Oman's Central Bank has stepped up its borrowing from local banks to stem swelling domestic liquidity and tackle festering inflation in the absence of other effective fiscal tools, official figures showed yesterday.

But such moves have failed to reverse a rapid growth in money supply and the Gulf country still appears to be tempted by surging oil revenues to overshoot budgeted spending in defiance of IMF recommendations.

From around RO249 million (Dh2.39bn) at the end of 2006, the total Certificates of Deposits (CDs) issued by the Central Bank of Oman (CBO) leaped to RO1.08bn at the end of 2007 and about RO1.36bn at the end of June 2008, CBO's quarterly report showed.It gave no figures for July and August but commercial bank data showed more than RO190m were issued in the past six weeks.

The surge in borrowing was reflected in sharp rise in CBO's foreign assets, which jumped from around RO1.92bn at the end of 2006 to RO3.66bn at the end of 2007 and a record RP3.86bn at the end of the first half of this year, according to CBO.

Deposits with foreign banks rose from RO516m to RO1.39bn before receding to nearly RO812m by end-June. But securities, which became more attractive following the fall in interest rates, shot up from about RO1.39bn to RO2.25bn and to RO3.03bn in the same period.

But the figures showed the surge in CD issuance has failed to reverse a rapid growth in money supply, with M1 jumping from around RO1.22bn at the end of 2006 to RO1.92bn at the end of 2007 and nearly RO2.24bn at the end of June.

M2, which includes M1 and quasi money, soared from RO4.46bn to RO6.11bn and RO7.02bn.

Like other Gulf oil producers, Oman has been hit by soaring inflation rates mainly because of a surge in rents and food prices, strong demand due to high investment spending and soaring imports because of the ailing US dollar to which the currencies of most regional states are pegged.

From only 1.9 per cent in 2005, inflation in Oman accelerated to 3.4 per cent in 2006 and 5.9 per cent in 2007. It hit a record 11.8 per cent in the first half of 2008 over the first half of 2007, according to the Ministry of National Economy. A breakdown showed food and rents were the main cause of the problem, with food, beverage and tobacco prices leaping by 20.8 per cent in the first half of 2008 compared with 9.4 per cent in the same period of last year. Rents jumped by around 10.4 per cent from nearly six per cent in the same period.

Despite recent calls by the International Monetary Fund on Gulf states to curb spending as part of measures to stem inflation, expenditure has remained far higher than the budgeted level in most regional countries as they are tempted by a rise in their oil export earnings.

In Oman, actual public expenditure soared by nearly 15 per cent to RO2.53bn in the first five months of 2008 from RO2.20bn in the same period of last year, the Ministry's figures showed.

Despite the surge, the budget recorded a bigger surplus of around RO813.8m compared with RO777.2m .

Oil export earnings, which account for more than 60 per cent of Oman's total income, leaped by 24 per cent to nearly RO2.18bn from RO1.76bn in the same period after the average price of Oman's crude jumped to $90.03 from 58.35 a barrel.

Besides higher crude prices, Oman also boosted its crude production by nearly 25,000 barrels per day in the first five months as it is pushing ahead with plans to raise its sustainable output capacity to around 900,000 bpd.

From an average 713,000 bpd in the first five months of 2007, Oman's oil production jumped to 738,700 bpd in the first five months of this year. The increase is in line with plans by the government to push up crude production to 790,000 bpd in 2008 after a steady decline in output over the past five years because of lower than expected oil investment to fund gas projects.

Oman, which is not a member of Opec, pumped nearly 714,000 bpd of crude oil last year, far lower than the 2002 peak of 898,000 bpd. The surge in oil production has allied with higher crude prices to boost Oman's revenues to RO3.35bn in the first five months of this year from RO2.8bn in the same period of last year.



THE NUMBERS

RO1.36: In billions was the total Certificates of Deposits issued by the Central Bank of Oman at the end of June 2008


RO3.86: In billions was the Central Bank of Oman's foreign assets at the end of H1, 2008


11.8%: Inflation in Oman hit this record in the first half of this year