Integration of oil with macroeconomic indicators and policy challenges in regard to Oman

Abstract

PurposeThe Oman economy is dominated by production and export of petroleum products and an overdependence on oil revenue, which may have contributed to the continuance of the “resource curse” phenomenon. The purpose of this research is to examine the co-integration of oil with macroeconomic indicators of Oman and of suggesting some policy reform measures to trim down overdependence on oil.Design/methodology/approachThe authors culled out data from the annual reports published by the Central Bank of Oman from 1975 to 2016. Considering oil price and oil export volume as regressors, the long-term integration with other macroeconomic indicators was examined by using the bound test. Further, auto regressive distributed lag (ARDL) model was also derived to check the impact of these cross-sectional relations.FindingsOil price is observed to have a strong long-term significant relation with all the macroeconomic variables used in this study. However, the volumes of oil exports do not appear to have significant influence on GDP and consumption but do naturally sway other variables. This indicates that less elasticity of consumption to the flow of macro income, because the consumption in the Omani economy is driven by perceived future income. Oil export revenue is not seems to be much impacting on the real sector as the deficits are funded by the government through compensatory spending. Oil prices and oil exports have exhibited a strong long-term integration with variables such as gross domestic savings (GDS), credit to government (C2G), credit to private (C2P), demand deposits (DD) and time deposits (TD). This hints that oil boom does constitute the key source of funding of the financial sector of Oman.Research limitations/implicationsThis study offers a generalized submission to support the real sector of Oman to lead out of a resource curse through diversification. The study however does not provide industrial groupings to assess the impact of fluctuations in oil prices.Originality/valueThis research has confirmed the existence of “resource movement” effect and “spending effect” in Oman economy. The nation needs to take radical measures to come out of this phenomenon. For addressing this we have suggested the modified version of Shumpeterian model of creative destruction. In this model we call for demolishing the oil dependent structure with a diversification structure. The new move can bring more positive effect on real and financial sectors of the economy.