economic & strategic outlook – oman
Global Investment House – Kuwait - Economic & Strategic Outlook - Oman - Monetary Policy The Central Bank of Oman regulates the monetary policy of the country and maintains the RO peg to the US dollar to maintain price stability with the medium term objective of having a monetary union with the other Gulf Cooperation Council (GCC) countries. The fixed exchange rate arrangement would also lead to the interest rates in Oman tracking US interest rates with close correlation in the medium to long run. However, some differences in the interest rates are inevitable in the short term because of factors such as the rate of return to capital in the domestic economy, level and state of bank liquidity levels, transaction costs and risk premium etc.
Recent data from the Central Bank of Oman indicate the narrow measure of money (M1), which comprises of the aggregate of currency with the public and local currency, increased in 2006. In the same year, M1 level was at RO1,229.6mn, higher by 9% as compared to the end 2005, however the rate of growth of M1 for 2006 was lower than that of 2005 whereby M1 grew at 24.3%. Demand deposits grew at a CAGR of 12.2% during 2002-2006, while that of “currency with public” grew at a similar CAGR of 12.9% within the same period.
The Quasi money which is comprised of savings in RO time deposits, margins and foreign currency deposits, registered a growth of 32.2% in 2006 over the previous year. The overall Quasi Money levels in 2006 further increased to RO 3,231.7mn. Savings deposits increased by 18.5% in 2006 to reach RO1,008.6mn, which translates into a CAGR of 15.5% during 2002-2006. Time deposits in local currency also increased by 21.7% in 2006 to reach RO962.6mn as opposed to a decline of 7% in 2005. Deposits in foreign currency registered the highest growth amongst components of Quasi Money in 2006 to reach RO47.4mn, a growth of 58.6% which translates into a CAGR of 39% during the period 2002 to 2006.
Overall, the broad measure of money (M2) which includes M1 and “Quasi Money” increased by 25% in 2006 over the previous year to reach RO4,461mn. Interestingly, M1 displayed major bouts of volatility during the period as a result of movements in Omani Rial demand deposits associated with the interest rate environment whereas the growth rate of M2 remained fairly stable.
The peg of the RO against the US$ imposes US interest rates movements on the Omani monetary authority in order to maintain the peg of the local currency. In line with the increasing interest rates in global markets since 2004 in general, and the US in particular, the interests earned on RO time deposits grew gradually. As per the latest data available for the month of Dec 2006, interest rates on the private sector RO time deposits moved in tandem with the US interest rates to reach 3.9%. Interest rates on total RO deposits also increased by 72 basis points since Mar 2004 to reach 1.8%. Total deposits also increased by 145 basis points to reach 2.6% from its low levels of 1.1% in Mar 2005.
The Sultanate has been witnessing some inflationary pressure (as measured by Consumer Price Index) in the last two years. After a period of relatively low inflation at less than 1% between 2000 and 2004, 2005 started witnessing some pressure, registering 1.9% inflation rate during the year and moved up to 3.2% in 2006.
The uptrend in inflation that started in 2004 emanates from multiple sources. High growth in public expenditure that has been driven by the favorable surplus revenues appears to be the major source of rise in inflation as it generates high aggregate demand, and in particular when this increase in demand takes place under tight domestic supply capacity. Another source of inflationary pressure for an open economy such as Oman is imported inflation. The Consumer Price Index (measured by a basket of general goods and services in Oman) increased by 3.2% in end-May 2006 as compared to the modest increase of 1.9% at the end of 2005.
This modest increase in CPI in 2005 was relatively broad-based with majority of groups registering marginal increase in their prices. Transport & communications which account for close 23.5% of the total index weight have seen their prices registering modest rises in 2006. The overall general price index has increased by 3% in 2006, compared to a fluctuation within a band of 1% in the previous two years, between 99.8 and 101.7 levels. The highest rate of inflation in terms of the CPI index for the Sultanate was the category of “food, beverages and tobacco”, with 34% weight and growing by 5.4% in 2006 as compared to 4% in 2005.
The rise in CPI during 2006 can be explained by the weakening US dollar (and hence a relatively weak Oman riyal which is pegged to the US dollar) against the currencies of Oman’s main suppliers, which has increased the local-currency cost of imported goods. In fact, Oman’s Real Effective Exchange Rate (REER) has experienced a cumulative depreciation of 13% since the end of 2002, although the pass through effects of this depreciation on Oman’s domestic inflation remains modest. Moreover, inflationary pressure has been on the rise among many of Oman’s trading partners on the import side, including some of the GCC countries. Also, on the back of a strong aggregate demand growth resulting out of a 15.6% rise in nominal GDP could have been a factor in contributing to the price increase in terms of higher profitability and other mark-ups for the intermediaries.
