Muscat: The foreign exchange reserves in the Sultanate of Oman remained adequate, supporting the stability of the Omani rial’s fixed peg to the US dollar. Based on international standard metrics, foreign reserves held by the Central Bank of Oman (CBO) remained adequate in 2020 and the first half of 2021, the apex bank said in a report.
They provide sufficient external buffers for the fixed exchange rate regime and provide suitable coverage of imports, the central bank said in its 2021 Financial Stability Report.
“As an oil-exporting economy with a pegged exchange rate regime, it is critical for Sultanate of Oman to hold adequate forex reserves to safeguard the stability of the peg”, points out the report.
Price stability, says the report, continues to be one of the strengths of the economy, as the stable peg to the dollar continues to serve as a credible nominal anchor that supports price stability and minimises the risk of inflationary pressures.
The central bank maintained the forex reserves sufficiency in relation to rial cash balances, supporting the stability of the peg.
According to the report, over the past five years, on average, the values of gross forex reserves were 2.1 times reserve money and 4.0 times currency in circulation, while the net forex reserves were 1.7 times reserve money and 3.4 times currency in circulation, respectively.
During the first half of 2021, with strong support from external borrowing by the government, the reserves strongly rebounded to exceed its 2019 values, recording their highest values since 2017. In June 2021, the gross reserves reached RO 6.74 billion, 5.1 per cent higher than its December 2019 value of RO 5.77 billion.
It is notable that despite fluctuating oil revenues and persistent current account deficits, the foreign reserves maintained relative stability over the past few years. The year-end values of the net forex reserves remained around 20 per cent of GDP, ranging from 17 to 25 per cent, over the last decade.
“The fixed peg of rial to the dollar serves as a credible nominal anchor that supports price stability by eliminating the exchange rate component of imported inflation, which is a major determinant of inflation”, the report points out.
It limits excessive changes in domestic inflation through transmitting prevailing monetary conditions in the US to the Sultanate of Oman. Higher US inflation, especially in normal times where price stability is given the utmost priority, triggers a rise in the Fed’s policy rate, raising US interest rates and curtailing inflationary pressures.
“In the absence of bottlenecks in local markets and/or domestic policy shocks, this would keep Sultanate of Oman’s inflation in line with inflation levels in the US and Sultanate of Oman’s major trading partners”, the report adds.
Over the past five years, Sultanate of Oman’s average inflation remained well below the world average and the average in emerging markets and developing economies (EMDEs), and even lower than the average in the US.
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