The impact of the global economic downturn caused by low oil prices has pushed Gulf States Including Oman to look beyond the existing oil-based economy. Most of the Gulf Cooperation Council (GCC) countries depend heavily on oil export which constitute over 80% in some states.
Oman is taking steps to develop its logistics sector to be one of the main pillars of the nation’s non-oil-based economy in the future. The current fluctuation in oil prices has pressured the country to boost non-oil exports & re-exports to eventually replace oil export in the future as the main source of income.
Therefore, scenario planning and forecasting are believed to be effective tools in evaluating the current condition of the logistics sector in the country and its future growth based on different realistic scenarios.
An interesting article by Mahmood W, an urban and regional planner with expertise in regional analysis, master planning and transportation studies, and consultant with Consult 2050.
Methodology
After evaluating the current conditions in Oman, we noted that augmented form of the gravity model will be the most appropriate model to predict the value of non-oil exports & re-exports up to 2022.
Gravity model explains the flow of trade between a pair of countries as being proportional to their economic size (GDP) and inversely proportional to the distance between them. The model has a lineage that goes back to Tinbergen (1962) and Poyhonen (1963), who specified the gravity model equation as follows:
Trade_ij = (∝ * GDP_i * GDP_j) / Distance_ij
Where Trade_ij is the value of the bilateral trade between country i and j, GDP_i and GDP_j are country i and j’s respective national incomes. Distance_ij is a measure of distance between the two countries and is a constant of proportionality.
To account for other factors, the augmented gravity model for Omani ports is taking logarithms of the gravity model equation to get the linear form. Designed to test the impact of Oman’s GDP, Oman’s population, trading partners, GDP, distance, political relation, cultural & religious similarity, and FTAs on Oman’s non-oil export and re-export activities between 2006 and 2016 with 35 trading partners.
Main findings are:
- The growth of Oman’s GDP is highly correlated with the value of non-oil export & re-export
- Distance is one of the most significant variables in the model with negative impact that indicates the farther the country is the less likely to receive Omani exports & re-exports.
- There is over trade with most Gulf States, China, Singapore, South Korea, Malaysia, South Africa, UK, and Australia.
Scenario Planning
Scenario planning starts with evaluating the current condition of the logistics sector by using SWOT analysis that illustrates strengths, weaknesses, opportunities and threats of the logistics Sector in Oman. This analysis gives a better understanding about the main elements to design the forecasting model and the likely scenarios in the future.
Scenarios evaluated:
- Business As Usual Scenario: Business As Usual Scenario assumes that Oman will maintain exact same foreign policies with all the 35 trading partners without any further economic agreements up to 2022. In addition, this scenario echoes the optimitic outlook of the World Bank and the IMF for the recovery of the world economy.
- Optimistic Scenario: The Optimistic Scenario is based on the same economic outlook in the previous scenario, but assumes signing FTA agreements with China, South Korea, India, and Japan on the GCC level and with Iran and the UK on bilateral level.
- Gulf Crisis Scenario: Gulf Crisis Scenario assumes that Gulf States cut their political and economic ties with Oman. This scenario is envisioned based on the current blockade of Qatar by other GCC members that isolated the country economically by cutting all logistics links.
Conclusion
This analysis could be used by Port Operators and Authorities as way to re-evaluate expansion plans of ports and investments in the logistics sector justified by realistic forecasted demand and scenarios. Undoubtedly, the study reaffirms the importance scenario planning and forecasting to provide decision-makers with better look into the future to make more informed decisions.