Central Bank of Oman Annual Report, 2008

H.M. Qaboos bin Said, Sultan of Oman

CENTRAL BANK OF OMANBoard of GovernorsH.E. Dr. Ali Mohammed MoosaThe Deputy ChairmanH.E. Mohammed Nassir Al-KhusaibiMemberH.E. Hamood Sangour Al-ZadjaliMemberH.E. Yahya Said Abdulla Al-JabriMemberMr. Mohsin Haidar DarwishMemberDr. Hatem Bakhit Al-ShanfariMember

Audit CommitteeAudit & InformationSecurityBanking Oversight,Market Operations & AccountingBankingInternal Audit InvestmentExaminationInformationSecurityBankingTreasuryDevelopmentBankingSurveillanceResearch &Market AnalysisLegalMonetaryOperationsAccounting& BankingOperationsORGANISATION CHART (CBO)The Board of GovernorsSilo/ DepartmentDomainExecutive PresidentBranchEconomic Research& StatisticsFinance, Payments &Corporate SupportSettlementsAdministration &Corporate RelationsSystems,Projects & Orgn.DevelopmentEconomicResearch &PaymentsCurrencyStatisticsHumanResourcesManagementCommunication& CorporateRelationsSystems,Projects & Orgn.DevelopmentGulfCooperationCouncil/InternationalFinancialOrganizationsInformationFinance Salalah BranchAdministration QualityTechnologyInternationalSohar Branch SecuritySettlementsCollege ofBanking &Financial Studies

CONTENTSPageForeword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1ChaptersI. Overview and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5II. Output, Employment and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15III. Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35IV. Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45V. Money, Banking and Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61VI. Foreign Trade and Balance of Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93Central Bank Accounts and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Statistical Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

FOREWORDIt is a great pleasure and privilege for the Central Bank of Oman to present its Annual Report for the year 2008 to HisMajesty, Sultan Qaboos bin Said, Sultan of Oman.Oman’s macroeconomic performance in 2008 continued to remain impressive, characterized by strong GDP growth,significant creation of job opportunities, further enhancement in the momentum of diversification, and large surplusesin the fiscal and balance of payments positions. Oman’s nominal GDP growth at 44 percent in 2008 was the highestever achieved. Petroleum activities continued to be the major driver of growth momentum with its contribution toGDP rising to 51.3 percent in 2008 from an average of about 46 percent in the previous four years. The growth processwas also supported by non-petroleum activities which witnessed a growth of 27.2 percent in nominal terms. Reflectingcomfortable balance of payments position, CBO’s foreign assets increased from RO 3,662 million at the end of 2007to RO 4,401 million by the end of 2008, which was equivalent to 6 months of cover for merchandise imports. Surgein oil prices in the global markets during the first three quarters of 2008 provided the Government with incentives topursue its expansionary fiscal policy in 2008 without resorting to budget deficit. In fact, the Government continued tomaintain fiscal surplus in 2008 primarily due to large increase in revenues, particularly from the oil sector.Oman’s average inflation rate at 12.4 percent in 2008 was mostly imported from the global markets and comparableto the regional trend. Globally, food and commodity prices surged and remained at an elevated level in the first threequarters of 2008. Since the last quarter of 2008, commodity prices, including oil prices, have been softening rapidlyin the international markets. Reflecting strong domestic demand, both broad money supply (M2) and commercialbank credit to the private sector expanded by 23.1 percent and 44 percent, respectively. CBO, in consultation withthe Government, took several anti-inflationary measures during 2008. Liquidity management received utmostattention of the CBO through constant monitoring and use of appropriate instruments. Despite global financial marketuncertainties, Oman’s banking system remained stable, well capitalized and resilient with noticeable surge in profitsand improved asset quality. Net profits of commercial banks rose further to RO 234.1 million in 2008 compared to RO213.7 million in the previous year. The outlook on growth remains a major policy challenge mainly due to recessionin the developed countries, fluctuation in oil prices, expected decline in world trade, and uncertainties in respect ofcapital flows to developing countries.The Central Bank of Oman acknowledges with utmost appreciation the cooperation and support it has been receivingon a sustained basis from the Government, commercial banks and other institutions in Oman. It takes this opportunityto place on record its deep appreciation for the management and the staff of the Bank for their continued commitmentto work and excellent contribution to the smooth and efficient functioning of the CBO.Dr. Ali Mohammed MoosaMinister of Health& The Deputy Chairman, Central Bank of OmanCentral Bank of OmanAnnual Report 2008 1

