Al-Zadjali: Looking to strengthen the growth process and give a fillip to the diversification process.

Reuters
Muscat

Oman will continue to invest in strengthening and diversifying its economy despite the damage to its state finances from low oil prices, the Central Bank of Oman’s executive president has told a Reuters summit.
Cheap oil has slashed the government’s revenues, pushing it deep into the red; it posted a budget deficit of 2.68bn rials ($6.97bn) in the first eight months of this year, swinging from a 205.7mn rial surplus a year earlier.
That puts the sultanate on track for a massive deficit of over 15% of gross domestic product this year. Oman lacks the big fiscal reserves of its neighbours; assets in its two biggest sovereign wealth funds are estimated to total around $20bn.
But Hamood Sangour al-Zadjali told the Reuters Middle East Investment Summit that Oman would press ahead with ambitious, and costly, efforts to expand its industrial base and create jobs. Industrial and infrastructure projects under construction or planning will cost billions of dollars.
“In the milieu of lower oil prices, the key goal before the government and the CBO (central bank) is to strengthen the growth process and give a fillip to the diversification process,” al-Zadjali said. “Our previous experiences suggest that the resilience and inner strength of the Omani economy will tide over lower oil prices and sustain its growth process.”
Economists and business executives believe that to save money, the government may be on the verge of cutting petrol, natural gas and electricity price subsidies which the International Monetary Fund estimates cost over $7bn annually. It has also been considering tax increases.
“The government is working hard to reduce expenditure and increase revenues through various means. They have directed the ministries to cap their expenditure at a certain level, or to cut the expenditures by a certain percentage,” Zadjali said. “On the revenues side, the government is considering taking some of the load off by cutting subsidies, and increasing some of the fees.”
The government has been expanding debt issues to cover its deficit, and this month received orders of 336mn rials for its first issue of sovereign Islamic bonds, worth 200mn rials.
Al-Zadjali said such issues could be conducted without straining liquidity in the local banking system because they were open to banks from elsewhere in the region, and could attract back to the country some deposits held by Omanis abroad.
But as pressures on Oman’s finances have increased this year, the Omani rial forwards market has become more unstable, which may be a sign of institutions hedging against the risk that the Omani rial’s peg could eventually be removed.
Removing the peg, or at least depreciating the rial to a lower level, could help government finances by inflating the rial value of oil export earnings.
Al-Zadjali made clear, however, that any currency change was not on the cards.
“The CBO, on its part, remains firmly committed to the fixed peg with the US dollar which has been sustained at $2.6008 per Omani rial since 1986,” he said.
“Our assessment has been that despite concerns arising from imported inflation, the benefits of the fixed peg are substantial, given our economic structure and high degree of openness in both current and capital accounts.
“The fixed peg provides the country with a stable exchange rate which helps in promoting investment, growth and diversification of the economy. As the fixed exchange rate has served the country well, there is no proposal to change the rial’s peg to the US dollar.”