International borrowing to meet funding gap: CBO

Business Reporter –
Muscat, April 14 –

Oman aims to capitalise on the relatively low interest rates on overseas lending, as well as its favourable international crediting rate, to meet shortfalls in government budget amid the ongoing constrained fiscal environment, rather than withdraw from domestic reserves, according to the Central Bank of Oman (CBO).
It is one of several key observations made by the nation’s central bank in its mid-year review of the Omani economy for 2016 published at the weekend.
The government, the CBO stated in its review, plans to finance potential fiscal deficits by expanding its long term borrowing in the domestic market through government bonds/Sukuk and by raising external borrowings. Borrowing domestically would also facilitate financial deepening as well as developing a yield curve. While raising resources by the government from the domestic sources, there is close coordination between the government and the CBO to tap the market at appropriate time and to closely monitor any impact such borrowings would have on liquidity condition of banks to ensure that required credit to the productive sector is met.
“Taking advantage of country’s international credit rating and low interest rate prevailing abroad, it is important to rely primarily on international borrowing to finance government deficits rather than drawing from reserves,” the apex bank said.
The decline in oil price has enhanced the urgency for Oman to undertake fiscal adjustments and reform measures. The State General Budget 2017 envisages meaningful fiscal reforms based on efficient and effective resources allocation. On the revenues side, the government would improve its tax collection from higher corporate taxes and customs revenues through effective infrastructure.
On the expenditure side, measures have been initiated to bring about better targeting of subsidies. Another important objective has been to rein current expenditure, which is mainly in the form of current consumption and at the same time allocate adequate investment for the infrastructure projects of strategic importance, the central bank said.
Inflation which had softened in 2015 reflecting the decline in international commodity prices, reduced government spending and significant appreciation of US Dollar in real effective terms during the year, registered a modest rise in January-September 2016 due to revision in energy prices, user fees and turnaround in global commodity prices.
Reflecting the global trend, the average inflation based on CPI for the Sultanate (base 2012) which weakened to 0.1 per cent in 2015 increased modestly to 0.9 per cent in January-September 2016. When measured in terms of point to point rather than based on average, the CPI for the Sultanate pointed to inflation of 1.3 per cent at end-September 2016.
Despite the drop in crude oil prices and a general slowdown in economic activities, the balance sheet of other depository corporations (includes all conventional banks as well as Islamic banks and windows banks) continued on the growth path with increased accretion to deposits and credit. The total outstanding credit extended by the other depository corporations stood at RO 21.8 billion as at the end of September 2016, a rise of 11.0 per cent over the level witnessed a year ago. Total deposits registered a growth of 4.9 per cent to RO 20.4 billion as at the end of September 2016.
Reflecting the country’s overall balance of payments position, the gross foreign assets of the CBO during the first three quarters of 2016 increased by 12.4 per cent to RO 7,583.0 million from RO 6,745.8 million at the end of December 2015, the CBO added.