CHAPTER I

OVERVIEW AND OUTLOOKInternational DevelopmentsThe sub-prime crisis, which initially surfaced in the middleof 2007 in the US, intensified in 2008 into the worst everworld economic crisis after the Great Depression of the 1930s.During the first half of 2008, the international economicenvironment was dominated by concerns associated withhigh food, metal and energy prices and sub-prime relatedstress in the global financial system. Most of the developingcountries initially believed that the impact of the sub-primecrisis might remain, by and large, confined to the US, Europeand to a few other countries having direct exposures to toxicassets of the highly leveraged financial institutions in theUS and Europe. The collapse of Lehman Brothers in mid-September 2008 sent the panic wave around the globe andthe sub-prime crisis was intensified into an internationalfinancial crisis, affecting almost every country of the worldthrough trade and other financial channels. Asset pricestumbled dramatically around the world due to flight to safetyfollowing deepening of global slowdown in 2008. Creditmarkets continued to remain frozen, mostly in the US andEurope, despite large liquidity injections. The slowdown ofthe global economy further deteriorated into a deep recessionsince September 2008 with its contagion spreading rapidlyto the rest of the world. In fact, the developing countriescould not remain decoupled in an integrated world. Reversalof capital flows, correction of asset prices, decline in exportsdue to collapse of commodity prices, including crude oilprices, drastically scaled down the outlook on growth in thedeveloping countries along with intensification of recessionin the US, the euro area, and Japan.After witnessing robust growth for four consecutive years,the world economy sharply decelerated to 3.2 percent in2008, led by strong recessionary forces operating in the US,the euro area and Japan. The IMF in its April 2009 WorldEconomic Outlook projected that the world GDP wouldcontract by 1.3 percent in 2009 with bulk of the negativecontribution emanating from the advanced economies.Moreover, according to the WTO projection, the global tradevolume is expected to decline by 9 percent in 2009. Morerecent trends, however, indicate some improvement in theoverall sentiment with respect to certain forward-lookingmacroeconomic indicators. The Purchasing Managers Index(PMI) in most of the advanced countries has improved toaround 50 by the second quarter of 2009. The rapid slide inthe house prices has been arrested in the US and Europe.Capital flows have resumed to a number of developingcountries. Crude oil prices have recovered considerably.The major macroeconomic concern, particularly from themiddle of 2008, has been to contain the adverse impact ofinternational financial crisis on the prospects of growth. Asthe inflationary pressures abated rapidly and down side risksto growth increased in the second half of 2008, most centralbanks pursued accommodative monetary policy along withexpansionary fiscal policy by the respective Governments.With the fear of recession deepening further, extendingto 2009, both monetary and fiscal policies continued toremain accommodative through conventional as well asunconventional measures.Domestic Macroeconomic DevelopmentsInternational economic developments significantlyconditioned the public policy pursuance in a small openeconomy like Oman. During the first half of 2008, the majorpolicy concern was to contain inflationary pressures, whichCentral Bank of OmanAnnual Report 2008 5

