Trade Relations between Oman and the UK: Building on Firm Foundations

Oman has a long and rich history of cooperation with the United Kingdom (UK). It was never a colony but its geographical position attracted interest and strategic support from the UK. The close ties between the two countries are reflected in the strong bond between the respective royal families, exemplified by both families sending their children to Sandhurst.  In July 2022, the Crown Prince of Oman, Theyazin Haitham Tariq Al-Said, graduated from The Royal Military Academy at Sandhurst. The British and Omani armed forces continue to strengthen defence cooperation and collaborate on several initiatives, such as the Exercise Khanjar Oman, which involves the deployment of 650 British soldiers, and significantly, the establishment of the Joint Omani-British Training Area in Duqm in 2019.

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While Oman is a relatively large country with a land mass of 309,500 sq km — roughly the size of Italy — it has a small population of just 4.6 million.[i] This figure includes many immigrants of whom a large percentage grew up on the Indian subcontinent. Because of its modest population numbers, Oman is somewhat overshadowed by its neighbour, the Kingdom of Saudi Arabia. However, it is an important member of the Gulf Cooperation Council (GCC), not least on account of its highly significant geopolitical location. For centuries, Oman has played an important role in the trade routes across the Indian Ocean and with a particularly strong historical role in Zanzibar.

 

Oman’s Economy: An Overview

 

Over the last decade, Oman has faced an escalating fiscal challenge as it seeks to attract foreign investment, create skilled jobs for its young population, and reduce government debt which surged from 5% to 80% between 2014 and 2020.[ii] This economic vulnerability can be accounted for by Oman’s reliance on its hydrocarbon resources, which generate up to 85% of government revenue, depending on fluctuations in international oil and gas prices. Fortunately, the International Monetary Fund’s (IMF) latest country assessment report, — published in November 2022 — noted that, ‘High oil prices and fiscal consolidation under the authorities’ Medium-Term Fiscal Plan (MTFP), have improved fiscal and external balances considerably. The overall central government balance improved by 12.8 percentage points of GDP to a deficit of 3.2 percent in 2021, largely due to higher hydrocarbon revenue, expenditure restraint, and the introduction of VAT.’[iii]

 

Meanwhile, the country is using enhanced oil recovery techniques to boost production, while simultaneously pursuing a development plan focused on economic diversification, boosting manufacturing and new digital technologies along with the privatisation of a range of state owned enterprises (SOEs). In this context, there is a special focus on improving port and logistic facilities. Other strands to this diversification strategy — known as Vision 2040 — include tourism, mining, manufacturing, and aquaculture. The goal is sustainable growth based on structural reforms.
 

Oman’s currency — the Omani rial — has a fixed exchange rate against the US dollar (1 rial is approximately $2.6 USD) and, when necessary, the country has issued debt to support this peg. In the view of the IMF, the fixed exchange rate peg remains appropriate as it ‘has provided a credible monetary anchor, helping to deliver low and stable inflation.’[iv]

Oman’s GDP totals $134.2 billion while its GDP per capita is relatively high at $30,178. The unemployment rate is 5% but there is a persistent problem surrounding youth unemployment. As noted earlier, the country is heavily reliant on immigrant labour and migrants make up nearly half the total population (approximately 46%). A relatively high percentage of the population is below 24 years of age with the median age estimated to be 26.2 (see population pyramid below). Official statistics put the number of citizens aged 14 or younger at 30.15%;  17.35% between 15 to 24; and 44.81 % between the ages of 25 and 54.[v]

 

Figure 1: Oman’s Population Pyramid

 

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Source: US Census Bureau, International Database.

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The population is concentrated around the capital, Muscat. In recent years, the government promoted a policy of creating more jobs for Omani citizens, coupled with higher social welfare benefits. In 2021, the government increased subsidies for food commodities, fuel, electricity, and water. This has placed additional strains on the government’s public expenditure programme. ‘Omanisation’ quotas that mandate the hiring of Omani nationals, have, in turn, triggered problems since these employees are legally difficult to dismiss[vi]. Hence, employers are cautious about hiring. Currently, public debt is equivalent to 81.1% of the country’s GDP.

 

Concerning taxation, Oman levies no individual income tax, but the country has recently introduced a value added tax to generate government revenue. The top rate of corporate tax is 15%. The overall tax burden equals 2.6% of total domestic income.[vii]

 

The 2022 Index on Economic Freedom published by the Heritage Foundation in Washington DC, ranks Oman eighth among 14 countries in the Middle East and North Africa (MENA) region. It stresses that more could be done to enhance the country’s legal code, so that it provides a more effective framework for ‘the prevention, exposure, and impartial prosecution of corruption.’[viii]

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Trade Statistics

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The tables below rank the top twelve categories of goods exported by the UK to Oman, and the top dozen categories imported by the UK from Oman in 2021. From this analysis, it can be seen that British exports to Oman outstripped imports. UK exports of goods and services to Oman in the four quarters to 1 July 2022 (the latest figures available) amounted to nearly $1.07 billion, an increase of 16.8% or $155 million compared with the corresponding period to 1 July 2021. Total trade between the two countries was $13.2 billion in the four quarters to 1 July 2022, a 9.2% increase compared to the previous year.
 

