Oman's peg wins praise from IMF |
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The International Monetary Fund said yesterday it supported Oman's decision to keep its national currency tied to the ailing US dollar although the peg is one of the main reasons for growing inflation in the Gulf country.
The Washington-based IMF also said it was satisfied with the progress of Oman's reforms, which, it said, had led to strong growth in its non-oil sector and boosted the overall GDP despite lower oil production.
In its fourth annual review of Oman's economic and fiscal situation published yesterday, the IMF executive board forecast good prospects for the Omani economy in the medium term because of high oil prices and investments.
"Most [IMF] directors supported the authorities' intention to maintain the current peg of the Omani rial to the US dollar, which has provided a credible monetary anchor and helped sustain investor confidence," the report said.
"Nevertheless, the peg requires that other policies play a supporting role. Directors attached particular importance to a prudent fiscal policy to contain inflation, and to the vigorous implementation of structural reforms to improve efficiency and sustain competitiveness."
The IMF cited several factors for soaring inflation rates in Oman and neighbouring Gulf oil producers, including supply-side constraints related to the construction boom, the strong growth in domestic demand associated with the public investment programme, rising international food prices, and to a lesser extent the depreciation of the US dollar against other major currencies.
It advised Oman's government to adopt the right fiscal policy to curb inflation and stressed that any increase in expenditure should conform to the domestic needs.
"In this regard, directors called on the authorities to restrain the growth of wages and transfer, phase the implementation of lower-priority projects.
"They encouraged the authorities to reduce over time the implied subsidy on petroleum products, and supported efforts to increase non-oil revenues through the introduction of a value-added tax," the report said.
But the Fund acknowledged that the dollar peg left Oman and other regional states with little options in their fiscal measures to tackle inflation. It recommended that Oman's authorities help reduce excess liquidity by more closely aligning short-term interest rates with comparable rates in the US.
It also supported the country's plans to raise reserve requirements further to mop up excess liquidity, as well as its intention to invest abroad a portion of the government's deposits currently held in commercial banks.
"Executive directors commended the authorities for Oman's strong growth performance over the past few years, despite declining oil production. They welcomed, in particular, the steady progress in implementing structural reforms that have contributed to strong non-oil output growth," it said.
"Oman's medium-term prospects look favourable, supported by a continued positive outlook for energy prices, a strong investment momentum, and an improved domestic business climate. The key challenge in the period ahead will be to contain inflation, while sustaining growth through economic diversification."
While commending Oman's commitment to pursuing structural reforms and economic diversification, the Fund stressed that progress in such programmes will be crucial to sustain medium-term growth.
Highlighting Oman's economic performance in 2007, the IMF described it as strong and put real growth at 6.4 per cent. It said the growth was mainly a result of high oil prices besides rapid growth of non-oil sectors such as petrochemicals, trade, transport and communications. Its figures showed the inflation rate in Oman peaked at 5.5 per cent in 2007 compared to 3.2 per cent in 2006.
As for the financial performance, it said the overall fiscal position registered a large surplus last year, while the non-oil deficit relative to the gross domestic product was estimated to have shrunk owing to an increase in non-hydrocarbon revenues attributable to strong growth in corporate profits and customs receipts, and to lower spending on defence.
With oil production waning, and strong growth of imports for infrastructure investment and consumption, the external current account surplus is to have fallen to 10 per cent of the gross domestic product in 2007, from 12 per cent in 2006.
"The Omani rial has depreciated by about 1.6 per cent in real effective terms since 2005. Money growth accelerated in 2007, reflecting the accumulation of foreign assets and strong private sector credit growth," it said.
By Nadim Kawach
© Emirates Business 24/7 2008
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