Muscat – The Central Bank of Oman (CBO) on Monday said that the outlook for Oman’s economy looks positive in 2021 and 2022 due to the steady recovery in international oil prices and large-scale vaccination programme in the sultanate.
In the ninth issue of its Financial Stability Report (FSR), the CBO stated that the outlook for financial stability has improved with the rollout of vaccines and gradual transition to normalcy.
While acknowledging the challenges caused by the COVID-19 pandemic, the report mentions that the policy measures taken by the government and the CBO to support businesses and households avoided any major set-back and supported a rapid recovery of the economy.
‘Despite the heightened global uncertainty about the effectiveness of COVID-19 vaccinations and the new strains of the virus, the outlook for the Omani economy looks positive in 2021 and 2022 due to the steady recovery in oil prices, the credible fiscal consolidation measures taken by the government, as well as the implementation of the government’s large-scale vaccination programme,’ the central bank said.
The CBO said that a survey of a cross-section of market participants and other stakeholders conducted in August 2021 revealed that the majority of respondents showed confidence in the Omani financial system and their optimism regarding the likelihood of an adverse event in the near future improved as compared to the previous survey.
The central bank said that the combined impact of drop in oil prices and strict precautionary measures caused nominal GDP to decline by 17 per cent in 2020. Similarly, real GDP declined by 2.8 per cent, a considerably smaller contraction than what was expected by the International Monetary Fund.
The CBO, however, warned that the persistent twin deficit along with the upward trend in public debt remained key challenges to macroeconomic stability in the sultanate. ‘Both domestic and external public debt increased during 2020 and the first half of 2021 to finance the elevated twin deficit. External debt continues to be the main source of deficit financing, but it also played an important role in supporting CBO’s foreign reserves.’
Despite these challenges, the CBO said its foreign reserves remain adequate to support the stability of the fixed exchange rate regime and to provide suitable coverage of imports.
‘Price stability continued to be one of the strengths of the Omani economy. The stable fixed peg to the US dollar continued to serve as a credible nominal anchor that supports price stability and minimises the risk of imported inflationary pressures,’ the CBO said.
The report said that the sultanate’s consumer price index inflation, which turned negative in 2020, is expected to moderately rise in 2021 due to the anticipated economic recovery and the application of the value added tax (VAT).
The CBO’s report also highlights that the Omani banking sector continued to be robust with strong soundness indicators despite the challenging operating conditions.
‘The stress induced by the pandemic has created fragilities for the banks and the borrowers. However, due to the international regulatory reforms and domestic regulatory norms, banks in Oman entered the pandemic from a position of strength with large capital buffers, which helped them sail through the stressed period,’ the report said.
The robust capital base of the Omani banks, the CBO said, provided them ample cushion to expand their balance sheets while absorbing the shocks.