Oman was the UK’s 81st largest trading partner in the year to 1 July 2022. It accounted for a relatively modest 0.1% of total UK trade. The UK earns more from services than goods in respect of what it sells to Oman. In the year to 1 July 2022, services totalled $574 million, equivalent to 53.5 % of total exports, whereas goods sold amounted to $499 million (46.5%). Encouragingly, these export totals were considerably higher than the previous year. Indeed, exports of services climbed by 21 % ($99 million), while exports of goods rose by 12.4% ($55  million).

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Figure 2: UK Export of Goods to Oman in 2021

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Source: tradingeconomics.com

 

Examining the top five categories of goods the UK exported to Oman, nearly a quarter  (23.6%) in the 12 months to 1 July 2022 were categorised as mechanical power generators. Electric and electronic equipment came second with a total sum of $55.5 million while aircraft, including military aircraft, followed in third position with a similar figure. Motor vehicles, mainly cars, ranked fourth. Oman has proved a good market for luxury UK brands. Again, reflecting the importance of the UK as a supplier to the military, arms and ammunition ranked fifth in 2021 with total sales of just over $45 million. Curiously, works of art, collectors' pieces and antiques, featured prominently in the export rankings: this category was ranked in eighth place with a total value of over $14 million.

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Foreign companies interested in importing products into Oman are required to register with the Ministry of Commerce and Industry via the online “Bayan” system. Sensitive products, including alcohol, firearms, explosives, medicinal narcotics, livestock and certain retail media items, require a special licence. In practice, licensing can prove a protracted business with the associated bureaucracy adding significant time delays to schedules. This is an area ripe for administrative reform.

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Figure 3: UK Imports of Goods from Oman in 2021

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Source: tradingeconomics.com

 

Turning to UK imports from Oman in 2021, a diversified group of goods was traded. Top ranking went to optical photo, technical and medical apparatus. Aircraft came second but these planes may have been re-exported from other countries, having been acquired by the national flag carrier, Oman Air, which has been downsizing its fleet as a result of lower demand during the COVID-19 pandemic. Oman Air’s Chairman, Mohammed Al-Barwani, announced the reduction of fleet from the current 50 to 36 aircraft.[ix]
 

Machinery, nuclear reactors and boilers ranked third with a total value of nearly $18 million with vehicles imported from Oman valued similarly. The UK Department for International Trade note that these vehicles were mainly vans and trucks as opposed to cars. Plastics, base metal articles and electrical equipment were also significant British imports.

 

The latest statistics from the UK Department for International Trade record total UK imports from Oman amounting to $225  million for the year to 1 July 2022, which was 16.8% lower than the corresponding period to 1 July 2021. The total of $225 million was split 68.6% in respect of goods imported from Oman ($155 million), a decrease of 20.4% on the year previously; and 31.4% in respect of services ($71 million), a decrease of 7.8%.

Future Opportunities

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Oman and the UK have a long history of mutual cooperation and UK companies account for nearly 50% of all total foreign direct investment in the country in recent years. In 2021, total foreign direct investment amounted to $4.1 billion. Following the visit by the Sultan of Oman, Haitham bin Tarik Al-Said, to London in December 2021, the two countries signed a Sovereign Investment Partnership, which will enable even closer economic ties and increase high value investment in such sectors as clean energy and technology.[x]

 

Observers are confident that a post-Brexit Free Trade Agreement (FTA) between the United Kingdom and the GCC, of which Oman is a member, is likely to significantly boost trade as well as speed up the Sultanate’s diversification process and create more high skilled jobs for the country’s youth.

 

Bill Murray, Britain’s Ambassador to the Sultanate of Oman, remarked in June 2022 that the UK is seeking greater scope for the FTA, building on the strong trade and cultural ties the two countries enjoy. According to Ambassador Murray: ‘The FTA to be entered into by both Britain and Oman is going to be a milestone, as Oman along with other GCC countries will be working towards what they want to achieve through this. So there’s is an opportunity for further growing it with the support of the private suppliers of British goods. We will be identifying the goods and services that these countries will benefit out of the Agreement.’[xi] Shipping, green energy, logistics, fin-tech and the retail sectors are high on the target list for greater trade cooperation. 

