Oman’s central bank hopes local lenders will not raise loan and deposit rates because of tightening liquidity arising from low oil prices, but rises may be inevitable depending on the trend in US rates, a top central bank official said yesterday.
One major commercial bank, Bank Sohar, has in the last few weeks informed some clients that it is raising rates for loans and deposits.
The rate on some personal loans will rise to 5.5% from 4.99%, effective December 15.
“Unfortunately, market conditions have now changed and the cost of funding has significantly increased,” Bank Sohar said in a note to clients. “As a result, it has become extremely challenging to hold interest rates at current levels.”
Central bank executive president Hamood Sangour al-Zadjali told Reuters that Bank Sohar’s hike followed a previous lowering of rates by that bank, so the hike was within allowable limits.
A 6% cap on rates for loans to individuals is still in place, he added.
“The increase was 0.5 percentage point, and we will try not to see it happening with other banks,” al-Zadjali said.
However, he noted that there had been upward pressure on Omani banks’ loan and deposit rates since oil prices began dropping about two years ago, because a decline in government deposits had pressured liquidity in the banking system.
In addition, the US Federal Reserve is widely expected to raise rates when it meets next week.
“Depending on changes in the Federal Reserve rates, (Omani rates) might increase more,” al-Zadjali said.
There is also talk among Omani banks that Iranian institutions could withdraw funds to repatriate them after the lifting of economic sanctions on Tehran in January.
Asked about this, al-Zadjali said the movement of Iranian deposits could have an impact on liquidity in Oman, but he did not elaborate.
After the US Federal Reserve last raised interest rates in December 2015, Oman’s central bank kept its own official rates flat, even though several other Gulf central banks hiked their own rates in response.
However, economists believe Oman could not resist an uptrend in US rates indefinitely because of the peg of its rial currency to the US
dollar.
The central bank’s quarterly bulletin for September showed it had raised its official repo rate, which it uses to lend money to banks, marginally to 1.025% from 1.000% previously.
The central bank did not issue a public statement on the repo rate change but al-Zadjali said the increase was based on a rise in the London interbank offered rate. “The Libor rate was below or at 1% for many years, and since it has gone higher than that, the repo rate also increased as our repo formula is based on Libor.”

‘Oman looking at spending cuts in 2017 budget’

Oman’s Finance Ministry is looking at cutting expenditure again in the state budget for next year to reduce a deficit caused by low oil prices, sources briefed on the ministry’s thinking told Reuters on Tuesday. A draft budget for 2017 foresees a 5% cut in spending from this year’s budget, and no increase in revenues, the sources said.
The draft assumes an average oil price of $45 per barrel. The ministry declined to comment on its 2017 budget plan, which is expected to be released around the end of this year or early next. 
The 2016 budget envisaged state expenditure of 11.9bn rials – down 11% from actual spending in 2015 – and revenues of 8.6bn rials; officials said their 2016 economic plans also assumed an average oil price of $45.



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