CHAPTER Iwere built up over a period of time since 2004, coincidingwith the high growth momentum in Oman and importedinflation following unprecedented boom in commodityprices in the international markets. Hence, it was imperativefor the CBO to pursue anti-inflationary monetary policyin the first half of 2008. With easing of global inflationarypressures and sharp decline in the crude oil prices, therewas a distinctive shift in the monetary policy stance of theCBO. Persistent easing of monetary policy adopted by theFed created additional pressure on countries operating withthe fixed exchange rate regime pegged to the US dollar.Despite adverse international developments, themacroeconomic performance of Oman was robust in 2008as reflected by high economic growth, large creation ofadditional employment opportunities, significant progresson economic diversification, sustained surpluses in thefiscal and balance of payments positions, comfortable levelof foreign exchange reserves, and a sound and resilientbanking system. Oman’s policy emphasis on “openness”as an instrument of promoting “efficiency, competition,and productivity” and liberal commitment given underWTO and bilateral trade agreements have deepened theprocess of globalization and opened up new opportunitiesand challenges. The domestic policy emphasis on“diversification, privatization and Omanisation” alongwith greater “openness” provided enduring impetus togrowth impulses and made the growth process durable andresilient.Economic GrowthThe Omani economy continued to witness robust growthfor the fifth consecutive year in 2008 with its GDP at currentmarket prices rising by 44 percent supported by acceleratedactivities in both oil and non-oil sectors. In 2008, there wasa turnaround in crude oil production, which rose by 6.8percent to 277 million barrels over the previous year. Briskactivities in the petroleum sector, not only overshadowedthe progress on diversification, but also improved its sharein GDP to 51.3 percent in 2008 from an average share of46.3 percent in the previous four years. Non-petroleumactivities also recorded a robust growth of 27.2 percent in2008 as against an average growth of 16.5 percent in theprevious four years. Manufacturing sector witnessed animpressive growth of 40.5 percent in 2008 and its sharein total GDP was maintained at a little over 10 percent. In2008, value added in the services sector grew at a higherrate of 22.5 percent compared to an average growth of 14.4percent in the previous four years.Employment GrowthHigh economic growth in Oman generated largeemployment opportunities for both Omanis and expatriatessince 2004. While the employment of Omanis in the publicsector increased by 7.2 percent, that of expatriates declinedmarginally by 1.1 percent in 2007 over the previous year.The share of Omanis in the public sector employmentimproved further to 84.7 percent in 2007 from 83.6 percentin the previous year. Since 2007, the number of Omanisemployed in the private sector surpassed the same in thepublic sector. According to the latest data available from thePublic Authority for Social Insurance (PASI), employmentof Omanis in the private sector increased by 11.7 percentto 147,194 in 2008 on top of 15.3 percent increase in theprevious year. There has been an unprecedented increasein employment of expatriates in the private sector, whichrose by 20.2 percent to 510,713 in 2006, by 25 percent to638,447 in 2007 and by 24.5 percent to 794,935 in 2008.Absolute increase in expatriate employment in the privatesector during the last three years worked out to 370,147which was an unavoidable necessity for sustaining highgrowth momentum and economic diversification. At thesame time, it had its adverse implications for the economyas a whole in terms of pressure on inflation from wage-rent6 Annual Report 2008 Central Bank of Oman

