Oman remains exceptionally vulnerable to the global drop in oil prices. But Muscat believes that increasing tourism, particularly to Salalah, could be an important factor in helping the country to overcome the many economic challenges it faces.
Can entrepreneurial spirit and tourists help wean Oman off oil?
SALALAH // Mohammed Alghassani sits in his gleaming white office in Salalah’s branch of Riyada, a government agency that helps young Omanis create sustainable small businesses. He recounts a success story that he hopes will be recreated across the country as Oman urgently seeks to diversify its economy away from oil and gas.
“A young woman, Jameela Koraa, started a handicrafts business in her house after learning from her mother how to make frankincense incense and perfume,” says Mr Alghassani, the acting director of Riyada for Dhofar governate.
The agency was established in 2013 along with Al Rafd Fund, a government fund, and the two work together to create and finance business plans by mostly young Omanis.
Mr Alghassani says Riyada was an incubator for Ms Koraa’s branding strategy and also helped her to obtain a reduced price for a storefront in a local mall. Her business has since grown in tandem with the increase in tourists that Salalah has experienced in recent years, and has become profitable enough for her to open in three more locations.
“She goes to schools and gives lectures about her business now,” Mr Alghassani adds, proudly.
Since its launch Riyada has created more than 6,000 jobs, Mr Alghassani says. Most of the small businesses that the agency has helped to set up so far are located around the capital, Muscat. But Oman has plans to make tourism one of five sectors that will help to wean the country off oil – and expanding Riyada’s scope to the rest of the country, and Dhofar in particular, is an important part of those plans.
The long-term goal of Riyada is to encourage young Omanis, who mostly prefer to seek traditionally stable – but now unsustainable – jobs in the public sector, to start their own businesses by reducing some of the financial risks involved in entrepreneurship.
Oman remains exceptionally vulnerable to the global drop in oil prices, both because its reserves are expected to run dry within 20 years and because the crude that remains is difficult and expensive to extract. The sultanate is expected to run the highest budget shortfall in the GCC this year, and its GDP has dipped from 3.5 to 2 per cent growth due to the weakening of non-energy sectors.
After Bahrain, Oman was the most affected GCC country during the Arab Spring. Some Omanis – the majority of whom are younger than 25 – protested against corruption and the lack of tangible benefits from the increasing privatisation of industries. According to a 2014 study on Oman’s economic policy by George Washington University in the United States, unemployment among young people is at 20 per cent, with underemployment afflicting an even greater number. The government responded to the protests with a significant reshuffling of ministers and more state spending on public sector jobs and subsidies.
The major dip in oil prices that began in 2014, however, has made this strategy untenable.
Oman appears to have recognised this and has made economic diversification, as well as more varied sources of investment beyond the government, a priority. The tax rate on Omani businesses has been increased, subsidies slashed and a new VAT tax set to be introduced, and, like its neighbours, Oman is issuing bonds in order to address its budget deficit.
“Usually the government is almost the exclusive source of capital into [Oman’s] economy,” says Cinzia Bianco, a London-based GCC analyst with Gulf State Analytics. “Now they are saying to Omani private businesses quite loudly, you have to invest in your own country’s economy.”
At least as far back as 1990, Sultan Qaboos publicly identified the long-term importance of economic diversification. Moves to reform the economy, as well as attract foreign investment, had little effect and did not contribute significantly to Omanization in the private sector or significant job growth – although the politically important large merchant families did benefit financially. According to analysts, a key question hanging over the latest diversification plans is whether now, in these more urgent times, vested interests will be more willing to acquiesce to reforms that change the status quo and reduce their overwhelming share of the economy.
Tourism currently accounts for 2.2 per cent of Oman’s GDP, according to the country’s national centre for statistical information NCSI – a doubling over the past decade. Oman hopes that by 2025 the proportion will rise to more than 3 per cent of GDP, with more than 70,000 people employed by the sector. In particular officials are looking to Dhofar, a world-class gem of natural beauty that is largely undeveloped for tourists, to play a significant role in that increase. However, the governorate is also the most undeveloped and deprived in Oman and was the site of unrest during 2011.
