Oman: In the World's Spotlight

By John T. Haldane

The Reagan administration's plan to reflag and escort Kuwaiti oil tankers through the Persian Gulf and the May 17 Iraqi attack on the USS Stark have focused world attention on the small Arab states of the Gulf. Oman, one of those states vulnerable to Iranian attack or subversion, is perched on the narrow Straits of Hormuz at the mouth of the 600-mile long Gulf. Roughly the size of Kansas, with a population of 1.5 million, Oman has a very small army and air force, but its location has enhanced its position as an important US ally. Accordingly, US military planners have paid closer attention to Oman since the outbreak of the Iran-Iraq war in 1980, and particularly since February 1984, when the so-called "tanker war" started.

The Pentagon has sought to maintain a low profile with regard to Oman. While a 1980 agreement between Washington and Muscat did not provide the US with any bases in Oman, it did permit preparations by the US for possible future military deployments in the Gulf area. The agreement's exact provisions have been kept secret, but it is known that it constitutes neither a treaty of alliance nor permission for the US to station military units in Oman. Muscat seems to have bought a measure of security from Washington at the lowest possible price, i.e., without any ongoing US military presence and with a low American profile.

In return for the possible future use of Omani military facilities, the US has provided Oman with development assistance and some military grants, and has upgraded one civilian and three military airfields there. Since 1980, US military spending in Oman has totaled at least $300 million. Roughly half of that has gone to the development of a strategic air base on Masira Island, which the US Navy has been using as a staging area for shuttling supplies to ships near the entrance to the Gulf.

While the Omanis welcome the military assistance, they have repeatedly told Washington that they will not support any American military operation in the region unless it has the full backing of the other five members of the Gulf Cooperation Council (GCC)—Saudi Arabia, Kuwait, Qatar, the United Arab Emirates, and Bahrain. Formed in 1981 as a regional security organization, the GCC has been active in efforts to end the Iran-Iraq war.

Although Oman has a long and colorful history, including colonial ventures in both Asia and Africa, its economy was a traditional blend of subsistence agriculture and fishing. The discovery and production of oil in 1967 provided the funds to transform Oman. It was only with the accession of Sultan Qaboos bin Said in 1970, however, that the government of Oman began to use its growing oil income to train and educate its people and develop a modern economy.

In Oman, as in most small developing countries, the key to economic growth and development is government spending. Development outlays estimated at over $7.1 billion during the first and second Five-Year Plans, 1976-85, financed the creation of a broad new infrastructure, particularly in the area around Oman's capital, Muscat. Educational, medical, and social services were provided where none had been available before. In the third Five-Year Plan (1986-1990), currently in effect, Oman will attempt to diversify its economy, and growth is expected to level-off to an average of five percent per year. Emphasis will shift from large infrastructure projects around Muscat to smaller-scale development in the countryside. To ease Oman's heavy dependence on skilled foreign labor, particular emphasis will be placed on training Omanis. Oman has already sent home an estimated 50,000 to 60,000 of its total of 200,000 foreign workers.

Like other oil producers, Oman faced a difficult year in 1986, as it attempted to adjust to lower oil prices and reduced national revenues. Faced with capacity limitations and high marginal output costs, Oman was unable to continue its previous strategy of increasing petroleum output to offset declining prices. Thus, 1986 oil earnings fell to about $2.7 billion, substantially below the 1985 high of $4.4 billion.

Given this loss of foreign currency, the Sultan wisely moved rapidly last year to protect his country's financial position. The Omani rial was devalued by 10.1 percent to dampen import demand and to stretch the local currency purchasing power of its dollar-denominated oil earnings. The government budget was cut by 10 percent and expenditures severely limited. This austerity program, plus the recent firming of world oil prices, should enable Oman to balance its budget by 1989. In the interim, Oman will draw on foreign currency reserves to meet the shortfalls.

Petroleum dominates Oman's economy, accounting for 93 percent of export earnings and 85 percent of government revenues. With reserves of about 4 billion barrels, Oman expects to be a modest oil producer well into the 21st century. Until oil prices begin to increase in the 1990's, as non-Middle East oil fields start to run dry, Oman leaders can be expected to proceed with financial caution.

Qabus ibn Abdulmonim Al-Zawawi, deputy minister for financial and economic affairs, announced recently that a comprehensive survey of the Omani economy is being undertaken to identify non-oil income sources. Special attention will be given to developing light industry and mineral resources, and to reviving and stimulating agriculture and fishing.

The Minister of Commerce and Industry, Colonel Salem bin Abdulla al-Ghazali, also has emphasized that the Sultanate is determined to diversify its resource base and encourage domestic industries to achieve self-sufficiency.

The recent story of Oman's economy—fiscally conservative, free-market, and advised by an international array of experts—stands as a good example of how a developing nation dependent on oil income should manage its economic and fiscal affairs.

The US Department of Commerce sums it up succinctly in a recent economic report on Oman: "Businessmen visiting Oman are generally favorably impressed with the country's financial management and economic planning, with its stable and secure political climate, and with the graciousness and hospitality of the Omani people."

John T. Haldane is a Middle East specialist who has served as a Foreign Service Officer in Baghdad, Cairo, and Beirut, and as an international economist with the Departments of Commerce and Treasury.