Fiscal policy "remains as the dominant policy option for the management of aggregate demand in a fixed-peg regime," Al Zadjali said yesterday.
Gulf states, including Saudi Arabia and the UAE, have come under pressure to drop their dollar pegs as interest-rate cuts by the Federal Reserve have contributed to the US currency plunging to a record against the euro and a 12-year low versus the yen. The weaker dollar has made European imports more expensive while lower US interest rates make borrowing cheaper, stoking inflation.
Inflation in Oman accelerated to a record 8.3 per cent in December from 7.6 per cent in November as the cost of food and rent increased. Kuwait is the only Gulf Arab state to have dropped its currency’s dollar peg, linking instead to a basket that also includes the euro, the yen and the British pound. Oman has boosted salaries by as much as 43 per cent, increased social security payments and subsidised the cost of basic foods in an attempt to mitigate the effects of rising prices. Fiscal policy "has to contend with the current challenge of apparent tradeoff between high diversified growth and inflation," Al Zadjali said.
"Since sustaining the growth momentum is highly essential for Oman’s economy, the fiscal response to inflation came in the form of compensating the public for the inflation-driven loss in their purchasing power through appropriate increases in their wages and salaries."
Food reserves: Oman said on February 12 that it will tap its food reserves to sell rice, sugar and lentils at subsidized prices to help counter inflation.
Oman’s decision to raise wages for government employees by as much as 43 per cent will stoke inflation in the country, Standard Chartered Plc said on February 10.
Economy Minister Ahmed bin Abdulnabi Macki told reporters in Muscat on January 7 that real GDP growth last year was expected to be 5.9 per cent. The figure will be "similar" in 2007, he added.
Oman remains "firmly committed" to pegging the rial to the dollar, and any speculation in the rial is "unwarranted," Al Zadljali said yesterday. The rial has been pegged to the dollar for the past 35 years.
"Despite the limited role for monetary policy under a fixed peg, the Central Bank of Oman has increased the volume of absorption of liquidity from the market, both by raising the reserve requirement from three per cent to five per cent, and also by increasing the volume of CDs in auctions."
"Oman’s decision to withdraw from a proposed Gulf single currency is final," Al Zadjali said.
Oman is part of the Gulf common market, and will "ideally” only implement value-added tax at the same time as it’s Gulf Cooperation Council neighbors, he said.