Overview and Outlookspiral and large increase in outflow of foreign exchangefrom the country in the form of remittances.InflationRising inflation continued to remain a major policy concernin Oman, particularly in the first half of 2008. Annualinflation measured by movement in the average ConsumerPrice Index for the Sultanate accelerated to 12.4 percent in2008 as against an average inflation of 3.1 percent during theprevious four years. The major drivers of inflation in Omanwere sustained domestic demand and steep increase in pricesof imported goods due to unprecedented rise in prices of food,metal and other commodities in the international markets.As external and supply side factors dominated in stimulatinginflationary pressures, there were limited policy optionsthat could be used effectively to contain domestic inflation.Nevertheless, the CBO took several anti-inflationary policymeasures such as hike in reserve requirement, tightening ofthe lending ratio and absorption of excess liquidity throughlarger issuances of CBO CDs in the first half of 2008. Asthe global inflationary pressures abated considerably andthere was sharp decline in crude oil prices in the secondhalf of 2008, the CBO shifted its monetary policy stance andrestored the reserve requirement and lending ratio to theFebruary 2008 level in addition to injection of liquidity atrepo rate linked to the US dollar Libor rates. In addition,the Government took several measures as a part of supplymanagement to contain inflationary pressures in 2008.Despite recent moderation in the inflation rate, it remains atan elevated level as the pass-through of falling prices in theinternational markets has been significantly muted in Omanon account of sustained domestic demand.Oil and GasThe oil and gas sector continued to play a dominant role inthe economic affairs of Oman in 2008. Oil and gas togetheraccounted for 51.3 percent of the nominal GDP, 79.1 percent ofthe net fiscal revenue, 84.9 percent of exports of Omani origin,and 76.0 percent of total merchandise exports (includingre-exports) in 2008. Reversing a sustained declining trendwitnessed since 2001, the aggregate oil production increasedby 6.8 percent to 277 million barrels in 2008 compared to259.3 million barrels in 2007. The increase in oil productionowed to the discovery of new oil fields as well as the use ofmodern technology such as Enhanced Oil Recovery (EOR).As regards trend in oil prices, average Omani crude oil pricesrose by 55 percent to US $ 101 per barrel in 2008 comparedto US $ 65.2 per barrel in the previous year. Highly favorableoil prices that prevailed in the greater part of 2008 alongwith a modest increase in crude oil production translatedinto significant windfall in government revenues, which inturn, were used to increase public spending and therebyexpanding aggregate demand. Beside crude oil, the Sultanateof Oman has also been exploiting natural gas resources fromits hydrocarbon fields. Unlike crude oil production, naturalgas production witnessed a marginal decline in 2008,reaching 30.2 billion cubic meters compared to 30.3 billioncubic meters in 2007.Government FinanceThe Sultanate of Oman continued to witness a robust fiscalposition in 2008, owing primarily to favorable oil pricesthat prevailed during the greater part of the year. TheGovernment continued to pursue an expansionary fiscalpolicy in 2008 as reflected in 25.8 percent increase in totalpublic expenditure over the previous year. Both currentand investment expenditures witnessed notable increasesduring the year with the former rising by 14.5 percent andthe latter by 34.4 percent. It may be noted that the growth ininvestment expenditure was more than double the growthin current expenditure, which testifies the Government’sefforts to direct large amount of resources to long-teminvestments in infrastructure and promote economicCentral Bank of OmanAnnual Report 2008 7

