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Oman inflation jumps, showing cost of dollar peg

(Reuters)
Filed on April 13, 2008

MUSCAT/DUBAI - Annual inflation in Oman, one of six Gulf oil producers, surged above 10 percent this year for the first time in at least 18 years, highlighting the cost of being pegged to the ailing dollar as food prices soared.

Food, beverage and tobacco costs- which account for almost a third of the consumer price index- surged 17 percent in January and 19.6 percent in February, the Omani Ministry of National Economy said on its Web site on Sunday.

Inflation climbed to 10.1 percent and 11.1 percent in the two months, respectively, the ninth consecutive rise. The consumer price index was at 120 points on Feb. 29, compared with 108 points a year earlier.

“There is no quick fix,” Omani Economy Minister Ahmad bin Abdul-Nabi Mekki told Reuters on the sidelines of an investment conference in the Omani capital, Muscat, on Sunday. “Inflation will take its natural course in 2008.”

The U.S. dollar has lost a third of its value against the euro since the start of 2006, dragging down the currencies of Gulf oil producers such as Saudi Arabia and Oman that are pegged to the greenback. That has made some imports more expensive.

“The very sharp and sustained upward trend on inflation is causing real alarm, but the policy response has been limited,” said Simon Williams, regional economist at HSBC Holdings Plc.

Omani inflation has doubled in eight months.

Cereal prices were up 32.7 percent in February, relative to a year ago, fish 50 percent and eggs 24 percent, according to the data. Rents, meanwhile, were 14.1 percent higher.

TRACKING THE U.S.

The dollar peg means Gulf oil producers have been cutting interest rates in line with the United States, which is looking to ward off recession, while Gulf economies are surging on a five-fold increase in oil prices during the last six years.

“Oman needs to slow economic expansion, on money we spend on big projects,” Central Bank Executive President Hamood Sangour al-Zadjali told Reuters on the sidelines of the conference.

The central bank raised bank reserve requirements in December for the second time in five months to 5 percent from 3 percent to prevent lower borrowing costs from stoking inflation.

“We are observing the liquidity situation in Oman, and if we need to raise it again we will do so,” Zadjali said.

Oman’s annual money supply jumped 40.5 percent in February, its fastest pace in at least four years. [ID:nL1391544]

Rising inflation has prompted Gulf governments to introduce policies to offset the impact of price rises on their people.

Saudi Arabia, where inflation almost doubled to 8.7 percent in the six months to February, raised cost-of-living allowances, boosted subsidies and cut import levies to ease inflation.

Oman’s ruler, Sultan Qaboos bin Said, ordered an increase of up to 43 percent in state workers’ wages, and 5 percent to 35 percent more for state pensioners.

“I don’t see much near-term relief,” HSBC’s Williams said. ”Domestic demand growth is strong, fiscal policy is expansionary, interest rates are negative, global commodity prices are rising, and the currency is weak.”

Oman, whose economy grew 7.2 percent in real terms in 2006, set its 28-day certificate of deposit rate at 0.79 percent at its last weekly auction.

While Zadjali has reiterated Oman’s commitment to keeping its rial’s dollar peg at the same rate, investors in forward contracts are maintaining bets that the Omani rial OMRF will rise 2.6 percent in a year.





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