During the rainy khareef season that runs from late July through September, Salalah and the mountains around it are transformed into a stunning, lush green landscape. The area is an increasingly popular destination for tourists – most of who drive from other GCC countries. During khareef, Salalah’s population doubles and its roads become jammed with cars and jeeps driven from as far as Kuwait and Qatar.
During this year’s khareef, nearly 580,000 mostly GCC tourists have so far visited Salalah, a 22.6 per cent increase on the same period last year. And numbers for Omani tourists are on the rise. The ministry of tourism has also been working on promoting the region to wealthy European tourists to keep visitor numbers up during the rest of the year when a much smaller number of tourists – mostly Italian and German ecotourists – visit. In January the ministry hired the British PR firm Four Communications to boost Oman’s profile in the UK.
While the trend for foreign tourism to Oman has been positive over the past decade, especially in Salalah, NCSI statistics point to a recent slump across the country as a whole that is leading to a slowdown in the pace of new tourism infrastructure projects. In the first six months of 2016, Oman experienced a 19 per cent drop in visitors compared to the same time period last year.
Salalah has seen major infrastructure development as part of the government’s plans to boost tourism. It boasts a new airport, and a number of large hotel resorts are under construction. The old souq and nearby homes have been torn down, and a new flyover recently opened in an attempt to ease traffic congestion during khareef.
But these large projects are being carried out by Omani conglomerates with mostly foreign workers, and usually in partnership with foreign hotels and firms. Unless Omani SMEs (Small and Medium Enterprises) are able to benefit from the expanding tourism trade, plans for the sector to employ substantial numbers of Omanis will remain unfulfilled.
“Since 2014, business is bad for Omani-owned villas (small hotels),” says Musallam Hassan, who operates a beachfront bed and breakfast and desert safari tour company in Salalah.
“There are four new big hotels – more than we need – with empty rooms,” he says, adding that his bed and breakfast is rarely occupied. “The government brought all these hotels [to the country] to create jobs, but Omanis don’t want to work in them.”
Tourists from the Arabian Gulf usually camp in Salalah with their jeeps or rent apartments and private homes, which has led to a burgeoning rental market and a boom in land prices. But the market is not labour intensive and does not employ many people year round.
Restaurants and other businesses in the service industry that would also be key to attracting European tourists have not been able to stay open; Gulf visitors prefer to cook themselves or eat meals at the many roadside stalls that spring up during khareef serving local specialities like barbecued camel and fish. “You see people opening and closing businesses all the time,” Mr Hassan says.
Despite the difficulties, Mr Alghassani says Riyada has helped to establish 490 small businesses in Salalah, many directly or indirectly tied to tourism. He does admit that the agency’s mission faces obstacles, including competition from large Omani conglomerates, but says Riyada has helped secure new guidelines aimed at levelling out the playing field. These include subsidised land for new businesses and loosened Omanization requirements, as well as guarantees that ten per cent of tenders in a project go to SMEs.
Another important component of the government’s economic plans is to ensure an equal distribution of development geographically. “We are trying to make sure education about SMEs is available through roadshows and events, and even mobile Riyada offices in more rural areas,” says Khalid Al Haribi, the deputy CEO for Riyada’s operations in Muscat. “Doing it on our own is challenging, so we do it in partnership with civil society organisations.”
But in the current economic climate, the government funding that supports Riyada and Al Rafd Fund is more difficult to secure. It is a difficult time to support SME creation “because all our plans depend on finance,” Mr Alghassani says. “So we have to slow down.”
He is still very motivated and optimistic that Riyada’s work has created a solid platform for sustainable job growth and for changing the mindset of young Omanis, however.
“We know it will take time but right now we are very happy with what we did in a short period,” he says. “We think we passed the foundation phase.”