Inflation continues to drop in Sultanate

MUSCAT, NOV 23 – Inflation continues to be less volatile in Oman and lower than the average compared to other countries in the GCC during the four-year period between 2012 and 2018. Consumer inflation in the Sultanate remained very closely aligned to the same in the US and other advanced economies of the world over the past few years. Data released by National Centre for Statistics and Information, inflation recorded a decrease of 0.15 per cent in October 2019 compared to the same month in the previous year.

The drop in the inflation is mainly supported by rising domestic interest rates, following rate hikes by the US Federal Reserve in 2018, as well as the nominal effective appreciation of the Omani rial during 2018. “The stable peg of the Omani rial to the dollar serves as a credible nominal anchor that supports price stability through weakening the exchange rate channel of the pass-through effect of imported inflation”, according to a recent report by the Central Bank of Oman (CBO).  The NCSI data shows that inflation in Oman dropped from 1.6 per cent in 2017 to 0.9 per cent in 2018 — the lowest in three years.

According to the report by the apex bank, imported inflation is a major determinant of inflation in Oman due to the large dependence on imports of goods and services. “Moreover, scope for import substitution is still limited as the diversification efforts are yet to achieve the desired traction”, the report points out. Transmission of the prevailing monetary conditions in the US due to the currency peg also has a bearing on the level of inflation in Oman. “Higher interest rates in the US raise domestic interest rates in Oman and reduce demand side inflationary pressure,” the report says.

Similarly, lower interest rates in USA may cause an inching-up of domestic inflation through demand side pressure. Nevertheless, in the absence of bottlenecks in domestic retail markets, the currency peg ensures that inflation in Oman will remain in line with inflation rates in USA and Oman’s major trading partners. However, based on projections by International Monetary Fund, consumer inflation in Oman is expected to inch up in 2019 and 2020 to 1.5 and 1.8 per cent, respectively. These projections, according to the apex bank report, “are based on the expected combined impact of increased aggregate expenditure, lower interest rates in USA, the introduction of the excise tax in 2019, as well as the expectation of introducing the value added tax (VAT) by 2020”.