CHAPTER Idiversification, which are critical for long-term sustainablegrowth. The Government’s efforts to diversify its sourcesof revenues, besides those generated from the oil and gassector, continued to bear fruits in 2008 as non-petroleumrevenues, including tax-based and non-tax based, increasedby 14.2 percent. Public revenues generated through taxesand fees increased by 31.3 percent to RO 694 million in2008 over the previous year. The revenues from customduties increased by 42 percent to RO 226.6 million due tolarge imports in 2008. As regards non-tax revenues, one ofthe key sources in 2008 was income earned on governmentinvestment, which increased by 52.6 percent to RO600.1 million over the previous year. Another healthydevelopment pertaining to Oman’s fiscal performance wasthe decline in government debt as proportion to GDP from6.3 percent in 2007 to 4.2 percent in 2008.The 2009 budget for the Sultanate was prepared in thebackdrop of a sharp decline in oil prices, intensification ofglobal recession and expected decline in global trade volume.The preparation of the budget was based on an assumedaverage Omani crude oil price of US $ 45 per barrel, sameas the previous year, and a slightly higher level of averagecrude oil production of 805 thousand barrels per day. Totalrevenues were estimated to increase modestly by 4 percent toRO 5,614 million over 2008 budget despite expected declinein oil revenues by 2.4 percent to RO 3,522 million over theprevious year’s budget. Total expenditure was estimated toincrease by 10.8 percent to RO 6,424 million in 2009 over theprevious year’s budget. The Government continues to sustainthe investment expenditure in key areas for the long-terminterest of the country. Based on the conservative estimateon the average Omani crude oil prices, the Governmentexpects an overall deficit of RO 810 million in 2009 of whichRO 710 million would be financed by drawing from reservesand the balance by borrowing. Recovery of oil prices in 2009so far, provides comfort to the Government for a better thanexpected overall fiscal balance in 2009.Monetary ConditionsThe monetary conditions in 2008 were characterized byhigh growth in money and credit influenced by risingdemand for money associated with the needs of a fastgrowing economy. Large fiscal and balance of paymentssurpluses also supported the expansion of money. With theoverall monetary conditions reflecting surplus liquidity, themonetary management operations of the CBO had to contendwith the twin challenges of sustained liquidity absorptionthrough issuance of CDs and simultaneously ensuring betteralignment of local interest rates with the US interest rates.With high economic growth, the broad measure of money(M2) registered an increase of 23.1 percent in 2008. Theprimary source of monetary expansion during the year wasthe large increase in bank credit followed by the accretionto CBO’s foreign assets. The natural sterilization processembodied in the creation of foreign assets by the Governmentfrom part of its oil revenues helped in relieving pressureon money supply. For most part of 2008, the case for pricestability remained the focal point of monetary policy withinflation touching a double digit mark. Appropriate antiinflationarymonetary and credit policy measures weretaken by raising the reserve requirement for banks andtightening the credit to deposit ratio as mentioned earlier.However, during the last quarter of the year with the globalfinancial crisis, the CBO shifted its approach and pursued anaccommodative monetary policy stance by liberalizing thereserve requirements and lending ratio.Financial SystemThe banking system in Oman witnessed yet another year ofimpressive performance in 2008, despite the global financialsystem remaining under severe stress. Banks in Oman wereneither exposed to the toxic financial assets nor to thedistressed global financial institutions. On a year-on-yearbasis, total assets of the commercial banks increased by 33.38 Annual Report 2008 Central Bank of Oman

Overview and Outlookpercent to RO 13.8 billion as at the end of December 2008. Thefast expansion in assets was driven by 42.3 percent growthin credit seen predominantly under construction, servicessector and in the personal loan category. Commercial banks’core capital and reserves improved by 23.5 percent to RO1.8 billion with the Basel II capital adequacy ratio at 14.7percent. The net profits of commercial banks in Oman forthe year 2008 stood at RO 234.1 million, a rise of nearly 10percent over the previous year. Asset quality of the bankingsystem continued to show improvements. Gross NPLs ofcommercial banks recorded an absolute decline of RO 26million during the year. Gross NPLs as a percentage of grossloans declined to 2.4 percent at the end of 2008 from 3.2percent at the end of 2007. CBO’s prudential requirementof general provisions on the performing loan portfoliosubstantially aided the loan loss coverage to improve to119.3 percent in 2008 from 107.6 percent in the previousyear, providing the cushion for banks to meet the challengesof any economic downturn in the future.Balance of PaymentsThe overall balance of payments position for the Sultanateof Oman continued to be in surplus during 2008. Thelarge current account surplus of RO 2,103 million was themain factor that contributed to this outcome. Favourabledevelopments in international oil markets and strong annualgrowth exhibited in non-oil exports of Omani origin (52.1percent) and re-exports (51.1 percent) helped boost Oman’scurrent account surplus position, in spite of outflows onaccount of higher remittances and dividend payments. Incontrast, capital and financial accounts recorded a net outflowof RO 1,145 million in 2008 as against a net inflow of RO 1,444million in the previous year. This was a result of negativeinvestor sentiment and greater risk aversion behavior bynon-residents following intensification of the internationalfinancial crisis since the middle of 2008. Accordingly, theoverall balance of payments account witnessed a smallersurplus of RO 702 million in 2008 compared to a surplus ofRO 2,404 million in 2007. As at the end of 2008, the grossofficial foreign exchange reserves of the Central Bank of Omanstood at RO 4,163.7 million (net of valuation adjustments),providing cover for 6 months of imports and 4 months of allgross current account payments.OutlookThe year 2009 could be an exceptionally difficult year withlarge contraction of world GDP, reduction in employment,sharp decline in global trade volume and above all,associated loss of economic welfare for the mankind as awhole distributed unevenly across the countries. In fact,the international financial crisis has caused enduringdamage to the real economy around the world. Althoughthe current assessment indicates some improvements inthe sentiment, key macroeconomic indicators continuedto remain depressed. Investors were optimistic asdeterioration in economic conditions was less rapid inthe more recent period than before or stabilizing in somesectors. Large fiscal and monetary stimulus provided byadvanced countries and collective and coordinated actionspromised by Governments of the G20 group of countriesimproved risk appetite of investors leading to turnaroundin equity markets in most parts of the world, particularlyin the second quarter of 2009. At the same time, largegovernment borrowing programme, particularly by theadvanced countries, has pushed up long-term yields ongovernment securities in many countries during the recentperiod indicating long-term inflationary implications ofthe on-going expansionary monetary and fiscal policies.Rise in long-term interest rates may delay the progress ofeconomic recovery and hamper the cautious optimismbuilt-up in the first half of 2009. The balance sheets of theinternationally reputed banks and financial institutionscontinue to be fragile. Despite large scale recapitalization,write-offs and asset substitutions, sizeable chunks of assetsCentral Bank of OmanAnnual Report 2008 9

