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Tue 1 Nov 2011 05:52 PM

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Oman cenbank chief upbeat on economic prospects

Hamood Sangour al-Zadjali says policy mix working to shelter from global challenges

Oman cenbank chief upbeat on economic prospects
Oman Central Bank executive president Hamood Sangour al-Zadjali

Oman's policy mix is well set given current global challenges and domestic need to create jobs and diversify away from oil but the Gulf Arab sultanate's central bank is watching inflation very closely, its head said on Tuesday.

The small non-OPEC crude exporter has been keeping a loose monetary policy stance since early 2009 as inflation eased from the double-digit rates of the oil-boom year of 2008.

However, social unrest seen earlier this year made its government boost spending by nearly 14 percent in 2011 compared to its original plan of OR8.1bn ($21.1bn).

Asked whether this was a right policy mix for Oman, Central Bank executive president Hamood Sangour al-Zadjali told Reuters: "Yes, it is working very well."

"It's creating employment opportunities and also developing the country and diversifying the economy, which we need to do anyway. We cannot be dependent on oil for a long period of time," he said on the sidelines of a financial forum in Kuwait.

The country of 2.8 million people lacks a fully independent monetary policy because, like most Gulf oil producers, its rial currency is pegged to the US dollar.

Oman's banks are not directly exposed to the euro zone debt crisis but the economy would take a hit if oil prices plunged as it depends on crude for 69 percent of budget revenues and the hydrocarbon sector accounts for 46 percent of economic output.

The central bank keeps the rate it uses for draining excess liquidity from the market at around 0.08 percent at its weekly auctions of deposit certificates, near the lower end of the US benchmark rate range of zero to 0.25 percent .

Oman needs to keep its rates more or less in line with the Federal Reserve to avoid excessive pressures on its $2.6 per rial peg, in place since 1986.

The central bank drained OR136m from the market in a CD auction on October 17 at an average rate of 0.08 percent. Demand stood at OR441m.

The bank's repo rate, which it uses to inject liquidity via purchases of deposit certificates or government bonds, has stood at 2.0 percent since May 2009.

Protesters demanding jobs and an end to graft prompted Sultan Qaboos bin Said, a US ally who has ruled Oman for 40 years, to promise a $2.6bn spending package in April. He also announced plans to create 50,000 new jobs among other measures.

Oman's wealthier Gulf neighbours pledged $10bn in aid in March to help the sultanate to improve living conditions and ease tensions.

"The projects have to be completed as they are planned but we have to watch that all this expansionary policy does not create an inflation threat," Zadjali said.

"So we are very careful and we look at inflation not to eat up the value of the currency," he said.

Inflation in Oman climbed to a 29-month high of 5.3 percent on an annual basis in August, one of the highest rates in the Gulf region, and jumped 1.4 percent on the month mainly due to rising food and housing costs.

However, it is still far below a record high of 13.7 percent seen in June 2008.

Asked whether he was worried about inflation at the moment, Zadjali said: "Not worried, but we will keep a very close watch on inflation. I think the inflation rate is at a reasonable level around 4.5, 5 percent."

Analysts polled by Reuters in September expected average inflation of 3.9 percent in 2011 after 3.3 percent in 2010, in line with the central bank's expectation of around 4 percent.

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