Gulf oil producer Oman ruled out revaluing its currency or dropping its peg to the dollar any time soon saying a weaker rial helps attract foreign investment and make exports more competitive, offsetting inflation effects.
It also ruled out altogether joining a Gulf Arab plan to create a single currency – ostensibly by 2010, central bank Governor Hamood Sangour al-Zadjali said in an interview in the Omani capital, Muscat.
"We might lose more than we would benefit if we reform the currency," said Zadjali, who is Executive President of the Central Bank of Oman. "For Oman, currency reform is not on the agenda for the time being."
Zadjali said he was unaware of any talks by Gulf Arab partners such as Saudi Arabia, the United Arab Emirates and Qatar to revalue their currencies in unison, though it was an option for them.
Gulf Arab states, which supply about a fifth of the world's oil, are struggling to contain inflation that has soared to near all-time highs as near-record oil prices spur economic growth.
All but one of the states – Kuwait – have long-pegged their currencies to the dollar.
In November, the US dollar fell to a record low against an index of six major currencies, helping fuel inflation in the Gulf region of 35 million people by making imports from countries – where currencies have appreciated against the dollar – more expensive.
The weaker Omani rial contributes to about a fifth of domestic inflation, Zadjali said, which struck at least a 16-year high in November of 7.6 per cent on rising rents and food prices.
"For the time being, we are not thinking of revaluing because it would not eliminate inflation, and if you can't revalue once, you have to do it again and again – there is no end to it," Zadjali said on Saturday.
"Pegging to a basket would not eliminate all of our problems of inflation because we have to import goods at higher prices as production costs rise globally," he said.
Kuwait in May dropped its peg to the dollar, tying to a basket of currencies of which the US unit is still the biggest component. The Kuwait dinar has since risen almost 6 per cent against the dollar.
Like other Gulf states, Oman is trying to diversify its economy away from oil, which generates almost half the country's gross domestic product.
In 2004, Canada's Alcan Inc agreed to help develop an aluminium smelter in Oman, the first investment by a foreign firm in production of the metal in the region.
Four of the world's five-biggest holders of natural gas – including Qatar, the UAE and Saudi Arabia – are in the Gulf, all of which are either starting or developing aluminium industries to capitalise on plentiful and relatively cheap energy reserves, and help create jobs.
"Having a stable currency helps us attract foreign investment," said Zadjali. Oman, where the population of 3.2 million is growing at about 3.2 per cent per year, is also developing chemicals, fertiliser and liquefied natural gas industries. "The only con is the imported inflation."
"The US economy is going to weaken, interest rates are going to be lower and the dollar will be under pressure, but as long as you are pegged to that currency you have to accept the woes of the currency," he said.
Asked about Gulf Arab plans to create a single currency – to which Oman agreed in 2003 but then said it would not join by the agreed 2010 deadline, Zadjali said: "Oman is not going to join the currency union. This is a government decision." (Reuters)
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