CHAPTER Iof systemically important banks and financial institutionsremain contaminated. It is not clear as to whether thedeleveraging process is complete. Lack of transparencyin accounting of off-balance sheet exposures continuesto impede the process of restoration of confidence. As aresult, credit and capital flows to the developing economiesremain highly uncertain.Global demand for goods and services continues to remaindepressed following expected contraction of world GDP andsharp decline in world trade volume in 2009 as mentionedearlier. The cyclical downturn in the emerging marketeconomies could be more pronounced and enduring thanexpected due to weak external demand. The commodityprices are still at a lower level due to prolonged recessionin the advanced countries and hesitant recovery in the restof the world.The regional economic outlook for the Middle-Eastand Central Asia, brought out by the IMF in May 2009,indicated that all countries of the region will be severelyaffected by the world economic crisis. The sharp drop inoil prices has been directly affecting the Middle-Eastern oilexporting countries (MEOEs), whose oil revenues in 2009may be less than half what they were in 2008. The externalcurrent account of the MEOEs as a whole could record adeficit of US $ 10 billion in 2009 in contrast to a surplus ofUS $ 400 billion in 2008. Despite decline in oil revenues,most countries of this group have been maintaining capitalspending at a high level. Nevertheless, the GDP growth inthe MEOEs is expected to decline significantly in 2009.Like many other countries of the region, Omani economyhas been impacted by the international financial crisis. Theslump in oil prices since the last quarter of 2008 and weakinternational demand for goods will contribute to significantdecline in Oman’s economic growth. The overall fiscalbalance and external accounts may be under pressure in2009. Real estate prices as well as house rent have softenedconsiderably. There is some slowdown in credit growth in2009 so far. Nevertheless, the real GDP growth in Omanis likely to remain in the positive territory in 2009 due tosustained domestic demand, continued capital expenditureby the government, and above all, on-going diversificationactivities in the non-petroleum sector. The medium termfundamentals of the economy continue to be strong. Inaddition to the official foreign exchange reserves held bythe CBO, large stock of off-shore financial assets held in thegovernment account provide flexibility to the Governmentto pursue counter-cyclical fiscal policy. Oman has a soundbanking system without direct exposure to toxic assets.Moreover, it is closely supervised by the CBO, adequatelycapitalized, and possesses better quality assets that earnprofit with low level of non-performing loans. The externaldebt to GDP ratio is low by international standards. Keepingin view the above factors, the international rating agencieshave reaffirmed their ratings despite possible slowdown ofthe economy in 2009.In view of the adverse international developments,sustaining high rate of growth in Oman has emerged as amajor policy challenge in 2009. Although fiscal positionwill be under pressure, it will not pose a near-termfinancing problem as the Government has accumulatedlarge amount of foreign assets from fiscal surpluses duringthe recent years. The Investment Stability Fund created bythe Government would support the unexpected downturnin the local stock market. Recent recovery in oil pricesprovides fair amount of comfort for better fiscal and externalbalance. Although inflationary pressures are expected toabate further, it is unlikely to decline to the level observedin the western countries. Liquidity management willcontinue to receive priority by the CBO keeping in viewthe developmental needs of the economy and mediumterm outlook on inflation expectations. Although theimpact of the global financial crisis on the banking system10 Annual Report 2008 Central Bank of Oman

