FOREWORD It is considered as the privilege of the Central Bank of Oman to present its Annual Report for the year 2000 to His Majesty, Sultan Qaboos bin Said, Sultan of Oman. The expansion in domestic economic activities observed in the preceding year gained momentum in the year 2000. The continued buoyancy in international oil price aided Omani economy to post handsome output gains in the year under reference. The proactive domestic economic policies too added to the improved performance of the economy. The shift in the focus of the public policies allowing private sector to play a larger role, and new philosophy of economic development as emphasised by His Majesty on the occasion of 30th National Day celebration, augur well for promoting sustained economic growth and to move the Omani economy forward to the higher growth path. Overall GDP at current market prices is estimated to have risen robustly by 26.7 per cent in 2000 as compared with that of 10.4 percent in the preceding year. The major part of the increase came from the petroleum activities. Non-oil GDP too rose higher at around 8 percent. Higher oil revenue rendered fiscal management easier. Larger oil export earnings turned external current account into a significant surplus during the year and almost doubled the balances under State General Reserve Fund. Prices as measured in terms of consumer price index, dropped by one percent. The performance and profitability of the commercial banks remained satisfactory. The Central Bank besides acknowledging the continued cooperation and support extended by the Government, banks and other institutions, appreciates efforts put in by the management and staff of the Bank during the year. Dr. Ali Mohammed Moosa Minister of Health & The Deputy Chairman, Central Bank of Oman OVERVIEW AND OUTLOOK
Overview International Economic Setting The world economy expanded further in 2000 posting handsome output gains on top of a significant output expansion in the preceding year. Encouragingly, the output growth was higher in the developing countries and countries in transition, with low rate of inflation. The relatively strong growth in world output in 2000 was due to the combined effect of higher order of growth in the US, rebound in economic activities in the European Union, recovery in the Japanese economy and consolidation of output gains in the Asian countries. While world real output grew significantly, world trade volume in goods and services improved alongside impressively as compared to the preceding year. Although the performance of consumer prices across the globe was mixed, underlying inflationary pressures remained subdued. The world prices of oil stayed high brightening the growth prospects of oil exporting countries. However, the global interest rates climbed up during the year. Real world output expanded by 4.8 percent in 2000- highest in the last few years since the recent economic crises around the globe. While the group of advanced economies registered output gains of 4.1 per cent, developing countries recorded larger economic growth of 5.8 per cent. In terms of regional groups, Developing Asia posted highest growth at 6.9 percent in 2000 followed by the group of Middle East, Malta & Turkey at 5.4 percent. Africa recorded a growth of 3.0 percent, while the countries of Western Hemisphere grew impressively by 4.1 percent as compared to that of 0.2 percent in the preceding year. The volume of world trade in goods and services expanded markedly by 12.4 per cent in 2000 as compared to that of 5.3 per cent in the preceding year. In the case of advanced countries, the volume of both exports and imports improved individually by 11.4 per cent. For the developing countries, the volume growth of trade in goods and services was more pronounced in 2000; export volume rose by 15.7 percent, while volume of imports expanded larger by 16.9 percent. As world trade prices of oil also improved during the year, the terms of trade for fuel exporters improved significantly by 45.6 per cent in 2000. On price front, the rate of inflation recorded was different as between the group of countries. In the case of advanced countries, the inflation rate as measured by consumer prices was higher in 2000 at 2.3 percent. Developing countries as a group recorded a lower rate of inflation at 6.1 per cent as compared to 6.7 percent in the preceding year. Interestingly, all the groups of developing countries registered decline in the escalation of prices in 2000. The prospects for global economic performance in 2001 appear to be hazy. The marked slow down in the US, limping recovery in Japan, moderating growth in Europe and lower growth momentum in Asian countries seem to
dampen the growth prospects in the year 2001. The world output is expected to grow lower by 3.2 per cent in 2001 while the fuel exporters are expected to record a lower output expansion of 5 percent. The inflation rate is projected to soften to 2.1 per cent and 5.7 percent in the advanced and developing countries, respectively. The volume of world trade in goods and services is estimated to expand by 6.7 per cent in the current year. However, the terms of trade for the fuel exporting countries may decline as the average price of oil is expected to be lower than that in the preceding year. Domestic Economic Development Omani economy performed better in 2000. Higher international oil prices combined with prudent public policies strengthened the Omani economy further. Strong world economic growth in 2000 improved the global demand for oil which mainly helped international oil prices stay high during the year. The average oil price for Omani crude which was US $ 17.35 per barrel in 1999 rose to US$ 26.71 per barrel in 2000. Escalation in oil prices coupled with the moderate improvement in the oil production increased Government revenue and export earnings which strengthened Government's fiscal balance besides building up international assets significantly. Gross Domestic Product Preliminary estimates show that the Gross Domestic Product (GDP) at current market prices rose in 2000 by 26.7 per cent over and above 10.8 percent in 1999. The rise in national output was mainly attributable to the higher contribution of the petroleum sector to GDP by 57.7 per cent. Nonpetroleum sectors including agriculture and services too expanded by 7.7 percent. In 1999, these sectors had contracted by 3.5 per cent. Among non-petroleum sectors, the growth pattern in 2000 was quite uneven. While 'manufacturing' rose by 56.7 percent, 'construction' activities contracted by 16.9 percent. 'Agriculture' expanded by 2.8 percent and 'fishing' rose by 3.7 percent. While the general level of prices dropped by 1 per cent, gross domestic as well as national savings are estimated to have improved significantly in 2000 reflecting higher output expansion. Government Finance The Government fiscal position improved substantially in 2000 with the significant rise in the contribution of Government saving to overall domestic saving. Actual fiscal deficit contracted to RO 324 million from RO 473 million in the preceding year. Total revenue receipts showed an increase of 27 per cent to RO 2284 million. Net oil revenue at RO 1721 million was higher by 43 per cent as compared to that in the preceding year, 'Other current revenues' under non-oil revenue receipts declined by 14 per cent from RO 520 million in 1999 to RO 449 million in 2000. On the expenditure side, the buoyant revenue position enabled the Government to stretch the public expenditure in order to stimulate the economy and to complete several ongoing projects which were put on hold in the earlier years due to slump in international oil price. Accordingly, total expenditure rose by 15 per cent from RO 2269 million in 1999 to RO
