LATEST ECONOMIC BRIEFINGS
TURKEY | 12.09.2008
Iranian President Mahmoud Ahmadinejad's recent visit to Turkey marked an important step for relations between the two countries, as Iran's role as a key energy supplier and growing trade partner make a deepening of diplomatic ties a necessity for Ankara.
LEBANON | 12.09.2008
The prospect of greater political stability in Lebanon is having a direct effect on the country's economy, with investments increasing, tourism numbers on the rise and a programme of economic reforms that will, if implemented, help to ease the state's massive debt burden.
SENEGAL | 11.09.2008
Dans le cadre du débat sur l'aide publique au développement, les pays donateurs, et en particulier la France, ont publiquement reconnu que la diaspora jouait un rôle de premier plan dans le développement économique du Sénégal.
JORDAN | 11.09.2008
The record profits earned by Jordan Phosphate Mines Company (JPMC) is indicative of the strength of the global fertiliser market.
TUNISIA | 11.09.2008
La publication des résultats financiers pour le premier semestre 2008 fait ressortir, pour les principales banques tunisiennes, un résultat d'exploitation en hausse sensible, démontrant ainsi que les fondamentaux du secteur bancaire tunisien sont bons.
GCC Technology Insight
GCC | 30.05.2008
Over the five years since coalition forces invaded Iraq, the country's academic and research institutions have been devastated.
COUNTRY COVERAGE
Loyal To The Peg
Oman, Volume 171
05.09.2008
05.09.2008
Although rising inflation and a weak US dollar have spurred some regional economies such as Kuwait's to drop their dollar peg, the Central Bank of Oman (CBO) has made moves to squash speculation of a revaluation of the Omani rial.
On August 31, CBO Executive President Hamoud Sangour Al Zadjali outlined for OBG the relevance and benefits of the fixed dollar peg for the sultanate.
"The fixed peg of the rial to the dollar has served as one of the key underlying factors behind sustained monetary and financial stability in an open and oil-dependent economy, and the exchange rate stability has also been a potent driving force in promoting investment and growth in the country," he said.
Al Zadjali explained that the current fixed peg has the benefit of preventing exchange rate speculation, thus encouraging promoting trade and investment. He added that the monetary discipline of the US Federal Reserve ensures the stability of the fixed peg, which in turn provides a nominal anchor for the CBO's monetary policy.
The latter point is of concern to some critics of the CBO's policy on inflation as - given the US economic slowdown and credit crunch - the Fed has been cutting interest rates in an effort to stimulate growth. While this policy may suit the US, it is the opposite of what the Omani economy needs, namely moderate interest rate increases to rein in exuberance.
Al Zadjali conceded that, "No regime has only benefits, without any costs. The choice of the regime has to be specific to the needs of the country, so that costs are minimised while the benefits are maximised in relation to the needs. Revaluation may have many harmful and undesirable effects on the economy."
He explained that Oman's oil income accrues almost entirely in dollars and that a revaluation would correspondingly reduce these revenues in rial terms. At the same time, budgetary expenses would remain allocated in rials. "Revaluation would, therefore, come as a major pressure on Oman's fiscal situation," Al Zadjali said.
"Given the import-dependent nature of the economy, revaluation-induced higher purchasing power of the rial may encourage higher consumption of imported goods and services, which would exert pressure on the sultanate's balance of payments," he added.
Murray Sims, CEO of the National Bank of Oman, also feels that revaluation of the rial could potentially hurt the economy.
"Oman is looking to encourage its fledgling export sector as part of its diversification process. If the CBO were to revalue the rial, Omani exports would become less competitive," Sims told OBG on July 27.
Conversely, Munir Abdulnabi Yousef Makki, managing director and president of Fincorp, one of the sultanate's leading investment banks, argues in favour of appreciating the rial.
"Because the Omani economy is in an upswing due to major investments in infrastructure, manufacturing and real estate, without appreciation of the value of the rial, the current value of the currency will not reflect its intrinsic strength," he told OBG on August 9th.
Makki went on to say that Oman had devalued its currency in the 1980s by 11% to address the challenges of slumping oil prices. He argued that if the government was able to devalue its currency at that time, then there is a strong case for appreciation now, during this time of growth and high oil prices.
