Rise of Oman: An Example of Fiscal Prudence

By the end of 2020, Oman’s economy was in poor shape. The downturn began with the oil price crash of 2014–2015, the full impact of which was felt in 2015 when the budget deficit ballooned to OMR 4.6 billion. The COVID-19 pandemic delivered a second major blow. Fast forward to 2024, and Oman is now running a fiscal surplus of approximately OMR 1 billion. So, how did the country manage such a dramatic turnaround?

Initially, the government focused on curbing expenditures to offset declining oil revenues. In the 2015 budget, Oman cut subsidies for fuel and electricity, saving OMR 479 million and OMR 386 million respectively. Defense spending, which had already been declining since 2012, was reduced by approximately OMR 350 million in 2015. Spending across civil ministries was also tightly controlled.

Fig 2: Disciplined spending (figures in OMR m)

Despite these austerity measures, the budget deficit remained high due to persistently low oil prices, which suppressed revenues. Consequently, public debt surged, reaching OMR 17.6 billion by 2019. Although defense spending was slashed significantly between 2018 and 2020, the economic fallout from the COVID-19 pandemic led to further increases in public debt. By 2020, the debt-to-GDP ratio had climbed to 64%.

Fig 3: Rising debt levels

The year 2020 also marked the ascension of His Majesty Sultan Haitham bin Tariq Al Said. Under his leadership, Oman not only continued to optimize government spending but also took bold steps to diversify revenue sources. The introduction of Value Added Tax (VAT) in April 2021 generated OMR 301 million in its first year. While the full impact of VAT was realized in subsequent years, collections from other taxes and fees also improved. Between 2020 and 2023, tax and fee revenues rose by approximately 70%. Meanwhile, the surge in oil prices from 2020 to 2022, driven largely by the Russia-Ukraine conflict, further strengthened Oman’s fiscal position.

Fig 4: Focus on non-oil revenues (figures in OMR m)

Thanks to these reforms, Oman recorded a fiscal surplus of OMR 1.1 billion in 2022, despite increasing fuel subsidies by around OMR 700 million due to soaring global oil prices. The country has maintained this surplus over the past two years. Notably, Oman’s oil export volumes have increased over the past five years, in contrast to declines in major GCC producers like Saudi Arabia and Kuwait, which implemented output cuts under the OPEC+ agreement. Oman’s budget breakeven oil price has dropped from around USD 100 per barrel in 2014 to USD 55 in 2024.

Fig 5: Balancing the budget (figures in OMR m)

Another noteworthy aspect of Oman’s fiscal discipline is the stability of public sector salaries and allowances, which have remained broadly flat over the past decade. With minimal growth in public sector employment and stable average salaries, the government has been able to reduce public debt to OMR 15.3 billion by 2024, equivalent to a debt-to-GDP ratio of 36.5%, down from 64% in 2020.

Fig 6: Lowering debt

The 2025 budget projects a deficit of OMR 620 million, primarily due to conservative oil price assumptions. However, given current price trends and ongoing regional tensions, it is likely that Oman will post another surplus, which could be used to further reduce debt. In recognition of its improved fiscal health, Oman’s sovereign credit rating was upgraded to investment grade (BBB-) in September 2024. This upgrade is expected to lower debt servicing costs. Oman also plans to issue OMR 750 million in new bonds and sukuk in 2025.

The fiscal consolidation achieved over the past five years provides a strong foundation for Oman to accelerate its ambitious development agenda, which spans sectors such as transportation, energy, housing, hospitality, and construction (Fig. 7). While the government hasn’t been aggressively spending on development activities directly in the past 10 years, they have the capacity to speed up spending in the next five years. This will be supported by additional revenue sources such as the domestic minimum top up tax (applicable from 2025) and personal income tax (to be effective from 2028). We believe that accelerated development spending will translate into loan growth for local banks such as Bank Muscat and Bank Sohar.

Fig 7: Project pipeline

Despite delivering an annualized total return of 10% over the past five years, Oman’s equity market has returned only 15% over the past decade. The upcoming wave of large-scale projects is expected to drive corporate earnings growth. With the market trading at attractive price-to-earnings (P/E) multiples—estimated at 9.5x for 2025—this growth could serve as a catalyst for a market re-rating. Additionally, initiatives like the Tanmia Liquidity Fund, launched in May 2024, are expected to enhance market liquidity and investor participation.