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)

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Summary
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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.

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Cautious Outlook
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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.

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Inflation Difficult to Contain
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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.

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Compensating for Rising Prices
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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.

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Spending Spree
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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."

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Comment
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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