OMAN CENTRAL BANK REMAINS FIRM ON DOLLAR PEG

C O N F I D E N T I A L SECTION 01 OF 02 MUSCAT 000293 SIPDIS SIPDIS STATE FOR NEA/ARP, EEB/IFD/OMA COMMERCE FOR ITA THOFFMAN TREASURY FOR OTA VALVO E.O. 12958: DECL: 04/19/2018 TAGS: EFIN ECON PREL MU SUBJECT: OMAN CENTRAL BANK REMAINS FIRM ON DOLLAR PEG REF: A. MUSCAT 289 ¶B. MUSCAT 148 Classified By: Ambassador Gary A. Grappo for Reasons 1.4 (b and d) -------------- Summary -------------- ¶1. (C) Oman's Central Bank chief reiterated his government's commitment to maintaining its currency peg to the dollar at the current rate of exchange, in spite of official statistics showing that inflation had exceeded 10% in February. He explained that a revaluation would not temper inflation in the wake of surging regional demand, and asserted that such a short-term fix would only fuel continued currency speculation. The Central Bank head further stated that the current levels of government spending, while contributing to inflationary pressures, were appropriate in light of plans to diversify Oman's economy away from oil and gas production. End Summary. -------------- Cautious Outlook -------------- ¶2. (C) On April 15, the Ambassador met with Central Bank of Oman Executive President Hamoud Sangour al-Zadjali to discuss Oman's commitment to retaining its currency peg to the dollar, as well as to urge vigilance over Iranian banks operating in Oman (ref A). Zadjali prefaced the conversation by noting that Oman had to remain "cautious" in times of plenty, adding that the current "windfall" resulting from high oil prices may never happen again, given Oman's modest oil reserves. "You have to keeping asking yourself about the 'what ifs'," the Executive President explained. -------------- Inflation Difficult to Contain -------------- ¶3. (C) Zadjali continued that revenues from high oil prices had unleashed huge demand, leading to across-the-board price increases in food, building materials, labor, and real estate throughout the region. With such strong demand, the Executive President said that it had been "difficult to contain inflation," and that the Bank has had to continuously defend its position to maintain the dollar peg at its current valuation. "The currency does have an impact on inflation, but I keep telling the media that we are still pegged and have no plans to revalue," remarked Zadjali. He commented that the dollar had served the Omani economy well, and that a revaluation would not eliminate inflationary pressures, since the sagging dollar only accounts for a fraction of price increases. "Since this is only a short-term fix, how many times would we have to revalue?" Zadjali asked rhetorically. -------------- Compensating for Rising Prices -------------- ¶4. (C) Zadjali stated that rather than revaluing the Omani rial, the government had decided to pursue other avenues to address inflationary pressures, such as raising public sector salaries, adopting rent caps, and reducing the price of wheat flour from the government-controlled mill. On the banking side of the equation, Zadjali highlighted that the Central Bank has increased commercial bank reserve requirements from 3% to 5% and has issued more certificates of deposit in efforts to mop up excess liquidity. -------------- Spending Spree -------------- ¶5. (C) Zadjali admitted that the Central Bank's policy position nevertheless had been stressed by added liquidity, coupled with a 30% expansion of credit over the past year. "There has been a lot of money coming into the country, and with the recent tumbling of world financial markets, more Omanis are bringing their money home," Zadjali mused. As a result, Oman's money supply increased 40% over the past year, the stock market appreciated 16% over the first three months of 2008, and Omani land values have skyrocketed. ¶6. (C) The Central Bank chief acknowledged that escalating government spending was another contributing force to MUSCAT 00000293 002 OF 002 inflationary pressures, but emphasized that the outlays had been concentrated on infrastructure projects such as roads, ports, and airports to set the stage for future growth. "These are not luxurious expenditures; they are need-based," rationalized the Executive President. Responding to a question from the Ambassador, the CBO chief also acknowledged that the government's recent wage and salary increases, coupled with the raise in pension payments, had exacerbated inflation. However, Zadjali defended the government's actions, noting that the government had no choice but to respond to worker demands in the inflationary environment and to play a leading role in diversifying Oman's economy away from oil and gas production since "the private sector is not strong enough." He added that government involvement in economic development projects provided a "significant" level of comfort for those foreign and domestic investors who "didn't want to take 100% risk on projects." -------------- Comment -------------- ¶7. (C) Even in the wake of growing inflationary figures, evidenced by the Ministry of National Economy's reporting in February of 10.2% inflation, the Central Bank appears to be content with its current dollar peg policy over the near-term. Zadjali reiterated the government line that changing the peg on the basis of cyclical trends would be counterproductive to an economy heavily dependent on the sale of dollar-denominated oil, and forecasted that the greenback would pick up steam by the end of 2008. He underscored the message relayed to Treasury DAS Baukol during a March teleconference, however, that Oman would not provide advance notice to the USG in the event it decides to revalue its currency. End Comment. GRAPPO