In addressing concerns that the fixed peg to a depreciating dollar automatically translates to a major source of imported inflation, Al Zadjali conceded that there are valid points to this argument. However, he said that changing monetary policy based on this argument alone tends to be too short-sighted and ignores the enormous benefits of the peg for the overall economy.
"One must notice that in the last six months or so, the dollar has gradually reversed its depreciating trend, and oil prices have also declined by more than 20% from their mid-July peak levels," he said.
"The fixed peg still looks like the most appropriate regime for Oman, and the CBO remains fully committed to defend the peg as one of the key pillars of its overall approach to monetary and financial stability in the sultanate," concluded Al Zadjali.
In the same vein, Sims explained, "Exchange rates go in cycles and what we have now is perhaps a more vicious cycle in the depreciation of the dollar versus other currencies, but it is still nevertheless a cycle. Cycles have been endured before and will no doubt be endured in the future."
On August 31, CBO Executive President Hamoud Sangour Al Zadjali outlined for OBG the relevance and benefits of the fixed dollar peg for the sultanate.
"The fixed peg of the rial to the dollar has served as one of the key underlying factors behind sustained monetary and financial stability in an open and oil-dependent economy, and the exchange rate stability has also been a potent driving force in promoting investment and growth in the country," he said.
Al Zadjali explained that the current fixed peg has the benefit of preventing exchange rate speculation, thus encouraging promoting trade and investment. He added that the monetary discipline of the US Federal Reserve ensures the stability of the fixed peg, which in turn provides a nominal anchor for the CBO's monetary policy.
The latter point is of concern to some critics of the CBO's policy on inflation as - given the US economic slowdown and credit crunch - the Fed has been cutting interest rates in an effort to stimulate growth. While this policy may suit the US, it is the opposite of what the Omani economy needs, namely moderate interest rate increases to rein in exuberance.
Al Zadjali conceded that, "No regime has only benefits, without any costs. The choice of the regime has to be specific to the needs of the country, so that costs are minimised while the benefits are maximised in relation to the needs. Revaluation may have many harmful and undesirable effects on the economy."
He explained that Oman's oil income accrues almost entirely in dollars and that a revaluation would correspondingly reduce these revenues in rial terms. At the same time, budgetary expenses would remain allocated in rials. "Revaluation would, therefore, come as a major pressure on Oman's fiscal situation," Al Zadjali said.
"Given the import-dependent nature of the economy, revaluation-induced higher purchasing power of the rial may encourage higher consumption of imported goods and services, which would exert pressure on the sultanate's balance of payments," he added.
Murray Sims, CEO of the National Bank of Oman, also feels that revaluation of the rial could potentially hurt the economy.
"Oman is looking to encourage its fledgling export sector as part of its diversification process. If the CBO were to revalue the rial, Omani exports would become less competitive," Sims told OBG on July 27.
Conversely, Munir Abdulnabi Yousef Makki, managing director and president of Fincorp, one of the sultanate's leading investment banks, argues in favour of appreciating the rial.
"Because the Omani economy is in an upswing due to major investments in infrastructure, manufacturing and real estate, without appreciation of the value of the rial, the current value of the currency will not reflect its intrinsic strength," he told OBG on August 9th.
Makki went on to say that Oman had devalued its currency in the 1980s by 11% to address the challenges of slumping oil prices. He argued that if the government was able to devalue its currency at that time, then there is a strong case for appreciation now, during this time of growth and high oil prices.
In addressing concerns that the fixed peg to a depreciating dollar automatically translates to a major source of imported inflation, Al Zadjali conceded that there are valid points to this argument. However, he said that changing monetary policy based on this argument alone tends to be too short-sighted and ignores the enormous benefits of the peg for the overall economy.
"One must notice that in the last six months or so, the dollar has gradually reversed its depreciating trend, and oil prices have also declined by more than 20% from their mid-July peak levels," he said.
"The fixed peg still looks like the most appropriate regime for Oman, and the CBO remains fully committed to defend the peg as one of the key pillars of its overall approach to monetary and financial stability in the sultanate," concluded Al Zadjali.
In the same vein, Sims explained, "Exchange rates go in cycles and what we have now is perhaps a more vicious cycle in the depreciation of the dollar versus other currencies, but it is still nevertheless a cycle. Cycles have been endured before and will no doubt be endured in the future."
