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 or 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, the paper uses a neoclassical growth model to estimate the Total Factor Productivity (TFP) (technical progress and other dynamics) and the evolving relationships in factor inputs and their contribution to GDP growth in Oman. Secondly, it applies a permanent income model to elaborate on how policy makers can set path for the optimal level of government expenditure available from created wealth. It is observed that technology and improvement in efficiency 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 so that oil-based spending reduces gradually to zero by 2050. Alternatively, the government could reduce expenditure from oil revenues so that oil wealth fund is equal to the net present value of the flow of spending in 2027, where then the level of 2027 consumption is extended to 2050