Oil Revenue Shocks and the Growth of the Non-Oil Sector in an Oil-Dependent Economy: The Case of Oman

Abstract

There is no consensus among economists on whether natural resource abundance is a curse or a blessing for countries heavily endowed with such resources. Oman is a small oil-exporting country that heavily relies on oil revenues. Recent adverse shocks to oil prices have left Oman’s economy more vulnerable relative to other countries relying on oil for their main source of income. One reason for this outcome may be that Oman’s private non-oil sector heavily depends on government spending and projects, which typically decelerate after negative oil shocks. Using a cointegrating Vector Autoregressive Regression (VAR) model and quarterly data covering the period 2000 to 2015, we evaluate the “oil-curse” phenomenon for Oman by exploring long-run and short-run relationships among economic growth sourced from non-oil producing sectors, oil revenues, and government expenditures. We also use causality tests and impulse responses to measure the extent of short-run and long-run macroeconomic implications of negative oil shocks for Oman. Results suggest that a sound fiscal policy that allows for true sectoral diversification of income is crucial to avoid an oil curse in Oman.