The Subsidy Legacy
For decades, Oman’s social contract was built on generous subsidies: below-cost electricity and water, cheap fuel, subsidised housing, and free public services including healthcare and education. These subsidies were affordable when oil revenues were high relative to a small population. As the population grew and oil revenues became less reliable, subsidy costs became a major driver of fiscal deficits. At their peak, energy subsidies alone cost the government several billion rials annually – a massive allocation that disproportionately benefited wealthy households with higher consumption.
Reform Programme
Oman’s subsidy reform programme has proceeded gradually but significantly. Fuel subsidies were reduced starting in 2016, with prices now linked to international benchmarks. Electricity and water tariff reforms have introduced more cost-reflective pricing for commercial and high-consumption residential users, while maintaining lifeline tariffs for low-income households. The introduction of VAT in April 2021 at 5 percent broadened the fiscal base. These reforms, combined with expenditure efficiency measures, have materially improved the fiscal position.
Social Impact
Subsidy reform has increased the cost of living for Omani households, particularly middle-income families. Fuel price increases affect transportation costs. Electricity and water price rises impact cooling costs – significant in Oman’s extreme climate. VAT adds to the cost of goods and services across the economy. The government has attempted to mitigate impacts through the National Social Protection Fund (Manfaa), which provides targeted cash transfers to low-income families. However, coverage gaps exist and the transition from universal subsidies to targeted protection is incomplete.
The Social Contract Evolution
The subsidy reform process reflects a fundamental renegotiation of the social contract between the Omani state and its citizens. The old contract – cheap energy, guaranteed government employment, and generous social services in exchange for political quiescence – is economically unsustainable. The new contract under Vision 2040 emphasises empowerment, private-sector opportunity, and a safety net rather than universal entitlement. Managing this transition without social instability requires transparent communication, visible alternative opportunities, effective social protection for the vulnerable, and demonstrable progress on economic diversification.