III. ECONOMIC TRENDS AND OUTLOOK Although Oman is continuing its diversification efforts the economy continues to move in lockstep with the price of oil. The government has run budget deficits since the early 1980's. However, recent deficits have been of such magnitude that the government is being forced to consider serious cuts in spending. The 1994 budget was based on an average oil price of USD 15 per barrel. For the first half of the year, the price was in the USD 12-13 range; only in May did it surpass the USD 15 level. The government has financed its deficits by the issuance of development bonds and by the drawing down of reserves. In addition, there have been some cuts in government spending, including delays in capital projects, reductions in employee benefits and the release of western and other expatriates employed by the government. The preliminary figures for the Gross Domestic Product (GDP) for 1993 indicate that the economy grew at a rate of only 1.7 percent. This is compared to a 9.1 percent surge in 1992. The 1993 figure, far below the estimated 3.8 percent growth in population, is due to the fall in oil prices over the year and the start of cuts in government spending. Not surprisingly, the crude oil sector, the economy's largest sector, was among the hardest hit, with its contribution to GDP falling by 8.9 percent. The construction sector contracted by 5.5 percent and the economy's second largest sector, government services, remained stagnant. Government spending continues to be the driving force in the Omani economy; it is directly linked to the oil revenues. The government was able to prevent government spending from falling in 1993 only by drawing down reserves and issuing government development bonds. If average oil prices remain below the level expected, the government will not be able to continue this policy and more significant spending cuts will be required, resulting in a depressing effect on Oman's economy. Turning to the balance of trade, the value of Oman's major export, crude oil, fell by 8.6 percent in 1993. Re-exports grew by 26.4 percent and non-oil exports by 27.7 percent. However, the latter two sectors combined account for only 27 percent of the value of oil exports. Due to the fall in the value of oil exports, the value of Oman's total exports fell slightly from the level of 1992, to Rial Omani (R.O.) 2.0 billion (USD 5.3 billion) for 1993. Imports, however, continued to flow in at a level 8.5 percent higher than in 1992. As a result, Oman's trade surplus fell by 30 percent to R.O. 455 million (USD 1.2 billion). Except for the trade data, no other details are available on Oman's balance of payments for 1993. In 1992, Oman recorded an overall balance of payments surplus of R.O. 8 million (USD 21 million) in calendar year 1992, sharply down from the 1990 and 1991 levels. The current account balance was again negative for the second straight year, at R.O. 132 million (USD 343 million). The capital account balance was barely positive at only R.O. 35 million (USD 91 million), sharply down from the 1991 figure. There are a number of barriers affecting trade and investment in Oman. The fundamental barrier is the country's small population and resulting small domestic market. Exacerbating this problem is the lack of a modern, high value consumer market, particularly beyond the capital area. In addition, other regional producers typically offer higher subsidies for industry than Oman, creating similar industries and making competition difficult. There are a number of specific constraints on trading and investing in Oman. First, Oman still publicly adheres to the primary Arab boycott. In addition, any foreign company operating in Oman is required to work through an Omani agent, sponsor or distributor. An importer bringing in goods covered by an agency agreement must pay that agent a 5 percent commission if the goods are brought into Oman over land. This requirement is waived if goods are brought into Oman through the ports or airports. In addition, most joint ventures must have at least 51 percent Omani ownership. Exceptions are granted, but never for more than 65 percent ownership. Another constraint is Oman's five percent tariff. In addition, although visas are easier to obtain than before, they still cannot be obtained upon arrival without making prior arrangements, including sending original photos. The government also pressures firms to increase the number of Omanis hired in order to support the government's "Omanization" policies, limiting the personnel choices of businesses. In terms of taxation, Omani-owned firms have recently begun paying taxes on profits, but this is still at a substantially lower rate than that being paid by foreign firms all along. In the area of intellectual property rights, neither copyright nor patent laws are in force, although drafts of both are currently under review. Other constraints involve the Tender Board, the government agency that evaluates major civil government contracts. Under the Board's guidelines, an Omani bid which is ten percent higher than the bid of a foreign company is judged to be equivalent in terms of price. In addition, tenders are only valid for a short period of time, usually for four weeks, making it harder for foreign firms to bid successfully. Oman relies heavily on expatriate labor, primarily from India, Pakistan and Sri Lanka, to perform menial and physically taxing tasks. The government sets out in the Omani labor laws basic practices to safeguard those workers. The workweek is five days in the public sector and generally five and one-half days in the private sector. The replacement of expatriate labor by Omanis is a high priority for the government. Foreign nationals may not be employed as technical assistants, guards, light vehicle drivers, agricultural workers, forklift or mixer operators or public relations officers unless the employer can show that there are no Omanis available for these positions. Companies are able to hire expatriates for highly technical jobs. However, in the long run, there will be growing pressure to train Omanis to fill those positions as well. U.S. firms interested in the Omani market face a variety of competitors. For much of its modern history, Oman has had very close ties with Britain. Although these ties are still strong, they are gradually weakening. U.S. exporters should find the civilian sector of the Omani market open and competitive. However, British companies still predominate in military sales to Oman. This is a legacy of close ties that many senior Omani officials have to the U.K. and of the presence of retired and active British military officials in the Ministry of Defense who are, however, gradually being replaced by Omanis. The other main foreign competitors are Japan (oil and gas, electronic goods and automobiles), France (oil and gas and consumer goods), Holland (oil and gas) and the United Arab Emirates (the re-export market). Twenty years of oil revenues have enabled Oman to build a modern infrastructure. The country enjoys modern roadways to all major urban areas and population centers. Communications, utilities and other services are also well-developed and widely available: the telephone system is quick and reliable. Oman's ports are modern and able to handle containerized shipping, although berths are sometimes in high demand. Oman manages its development through five year plans. Most of the major projects in the current plan (1991-1995) are either complete or currently underway. The government is in the process of drafting the next plan (1996-2000), but details are not yet available. The next plan will likely continue the emphasis of the current one in developing the infrastructure of Oman's interior. No new major infrastructure projects will be begun before the new five year plan goes into effect.