Overview and Outlookhas so far been limited, the CBO will continue to monitorthe asset quality of banks and financial institutions in viewof the cyclical downturn of the economy. The CBO willkeep a strong vigil on the evolving international scenariosand use its instruments flexibly to strike a balance betweensustaining high growth momentum and controllinginflation expectations as the situation warrants within thelimited scope of pursuing independent monetary policyunder a fixed peg.Central Bank of OmanAnnual Report 2008 11

CHAPTER II

OUTPUT, EMPLOYMENT AND PRICESThe Omani economy continued to witness high growthmomentum for the fifth consecutive year in 2008 supportedby accelerated activities in both oil and non-oil sectors.Favourable oil prices during the greater part of the yearprovided fillip to economic activities, created additionalemployment opportunities for both Omanis and expatriatesand sustained economic diversification, while inflationarypressures emerged as a major policy challenge due toboth rise in domestic demand and imported inflationfollowing sharp increase in prices of food, energy and othercommodities in international markets. Gross DomesticProduct (GDP) at current market prices registered a growthof 44 percent in 2008, the highest nominal GDP growthever achieved, compared to an average nominal growthof 18 percent in the previous four years. Despite modestrise in oil production, impressive growth in the nominalGDP in 2008 was primarily conditioned by high oil pricessupported by sustained diversification of activities in thenon-petroleum sector (Charts 2.1 & 2.2). A notable featureof the growth pattern in 2008 was brisk activities in thepetroleum sector, which not only overshadowed progresson diversification, but also improved its share in GDP to51.3 percent from an average of 46.3 percent in the previousfour years (Table 2.1). Non-petroleum activities recorded arobust growth of 27.2 percent in 2008 as against an averagegrowth of 16.5 percent in the previous four years. The highGDP growth in Oman since 2004 was also accompanied bylarge employment generation with employment of Omanisin the private sector surpassing the same in the public sectorsince 2007. Given the emphasis laid on the private sector toplay a critical role in the process of Oman’s development,employment opportunities grew at a faster rate in the privatesector than in the public sector. As a result of high growthand large employment generation during the recent years,aggregate demand conditions expanded significantly, puttingpressure on wages, rent and prices of essential commodities.Simultaneously, adverse inflationary pressures from theexternal sector and supply side factors worsened thedomestic inflationary environment in 2008. The inflationrate measured by movement in the annual average ConsumerPrice Index (CPI) for the Sultanate accelerated to 12.4percent in 2008. Managing inflationary pressures was theChart 2.1: Nominal GDP Growth and Changein Oil PricesChart 2.2: Oil Production &Non-Petroleum ActivitiesIn percent60504030201002004 2005 2006 2007 2008Annual % growth3025201510502004 2005 2006 2007 2008350340330320310300290280270260250In Million BarrelsGrowth in Nominal GDP% growth in non-petroleum GDP (left scale)% change in oil price (Omani Crude)Oil Production in mn. barrels (right scale)Central Bank of OmanAnnual Report 2008 15