2608 million during the year under reference. While 'current expenditure' showed a small rise of 13 per cent, the 'investment expenditure' rose faster by little over 15 percent in 2000. Expenditure on account of 'participation & subsidy to private sector' stood higher by around 15 percent in 2000. The deficit of RO 324 million was entirely financed by drawing down the SGRF balance. In fact, draw down of SGRF balances at RO 346 million was larger than the deficit as other items of financing showed net payment during the year. As percent of GDP, the fiscal deficit declined from 7.9 percent in 1999 to a near sustainable level of 4.3 percent in 2000. Monetary and Banking Developments Narrow money (M1), expanded by 4.8 percent over the year to RO 534 million. The currency with the public rose by 1.2 per cent and Rial Omani demand deposits jumped up by 8.9 per cent. Broad money (M2), expanded by 6.0 per cent to RO 2404 million as at the end of December 2000 as the quasi money stock rose by 6.4 per cent. In terms of factors affecting the money supply (M2), net foreign assets declined by 6.7 percent while net domestic assets rose by 13.4 per cent. The increase in net domestic assets was brought about by moderate expansion in bank credit to private sector by around one percent. While domestic interest rates on deposits softened somewhat, those of aggregate bank lending edged up during 2000. The weighted average rate of interest on all deposits at 5.43 per cent as at the end of December 2000 was lower as compared to that of 5.79 percent in the preceding year. Weighted average interest rates on Rial Omani deposits were lower at 5.45 per cent as at the end of December 2000 as compared to 5.89 per cent a year ago. However, while Rial Omani lending rate came down by 258 basis points to 10.06 percent, the weighted average interest rate on commercial bank total lending was a shade higher at 9.68 percent as at the end of December 2000 as compared to that of 9.64 percent a year ago. The spread between the banks' total deposit and lending rates widened by 394 basis points to 4.245 percent as at the end of December. However, spread between private sector deposits and lending to the private sector rose only by 133 basis points, reflecting softening of interest rate charged particularly on personal loans. Although the interest rate spread has increased, the profits of the commercial banks were moderated during the year mainly because of the provisioning for diminution in the values of investments. To enumerate important policy developments in the banking and financial system, the overall ceiling on personal loans was relaxed to 35 percent of the total credit portfolio of the banks with effect from October 2000. The Commercial Bank of Oman was allowed to merge with the Bank Muscat in order to mainly achieve synergy in banking business. The Banking Law was revised and updated to take into account the recent developments in the domestic and international banking and financial sector. The Law, interalia, grants greater investment powers to the banks; elaborates banking business to cover new areas; and streamlines the exposure towards loans secured by real estate and holding real estate securities.
The Muscat Securities Market remained bearish in 2000. The General Index of share prices dropped from 250.26 as at the end of 1999 to 201.20 as on December 31, 2000 reflecting a loss of around 20 percent over the year. Prices The level of prices declined in 2000. The prices measured in terms of consumer price index dropped by 1.2 percent. In 1999, the consumer price index had registered an increase of 0.5 per cent. Group-wise, fall in the index under 'recreation & entertainment' by 3.9 percent was sharper, followed by 'transport & communication' (2.2 percent) and 'housing material & furniture' (2.1 percent). Balance of Payments The preliminary estimates of balance of payments for 2000 which are presented in the new format being followed from the current year, showed that merchandise trade account recorded a significant surplus of RO 2586 million due to surge in export earnings because of pick up in international oil price. In 1999, there was a trade surplus of RO 1130 million. While services account showed a net payment of RO 468 million, income account and current transfers recorded outflow of RO 276 million and RO 560 million, respectively. As a result, the current account showed a marked surplus of RO 1282 million during 2000 as against a moderate deficit of RO 142 million in the preceding year. In terms of percentage to GDP, current account surplus accounted for 16.9 percent. million after making allowance of RO 260 million (negative) for net errors and omissions, which accrued to the reserve assets. While Government reserves (balances under SGRF) showed a healthy increase of little over one billion Rial Omani, the foreign exchange assets of the Central Bank of Oman declined by RO 133 million in 2000 mainly because of withdrawal of a part of SGRF funds parked by the Government with the Central Bank. Outlook The short-term prospects for global economic growth appear to be relatively weak with the expected slow down of US economy. The decline in world economic growth may slacken the global demand for oil. As a result, oil price scenario though looks promising at this juncture, remains uncertain. The performance of the Omani economy in 2001 hinges broadly on the behaviour of international oil price. Assuming that the level of oil price prevailing in the first half of the year would stabilise, Omani economy is expected to register continued strong growth in 2001. Higher level of oil price would render fiscal administration easier and yield balance of payments surplus helping to build international assets further. Inflationary tendencies are expected to remain under control. With the liquidity conditions remaining comfortable, interest rates may not show greater volatility. On capital and financial account, there was a net outflow of RO 153 million. All the current, capital and financial transactions put together, yielded a positive overall balance of RO 869