Oman Rules Out Currency Peg Shift to Curb Inflation

MUSCAT, 9 October 2007 — Oman considered measures including unshackling its rial currency from the tumbling US dollar and price caps to contain rising inflation but decided against such moves, the commerce minister said.

Oman, like other Gulf Arab oil producers, is struggling to contain inflation because its central bank traditionally follows shadow US interest rate policy to maintain the relative value of its dollar-pegged currency.

Oman’s inflation accelerated to 5.98 percent in the year to July, the highest level this year.

The dollar peg was partly to blame because the US currency’s decline was driving up the cost of imports, Commerce Minister Makboul bin Ali bin Sultan said in remarks carried by the official Oman News Agency on Monday. The dollar fell to a record low against a basket of six currencies last week.

Rapid economic expansion, a construction boom, and the impact of record oil prices on transports costs were also to blame, he said.

The government had decided against price caps, dropping the dollar peg, subsidising some goods, or introducing ways to monitor prices, bin Sultan said, responding to reports and opinion pieces in the Omani media.

“The authorities have studied all of these solutions and found that they would not be useful in view of the (government’s) strategy, which is based on free trade and market economics,” ONA quoted bin Sultan as saying.

Inflation is rising across the Gulf Arab region, where a quadrupling of oil prices in the past five years is driving rapid economic growth.

In the United Arab Emirates the economy ministry took out newspaper advertisements on Sunday to warn businesses against price hikes in the run-up to a Muslim holiday next week. Inflation hit a 19-year high of 9.3 percent in the UAE last year.

In May, Kuwait broke ranks with its Gulf Arab neighbors and dropped its peg to the dollar, saying the US currency’s decline was fueling inflation.

Oman, one of the five Gulf oil producers that agreed with Kuwait to peg its currency to the dollar to prepare for monetary union, was committed to keeping the value of its rial unchanged, the central bank governor said last month.

But like Saudi Arabia and Bahrain, Oman held back from reducing interest rates to match the Sept. 18 cut in the United States, saying domestic economic considerations took precedence when deciding monetary policy.

HSBC expects Oman’s $35.3 billion economy will expand by 6.5 percent this year, the second-fastest pace in six years.

Oman increased the oil price assumption for its 2008 budget to $45 per barrel, compared with $40 in 2007, the news agency said.

Meanwhile, Kuwait left the dinar currency’s reference rate unchanged yesterday for the second time this week after the dollar fell against a basket of currencies at the end of last week’s trading.

The dinar will trade around a mid point of 0.28015 per dollar, the Central Bank of Kuwait said. The dollar rose sharply on Friday after data showed the US economy added 110,000 in September, the highest since May, but the rally petered out ahead of the long Columbus Day holiday weekend. The currency of the Middle East’s fourth-largest oil exporter has now risen 3.21 percent since May 19, a day before the central bank dropped its peg to the weakening dollar and adopted a basket of currencies.

Kuwait has declined to give the composition of the basket.

The central bank says the dollar’s decline on global markets is driving up inflation and making some imports more expensive. Kuwait pays for more than a third of its imports in euros.

Central Bank Governor Salem Abdul Aziz Al-Sabah said on July 29 the basket gave the bank flexibility to track moves on global foreign exchange markets, state news agency KUNA reported.