 percent). 57. Monetary movements mainly reflect the financial impact of oil reve- nues. Money supply rose from OR 24.9 million in 1973 to OR 50.5 million in 1974, an increase of about 103 percent, whereas between 1971 and 1973 money supply increased by 76 percent, 41 percent, and 32 percent resnectively (Table 6.1 of the Statistical Annex). The sharp increase in money supply in 1974 resulted primarily from Government spending and the sharp rise in private sector credit. The increase in monev supply occurred in both demand deposits and the currency in the hands of the public, with demand deposits accounting for about 43 percent of the money supply in 1974 compared to only 37 percent in 1973. The importance of demand deposits has been steadily increasing since 1970, reflecting the development in banking habits of the public. The high rate of growth in money supply in relation to domestic output has contributed to the inflationary pressures of demand on the limited productive capacity of the economy, scarce skilled labor, and on limited housing facilities. However, supplv of imported goods improved as Port Qaboos in lNutrah and Sib International Airport were completed, relaxing somewhat the pressure on prices. Foreign Assets 58. Net foreign assets of Oman reached a record level OP 95.3 million in 1971 as a result of oil exports and the low level of imports. Ilowever, as development expenditures increased rapidly, foreign assets declined in the following two years, amounting to OR 50.6 million in 1973 and increased only slightly in 1974 (Table 6.1 of the Statistical Annex). The Central Bank's foreign assets increased steadily from OR 5.2 million in 1970 to OR 46.1 mil- lion in 1974. At the same time, Government in foreign exchange deposits declined from OR 50.9 million in 1970 to OR 29.8 million in 1974. Commercial  - 23 - banks' foreign assets which declined from a peak of OPR 37.0 million in 1971 to OR 16.3 million in 1973, almost doubled in 1974. A large part of this increase was due to foreign currency liability of OR 34.5 million incurred by the largest commercial bank in Oman to finance short-term credit to the Omani Government during late 1974. The aforementioned recent trends in money, credit, and foreign assets are summarized in Table 8 below: Table 8: SITMfARY OF RECENT TRENDS IN MONETARY DFVFLOP1'