Business Interview: ‘Year 2018 looks promising for Oman’s economy’

Muscat - 

In an exclusive interview with Muscat Daily, Ahmed Amor al Esry, managing partner at EY Oman, talked in details about ongoing economic diversification in the sultanate and changes in the region’s tax environment. 

He believes the successful and effective implementation of the key initiatives of the National Program for Enhancing Economic Diversification (Tanfeedh) is critical for achieving the economic diversification gaols.

Crude oil prices witnessed an improvement in the beginning of this year. How do you see Oman’s economic recovery in 2018?

The situation looks promising, thanks to a rebound in crude oil prices. For the first four months (by forward contracts) of this year, the average price realisation for Oman crude stood at close to US$63 per barrel. This is quite encouraging compared to US$50 assumed in the 2018 budget.

The expectation is that the oil price of above US$60 will be sustained in 2018 globally. Both the International Monetary Fund and the World Bank project that the average crude oil price for 2018 will be in the range of US$60s. This should help reduce Oman’s projected budget deficit for 2018, which stands at RO3bn.

We are seeing some early signs of Oman’s economic diversification efforts. Until a few years ago, oil and gas revenue constituted about 80 per cent of Oman’s income and about 20 per cent from non-oil sector. In the 2018 budget, oil and gas revenue stands at 71 per cent with the non-oil sector contributing 29 per cent. This is still quite premature in the diversification arena. However, early signs are quite encouraging.

Many experts predict that recent increases in global oil prices may not be on a permanent basis and price fluctuations would rather increase in near future. What is your view?

As I mentioned, the year 2018 looks promising. Oil and gas business is highly volatile. It is not possible to predict with certainty what future prices will be. Even the so-called experts have got it wrong several times. That aside, the extended OPEC production curb may in the short run help mitigate significant decline in oil prices like the one experienced in 2015.

What is important for us is to continue our focus in the economic diversification drive. Oman’s success in the long run will depend on how successful we are in the diversification front. In the last two years or so a lot of efforts have been directed towards planning our diversification through the Tanfeedh programme. The implementation of initiatives/projects identified in the Tanfeedh programme is the key.

Despite the improvement in oil prices the government has refrained from announcing big ticket infrastructure projects to give a boost to the economy, what are your views regarding this?

This is not true. In the second half of last year three contracts were awarded for the multi-billion dollar Duqm petrochemical project. Recently there was an announcement that a 385km mineral rail line will be constructed in the south, which is rich in mineral connecting to the Port of Duqm. The mineral rail line is part of the Tanfeedh initiative of developing the mining sector within the economic diversification strategy. The government is rationalising spending and focusing on priority areas. In addition, we expect many projects to be executed via the public-private-partnerships (PPPs). We expect the PPP law to be issued this year, which will pave the way for execution of a number of projects.
The PPPs should help reduce significantly the financial burden on the government with a positive impact on the overall budget. This will allow the government to focus more on other important areas such as defence and security. The PPP model should therefore play a very important role in the diversification strategy.

The UAE and Saudi Arabia have already implemented value added tax (VAT), but there is no announcement for the introduction of VAT in Oman yet. What would you say about the preparations for VAT in the sultanate?

Oman has made its intentions clear that it would be looking at implementing VAT in 2019. The decision has been taken in order to allow comprehensive preparation by all the stakeholders. The VAT law is expected to be issued in the second half of 2018. It is the intention of the government to provide businesses adequate time to prepare for VAT implementation.

The value added tax affects an entire organisation across all its functions and processes. In view of this, adequate time is required in assessing its implications and prepare for its implementation accordingly. Corporations will have to ensure that their IT systems are able to support VAT processing and reporting. They will also have to ensure that their staff is trained on VAT. There are also transitional issues to be dealt with such as long term contracts that will be ongoing when VAT becomes effective and other important matters.

It is important to bear in mind that the VAT is being introduced for the first time in the region. The region will therefore be in a learning curve in the initial period. Not allowing for adequate preparation time makes the learning curve very steep and implementation extremely challenging.

Over the past two years, there have been many changes like fuel subsidies were removed, corporate tax rate was increased, and exemptions from tax for some were also removed. What impact do you think these changes would have on Oman’s investment environment?

The corporate tax was raised to 15 per cent from 12 per cent. Even at 15 per cent, this is still one of the lowest in the world and in the region. In Saudi Arabia the corporate tax rate is 20 per cent and in Kuwait it is 15 per cent. With regards to tax exemptions, the government had certain objectives to achieve when the exemption regime was put in place some decades ago. Oman’s infrastructure was at its infancy then. Tax exemptions were given as an incentive for foreign investment. Four decades later Oman’s infrastructure having been developed to world standard, it made sense to consider whether such exemptions were necessary.

The manufacturing sector, earmarked as one of the five sectors for economic diversification will continue enjoying tax exemptions for a period of five years from commencement of commercial production. In addition it is important to note that generous exemptions are available in the free zones. For example, the Special Economic Zone in Duqm provides a renewable 30 year tax exemption which in effect is a lifetime exemption.

EY recently announced the opening of Oman’s first cybersecurity centre. How has been the initial response from clients and what are your future plans for this centre?

The Digital Security Operation Centre (DSOC) facility has been set up in Oman to support the Middle East and North Africa (MENA) region. So the centre will not only serve Oman but the whole MENA region. We are very proud of the DSOC. It is the first of its kind in the region and globally. It is a state-of-the-art facility that has digital capability and Artificial Intelligence unlike the traditional security operation centre (SOC). Its machine learning capability implies that it can learn by itself and detect deviation from the norm without human intervention. This is a key differentiator from a traditional SOC, which requires a set of rules to be made by humans. This implies identifying all possible ways that an attack can be launched.

As hackers are increasingly becoming sophisticated it is impossible to identify all potential ways or sources of attacks. Therefore, should hackers come with a different tactic for an attack other than what was prescribed in the set of rules, the traditional SOC will not be able to detect such attack. The DSOC in Muscat is a 24/7 facility. It was inaugurated on December 6, 2017 by H E Dr Ahmed bin Mohammed bin Salim al Futaisi, Minister of Transport and Communications.

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