From Oil Wealth to Export Weakness: The Hard Road to Diversification in Oman

Oman has reduced its reliance on oil in domestic production, but its economy and exports remain highly dependent on hydrocarbons, leaving growth and public finances vulnerable to oil price swings. The IMF argues that without stronger manufacturing, modern services, and deeper integration into global value chains, backed by better governance and logistics, true diversification will remain out of reach.

For decades, oil has been the backbone of Oman's economy. Since hydrocarbons were discovered in the 1960s, they have funded modern infrastructure, public services, and rising living standards. But a new analysis by the International Monetary Fund, drawing on research from UNCTAD, the World Bank, the OECD-WTO, and Harvard University's Growth Lab, warns that this success has created a fragile economic model. Growth, government revenues, and exports remain highly sensitive to oil price swings, leaving Oman exposed at a time when global energy markets are increasingly uncertain.

Oman Vision 2040 sets out a clear ambition to move beyond this dependence. The challenge now is turning that vision into an economy that can thrive without relying on oil.

Diversification Exists, but Mostly on Paper

At first glance, Oman appears to be diversifying. Non-oil activities now account for nearly 70 percent of GDP, a major shift compared with the early 2000s. But the IMF finds that most of this growth has taken place in sectors that do not generate exports or foreign income. Construction, public administration, education, healthcare, and real estate dominate the non-oil economy, while manufacturing remains small.

This matters because countries that succeed in long-term diversification usually build strong tradable sectors, especially manufacturing and modern services. In Oman, manufacturing contributes only about 8 percent of non-oil GDP. As a result, oil and gas still generate around 80 percent of government revenue, and exports remain dominated by crude oil, refined petroleum, chemicals, and metals. When oil prices rise, Oman's finances improve; when prices fall, pressure quickly returns.

A Narrow Export Base Limits Growth

Compared with other countries, Oman's exports remain highly concentrated. The IMF shows that only Kuwait and Saudi Arabia have a narrower export structure in the Gulf. While some progress has been made, Oman still exports relatively few products, and most are linked to hydrocarbons.

Manufacturing illustrates the problem clearly. About 60 percent of manufacturing output comes from oil-related industries and basic metals. High-value products such as machinery, electronics, and advanced equipment barely feature. Countries like Malaysia and Mexico once faced similar constraints but managed to move into more complex exports by integrating into global supply chains. Oman has yet to make that leap.

Services exports tell a similar story. Transport and tourism perform reasonably well, but modern services such as information and communication technology make up less than 5 percent of service exports. Overall, Oman's services exports per person are among the lowest in the GCC.

Strong Foundations, Weak Results

What makes this outcome surprising is that Oman has many advantages. Infrastructure quality ranks among the best in the region, with modern ports, airports, and roads built through decades of public investment. Logistics performance has improved steadily, governance indicators compare well with regional peers, and trade and investment restrictions are relatively low. Education spending is high, and average years of schooling have increased sharply.

Yet these strengths have not translated into export success. According to the IMF, Oman generates far fewer non-oil exports for every dollar invested in infrastructure than countries such as Malaysia or Mexico. Education outcomes lag behind years of schooling, suggesting skill mismatches. Most importantly, Oman remains weakly integrated into global value chains outside hydrocarbons, limiting technology transfer and learning.

What Needs to Change Now

The IMF's message is that broad reforms alone are not enough. Better roads, schools, and regulations matter, but they must be combined with targeted efforts to build competitive export sectors. Lessons from South Korea, Singapore, and Malaysia show the importance of focused industrial strategies, strong logistics, skills development, and clear performance requirements for firms receiving state support.

Empirical analysis in the paper shows that improving government effectiveness and logistics performance could significantly boost Oman's non-oil exports. Matching the standards of leading Gulf peers could raise exports by thousands of dollars per person, especially in manufacturing and more complex products.

For Oman, the next phase of reform means strengthening the private sector, reducing the state's direct role in the economy, using special economic zones as true engines of export growth, and investing more effectively in skills and innovation. Vision 2040 provides the roadmap. The task now is execution.

Oil gave Oman a strong starting point. Whether the country can secure a resilient future will depend on how quickly it can turn diversification from a goal into a reality.