OBG talks to Hamood bin Sangour bin Hashim Al Zadjali, Executive President, Central Bank of Oman (CBO)

Interview: Hamood bin Sangour bin Hashim Al Zadjali

To what extent is the sultanate’s inflation imported, and how is policy being tailored to address this?

HAMOOD BIN SANGOUR BIN HASIM AL ZADJALI: The CBO and the government closely monitor the price situation in both domestic and international markets so as to take timely action as and when required without jeopardising the growth of the economy. The eighth five-year development plan for 2011-15 strives to realise low inflation rates throughout the plan period by developing market monitoring means, awareness of consumers, and encouraging importers to diversify and expand their imports.

The annual inflation rate measured by movement in the average consumer price index stood at 4% in 2011, compared to 3.3% for the previous year. Although inflation expectations largely remain anchored in Oman, the upside risks to inflation have been building up mostly due to external factors, supported by domestic demand. When we look at the major groups that contributed the most to the 4% inflation rate in 2011 – food, beverages and tobacco, and personal care items and other services – we see that they consist mostly of imports and account for nearly 73% of price rises in 2011. It could be inferred from this that prices were mainly influenced by elevated global commodity prices.

What liquidity management operations does the CBO undertake to ease short-term fluctuations and maintain stability in the money market?

AL ZADJALI: Under a fixed exchange rate, the CBO has to adopt the monetary policy of the anchor country to avoid any pressure on the exchange rate. Within this limitation, the CBO selects the appropriate strategy in discharging its responsibilities as a monetary authority to ensure monetary stability. The primary focus of our policy is to ensure an appropriate level of liquidity so as to avoid internal and external imbalances. The CBO uses both direct and indirect instruments for liquidity management and thereby tries to achieve monetary stability. With regard to direct instruments, the CBO uses the cash reserve requirement and the lending ratio from time to time, depending on the circumstances.

Indirect instruments include sale of CBO certificates of deposit (CDs) to absorb excess liquidity, repo operations to inject liquidity into domestic currency, and swap and reverse swap operations for lending in foreign currency to domestic commercial banks in case of need.

Besides operationally active CDs and repos, the CBO can provide discounting facilities to commercial banks against eligible securities.

How will the introduction of Islamic finance broaden opportunities in the financial market?

AL ZADJALI: The CBO has finalised a regulatory framework and believes that the advent of Islamic banking in Oman will complement existing conventional banking, augment financial inclusion and promote growth in the economy for years to come. Two new local banks, Bank Nizwa and Al Izz Islamic Bank, have been granted licence approvals, while almost all local banks have shown interest in Islamic financial services. Oman offers vast potential for the growth of Islamic banking by opening up new segments to players both from banks within Oman and investors from abroad, thus providing opportunities for new foreign investments.

Local banks are optimistic that they will be in a position to significantly increase business through Islamic finance windows. In a competitive environment, the consumer should get the benefit of choosing between both conventional and Islamic banking products. Innovative asset-based financing, including prospects of sukuk (Islamic bonds), provide immense opportunities as well. This will enhance product diversification in the banking system over the long term.

Both the government and private sector are focusing on developing and employing Oman’s young human resource base through training and education, while also focusing on infrastructure and value-addition project development. The CBO believes that new horizons offered by Islamic finance augur well for the broader market and investment climate of the sultanate.