New initiative to enhance monetary policy in Oman

ALL-ROUND BENEFITS: CBO’s Monetary Policy Enhancement Project will further strength Sultanate’s economic and financial stability

The Central Bank of Oman (CBO) says its new Monetary Policy Enhancement Project, launched at the start of this year, will help unleash an array of benefits that will contribute to further strengthening the economic and financial stability of the Sultanate.  The overarching objective behind the initiative is to enhance the effectiveness and the transmission mechanism of CBO’s monetary policy within the boundaries of the fixed exchange rate regime, thereby reinforcing the country’s economic and financial stability, the sector regulator said.

Earlier, an action plan approved by CBO’s Board of Governors last December was fine-tuned by CBO experts with technical assistance provided by the International Monetary Fund (IMF), it pointed out. “Successful implementation of MPEP would have enormous positives impacts on the effectiveness of CBO’s operations in particular and on the Omani economy at large,” said the apex bank in its newly published 2020 Financial Stability Report.

“First, it would smooth the transmission mechanism of monetary policy in Oman within the boundaries of the fixed exchange rate regime, through improving domestic liquidity management, better alignment of domestic interbank rates with CBO’s policy rate, and boosting the efficacy of domestic interbank markets.

Second, it would raise CBO’s capabilities in performing two of its critical functions — the lender of last resort and guardian of financial stability — and would expedite the completion of the regulatory framework within which CBO performs these functions. Finally, it would expand CBO’s capacity as the monetary policymaker and as a consultant to the government on various economic affairs,” it stated.

Among measures initiated to this end is the scrapping of the use of USD LIBOR as the reference rate for CBO policy and standing facilities rates. Accordingly, the interest rates on CBO’s lending facility (repo transactions) and discount/rediscount facilities are calculated, with effect from March 2020, as the upper bound of the Fed’s target federate funds rate plus a spread.

Additionally, the Steering Committee is conducting an Interbank Market Survey on all traditional and international money markets and the challenges posed in meeting their short-term financing and investing needs. Significantly, a key objective of the Monetary Policy Enhancement Project is to support the development of a Domestic Money Market and Foreign Exchange (FX) market, according to the Central Bank.

“The goal is to strengthen the role of the interbank market as the primary source for meeting banks’ short-term financing and investment needs.  This dimension also considers increasing the availability of sharia-compliant money market instruments to Islamic Banking Entities (IBEs),” it said.

The monetary policy enhancement initiative will also help the Central Bank advance its macroeconomic forecasting capabilities. To this end, it is working with other government institutions to improve the quality of Oman’s macroeconomic data and enhance the reliability of existing macroeconomic forecasting models.

It is also working on the establishment of a centralised data hub to facilitate liquidity and macroeconomic forecasting. “Over the medium term, CBO is planning to set up an advanced framework for its macroeconomic forecasting, including building its own macroeconomic forecasting model,” it added.

CONRAD PRABHU

@conradprabhu