Oman Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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After coming out of a contractionary phase, the Omani economy witnessed a good nominal growth for the second year in succession, supported by expansion across all major economic activities. Notably, besides higher oil prices, traction in diversification also contributed to the economic recovery. Furthermore, the reduced fiscal deficit and improvement of external conditions helped in the journey towards reinstating macroeconomic balance.

Nonetheless, twin deficits remain a challenge, but the government is committed to structural measures to restore balance. The government has recently introduced new excise tax to augment non-hydrocarbon revenue. Inflationary conditions in Oman, which are contingent largely on imported inflation, remained benign in the last few years.

Given the currency peg with the US dollar and the open capital account, monetary policy has a very limited scope in Oman. However, regulatory measures, such as loans-to-deposits ratio, allows some monetary policy independence to the Central Bank of Oman (CBO). The domestic interest rates hardened in the recent past following normalisation of monetary policy in the US. The CBO, however, continues to act proactively to ensure availability of appropriate liquidity in the system so that liquidity squeeze does not hamper credit availability.

Turning to regulatory practices, all international best practices, such as Basel III guidelines, are generally followed in Oman. Banks have to maintain the minimum capital adequacy ratio (CAR) of 11% along with additional capital buffers (CAR stood at 17.9% at end-2018). The liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) have also been implemented and the banking sector maintained the LCR and NSFR at 254% and 115%, respectively, as of end-2018.

During the recent global financial crisis, 'too big to save' posed a policy dilemma in some jurisdictions as opposed to 'too big to fail' in others. To deal with such dilemmas, a robust bank resolution framework could be very effective, allowing self-propelled recovery for banks and should the situation warrants, permitting authorities to resolve them in an orderly manner. In April 2019, the CBO issued the Bank Resolution Framework for Oman and became one of the first central banks in the region to do so.

Presently, banks and central banks worldwide are handling the fintech wave. Innovations brought by fintech are certainly helping to further deepen and improve efficiencies in financial systems. Fintech companies are improving financial inclusion by providing unbanked households and firms with access to credit and other banking services. At the same time, fintech poses some regulatory challenges, especially given the scale and complexity of instruments.

Another challenge is presented by crypto-currencies, which remain unregulated. Virtual currencies could potentially undermine monetary policy's ability to achieve its stated objectives as well as financial stability. Hence, it may be prudent for central banks to float their own virtual currencies to counter the proliferation of unregulated virtual currencies.

Notwithstanding various macroeconomic and regulatory challenges, Oman is poised for a reasonable growth outlook over the medium-term. The appropriate policy responses are being taken to deal with the evolving challenges. The CBO continues to support economic activity by ensuring appropriate liquidity in the banking system and fostering financial stability.