Oman urges banks to rein in lending

INFLATION BATTLE: Oman's central bank said banks should curb consumer lending and focus on project financing.

Oman's central bank chief is urging banks in the Gulf Arab state to lend less to individuals and focus on project financing as the country contends with inflation at an 18-year peak.

Central banks across the world's biggest oil-exporting region, most of which peg their currencies to the ailing US dollar, are concerned about credit growth as they track interest rate cuts by the US Federal Reserve and money supply surges.

About 40% of total loans extended by commercial banks in Oman go to personal borrowers, Oman Central Bank Executive President Hamood Sangour Al-Zadjali said on Tuesday.

"This will have a negative impact on the economy if it persists," Al-Zadjali told newswire Reuters. "Banks should concentrate on project financing."

Interest rates for Omani savings accounts have tumbled as the Fed slashed its benchmark rate by three percentage points in six moves since September, making it more attractive for individuals to spend money on other assets, such as real estate or stocks.

Oman, which sets interest rates at a weekly auction of certificates of deposit, has slashed the cut-off on its 28-day certificate by 2.44% since September 19, the day after the first Fed cut, to 0.80% this week.

Inflation, meanwhile, is surging across the region, driven by government spending, rising rents and accelerating food costs as the dollar tumbles to record troughs against the euro and other global currencies.

In Oman's $40.3 billion economy, inflation accelerated for a ninth month to an 18-year high of 11.1% in February as food costs soared almost 20%.

Oman's annual money supply, an indicator of future inflation, jumped 40.5% that month to a four-year peak as narrow money, the category that includes all physical money and funds held in current accounts, jumped 66%.

With its monetary policy tools constrained by the dollar peg, Oman's central bank is ready to tighten bank lending curbs again to reign in credit growth, Al-Zadjali said this week.

In December, Oman raised the reserve requirement for banks for the second time in five months to 5% of total deposits from 3% to prevent lower borrowing costs from fuelling inflation.

It has also raised wages for state employees and pensioners in a bid to offset the impact of price rises on the population.

The central bank of Kuwait, the only Gulf oil producer without a dollar peg, also wants to slow down the pace of lending growth, its central bank governor said in comments published on Monday. (Reuters)

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