Natural resource depletion, productivity and optimal fiscal strategy : lessons from a small oil-exporting economy

Dependency on oil income in many resource-exporting open economies threatens the ability of their economies to sustain GDP growth when oil income runs low and when oil resources are depleted. This paper attempts to appraise the efficiency of the Omani economy and its fiscal sustainability in relation to oil income. Firstly, we utilize a neoclassical growth model to estimate total factor productivity (technical progress and other dynamics) and the evolving relationships in factor inputs and their contribution to GDP growth in Oman. Secondly, we apply a permanent income model to elaborate on how policymakers can set path for the optimal level of government expenditure available from created wealth. We observe that technology and improvement in efficiency have induced GDP growth in Oman during the 1988-2007 period. For a higher productivity and sustainable fiscal policy, policy options include an expenditure path for the government to consume current wealth and future income from oil to allow spending from oil to reduce gradually to zero by 2050, or to reduce expenditure so that oil wealth is equal to NPV in 2027, the level of 2027 consumption is extended to 2050.