 The IMF’s country assessment report published in November 2022 highlighted the fact that, ‘Oman has been active in liberalising its trade regime, an area of policy especially important in its plan to diversify its economic output.’ Oman currently has four preferential trade agreements in force. The trade-weighted average tariff rate is 5.8%, and 19 non-tariff measures are also applied. Clearly, if these tariffs can be reduced through a new FTA, trade will prosper.

 

Regulatory Reforms

 

Oman is currently working on updating its commercial law, and its laws relating to foreign capital and public private partnerships, with the aim of improving the country’s business climate and appeal to foreign investors. The country is particularly keen to open up more sectors to private capital and competition. This involves the privatisation of a number of SOEs.

 

Oman’s fresh commitment to reform is illustrated by the recent Foreign Capital Investment Law, passed in January 2020. This legislation removed minimum capital requirements and increased the number of sectors in which 100% foreign ownership is allowed. Privileges which previously were available to US nationals as part of the US-Oman Free Trade Agreement were extended to all foreign investors.

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Conclusion

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Oman is clearly seeking to reform and modernise its economy under the new Sultan Haitham, who inherited his position from his late cousin in January 2020. Consistent implementation of structural reforms outlined under Vision 2040 is paramount to secure more inclusive, diversified, and sustainable growth. The move to privatise many SOEs should enhance productivity and deliver better standards of service and keener prices. But before Oman’s economy can embrace digitalisation more will need to be done to educate and train its young people. Yet, as Jeremy Jones and Nicholas Ridout point out in A History of Modern Oman, ‘What Oman faces, in common with other Gulf Arab States, is a serious mismatch between the education system and the skills needed to support economic development through diversification.’[xii] That said, a similar criticism could be applied to Britain’s educational system.
 

A pertinent barometer of progress lies in the ambitious plans for the port of Duqm and its associated ‘Special Economic Zone’. Duqm is a 50:50 joint venture between the Oman government and the port of Antwerp (Consortium Antwerp Port). Together with its new airport, opened in 2014, there is considerable scope for promoting trade through this major new infrastructure facility. Its geographical location, outside the Gulf and the Strait of Hormuz, has triggered suggestions that, in time, it might rival Dubai for commercial traffic. Already, it is earning a reputation as a hub of economic activity due to its favoured location and a number of energy projects including a refinery, a crude oil storage facility, and a green hydrogen project. In this specific trade context, Duqm embodies Oman’s bright future.

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4 January 2023

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References

 

[i] IMF, ‘Oman: 2022 Article IV Consultation-Press Release; and Staff Report,’ Country Report No. 2022/343, 15 November 2022, https://www.imf.org/en/Publications/CR/Issues/2022/11/14/Oman-2022-Article-IV-Consultation-Press-Release-and-Staff-Report-525674.

[ii] Davide Barbuscia, Aziz El Yaakoubi, Lisa Barrington, ‘Analysis: Reform momentum of Oman's new ruler faces headwind of COVID-19 reality’, Reuters, 14 October 2020,  https://www.reuters.com/article/us-oman-economy-analysis-idUSKBN26Z25X; Heritage Foundation, ‘2022 Index on Economic Freedom,’ https://www.heritage.org/index/country/oman.

[iii] IMF, ‘Oman: 2022 Article IV Consultation-Press Release; and Staff Report.’

[iv] IMF, ‘IMF Staff Concludes 2022 Article IV Mission to Oman,’ 5 October 2022, https://www.imf.org/en/News/Articles/2022/10/05/pr22337-oman-imf-staff-concludes-2022-article-iv-mission.

[v] CIA World Factbook, ‘ Oman,’  updated 2 December 2022.

[vi] Heritage Foundation, ‘2022 Index on Economic Freedom,’ https://www.heritage.org/index/country/oman

[vii] Ibid.

[viii] Ibid.

[ix] Arabian Business, ‘Oman Air abandons fleet expansion plan as virus hits flights demand,’ 12 February 2021, https://www.arabianbusiness.com/industries/transport/458663-oman-air-abandons-fleet-expansion-plan-as-virus-hits-flights-demand.

[x] Reuters, ‘UK, Oman agree to strengthen economic ties, boost investment,’ 12 January 2022, https://www.reuters.com/business/uk-oman-agree-strengthen-economic-ties-boost-investment-2022-01-12/.

[xi] Kabeer Yousuf, ‘Oman-UK FTA likely soon,’ 8 June 2022, https://www.bilaterals.org/?oman-uk-fta-likely-soon.

[xii] Jones, Jeremy, and Nicholas Ridout. A History of Modern Oman. Cambridge: Cambridge University Press, 2015, p. 263.