By Martin Dokoupil
Central bank sees inflation nearly tripling this year on imported price pressures.
Oman's inflation will accelerate this year to 4 to 5 percent as the economy improves while sharply higher oil prices should enable the government to post a budget surplus, officials said on Tuesday.
The non OPEC oil producer also vowed to maintain its currency peg to the dollar and said it was not reconsidering a decision to pull out of a planned Gulf Arab monetary union.
The global downturn slashed inflation across the world's largest oil exporting region last year with some Gulf countries such as the UAE and Qatar seeing deflation.
But prices are ticking up again with economic recovery under way and large fiscal stimulus packages still in place.
Consumer price inflation in Oman shot up to a five month high of 1.7 percent in January and its central bank sees inflation nearly tripling this year on imported price pressures.
Speaking to Reuters at the sidelines of an economic conference, Hamood Sangour al Zadjali, executive president of the central bank said: "There will be an increase in inflation but not to a level that would cause difficulties. Of course most inflation will be coming from outside."
He said: "It will be within expected limits, between 4 to 5 percent."
The central bank prediction is above the economy ministry's forecast in January of 3.5 percent, but inflation will be still well below a record peak of 13.7 percent in June, 2008. Analysts polled by Reuters see 2010 inflation at 4 percent.
Monica Malik, chief economist, EFG Hermes, said: "We continue to see inflation picking up, driven mostly by housing price increases as Oman continues with its investment programme and external factors such as a pick up in global food prices."
Oman's economy is expected to grow 6.1 percent this year, both Zadjali and Economy Minister Ahmad bin Abdul Nabi Mekki reiterated on Tuesday, helped by recovery in oil prices.
The country's gross domestic product rose 3.7 percent in real terms in 2009. Analysts forecast 4 percent growth this year as the government boosts spending by 12 percent and oil output is set to rise by nearly 11 percent.
Despite budgeting a deficit this year, Oman now expects a surplus as oil prices are now seen at $60 to $80 per barrel, above initial projections, Mekki said.
Speaking to reporters, he said: "From the beginning of the year until today, we have achieved an oil price of $70 per barrel, so I hope we will not face any deficit."
He said: "Our prediction is that the oil price will be between $60 and $80, and I think we are alright until now."
Oman had based its 2010 budget on a projected oil price of $50 a barrel and expected a deficit of $2.08 billion given plans to finance a range of infrastructure projects.
OPEC meets on Wednesday to discuss output but no action on targets is expected even beyond this meeting.
Oman will also likely issue $316.8 million in domestic bonds at the end of 2010 to replace the same amount of debt maturing in November, Zadjali told Reuters. Mekki said no decision had been taken yet.
When asked if any international issues were likely in 2010, Zadjali said: "I don't think so."
The Omani government has maintained a tight control of public debt in the past years and Mekki told the conference the debt fell to 5.6 pct of GDP in 2009, from 34 percent in 1999.
Farouk Soussa, head of Middle East government ratings at Standard & Poor's, said: "They can run deficits of 10 percent of GDP in the next five years without drawing down their assets and there are very few countries that can do it."
The country is rated "A" by Standard & Poor's. Moody's last month upgraded Oman to "A2", from "A1", citing the strength of public finances. Analysts expect a fiscal surplus of 4 percent in 2010.
Oman will continue to maintain its currency peg to the dollar and is not reconsidering a decision to pull out of a planned Gulf Arab monetary union at this time, Zadjali said.
"We shall continue to maintain that peg," he told Reuters in remarks ahead of a meeting of Gulf central bank governors in Kuwait next week.
The sultanate pulled out of a planned monetary union with Gulf neighbours in 2006, and was followed by the UAE in 2009.
Kuwait, which runs the six nation Gulf Cooperation Council (GCC) this year, has made bringing both states back a priority. (Reuters)