Oman central bank to cut bank reserves, raise lending

LIQUIDITY BOOST: Oman's central bank says it plans to cut reserves and increase lending in an effort to boost liquidity. (Getty Images)

Oman's central bank said on Sunday it was reducing bank reserve requirements and raising the loan-to-deposit ratio in the latest attempt by a Gulf Arab oil producer to defrost regional credit markets.

The Omani central bank said it would cut the reserve ratio to five percent from eight percent, while also loosening the loan-to-deposit ratio to 87.5 percent from 85 percent. The changes, effective Jan. 1, were taken "in consideration of the local economic scenario," the central bank said in a statement, without elaborating.

Global financial turmoil has put the brakes on an economic boom in the Gulf region and has discouraged private investors from taking loans to participate in public-private expansion projects because of the high cost of funding.

Gulf policymakers have sought to ease tight liquidity and improve investor confidence by slashing interest rates, reducing reserve requirements, guaranteeing bank deposits and setting up emergency funding facilities for banks.

"A reserve requirement is like a tax on the banking system. Lowering it will hand immediate liquidity to Omani banks which they can use as they see fit," said Giyas Gokkent, chief economist at National Bank of Abu Dhabi.

"The lowering of the reserve requirement will also allow banks to get a return on the funds that have been released." Oman's stock index, which fell 2.29 percent on Sunday, has fallen more than 30 percent this year.

The Omani central bank, tackling record inflation rates above 13 percent this year, raised reserve requirements in August to 8 percent from 5 percent in an effort to curtail credit growth.

But as the global credit crisis intensified, fighting inflation took a back seat as Gulf governments sought to boost confidence in their banks. Like most of its neighbours in the Gulf region, Oman pegs its currency to the US dollar.

The central bank, which sets interest rates every Monday, cut its repurchase rate by 89 basis points to 1.53 percent last week ahead of a move by the U.S. Federal Reserve to slash its key interest rate to nearly zero.

It has also allocated about $2 billion to local banks to provide them with dollar liquidity, while the government set up a 150 million rial market-maker fund with the private sector to help stabilise the Gulf country's bourse.

Inflation, which has almost doubled in the last year, could "moderate significantly" in 2009 as price pressures decline in developed countries, food and non-oil commodity prices ease and the dollar gains, Oman's central bank governor said this month.

Omani inflation eased for a second month in October to 12.6 percent. (Reuters)

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