CHAPTER IIkey policy challenge in 2008 in addition to sustaining highgrowth with strong momentum on economic diversificationand adequate employment generation in Oman. During thelast quarter of the year, there were clear signs of moderationof growth momentum and marginal softening of prices inOman.Petroleum ActivitiesThe petroleum and gas sector continued to play apredominant role in the overall economic affairs ofOman. Detailed developments in the oil and gas sector arediscussed in Chapter III. In 2008, there was a turnaroundTable 2.1Output IndicatorsItems 2004 2005 2006 2007* 2008**GDP at current market price (RO mln.) 9487.0 11882.9 14151.2 16010.3 23049.0Annual Growth (%) 14.53 25.25 19.08 13.13 43.96GDP at constant 2000 prices (RO mln) 8362.4 8771.7 9297.9 10017.4 NAAnnual Growth (%) 3.41 4.89 5.99 7.73 NAGDP Deflator 113.44 135.46 152.19 159.82 NAAnnual Growth (%) 10.75 19.41 12.35 5.01 NAContributions to GDP (in percent)#1. Petroleum Activities 42.98 49.44 47.62 45.15 51.261.1 Crude Petroleum 40.38 45.72 43.51 40.72 46.911.2 Natural Gas 2.59 3.71 4.10 4.40 4.342. Non-Petroleum Activities 58.25 52.82 54.10 56.38 49.802.1 Agrl. and Fishing 1.83 1.54 1.35 1.25 1.012.2 Industry 13.48 14.25 16.17 16.64 16.042.3 Services Activities 42.92 37.02 36.57 38.47 32.70Components of GDP (in percent)a. Private Consumption 36.87 31.43 30.97 35.09 NAb. Government Consumption 22.50 19.93 18.52 18.19 NAc. Capital Formation (investment) 25.57 23.14 24.21 30.50 NAd. Exports-Imports (goods and services) 12.65 26.42 23.89 15.72 NA* Provisional ** Preliminary NA: Not Available# Shares may not add up to 100 because two items are not considered here, i.e. net import taxes and financial intermediation services indirectly measured.Source: Ministry of National Economy.16 Annual Report 2008 Central Bank of Oman

Output, Employment and Pricesin the production of crude oil, which rose modestly by6.8 percent over the previous year in contrast to a steadydecline since 2001. As the crude oil prices were extremelyfavourable, the petroleum sector nominal output expandedby 63.5 percent in 2008 with direct value addition incrude oil and natural gas rising by 65.9 percent and 41.4percent, respectively (Table 2.2). Oil and gas, being naturalendowments of the country, are increasingly being used forvalue addition within the economy in a variety of otherindustries such as fertilizer, petrochemicals, aluminum,power generation, and water desalination. The associatedvalue additions in these industries are essentially indirectcontribution of oil and gas sector, which get reflected inthe performance of non-petroleum industrial activities.As a prime source of industrialization and diversification,the indirect contribution of oil and gas sector to overallGDP of Oman needs to be recognized along with directcontribution. In 2008, total crude oil production was277 million barrels, while export of crude oil was 216.7million barrels, reflecting a significant portion of crude oilbeing used by existing and new refineries, which becameoperational recently. Similarly, out of the total natural gasproduced in 2008, about 44.1 percent was used in LNGtrains and another 29.2 percent was used by the Governmentgas system for power and industrial activities. In termsof direct contributions, oil and natural gas accounted for46.9 percent and 4.3 percent of GDP in 2008, respectively(Table 2.1).Non-Petroleum Industrial ActivitiesWithin the broad policy emphasis of diversification andadequate employment generation, the “Vision 2020” hasset a target of raising the manufacturing base of the countryfrom 5 percent of GDP in 1995 to 15 percent by 2020.Accordingly, the Seventh Five-Year Development Plan(2006-10) aims at an annual average growth of 7.8 percentin the non-oil sector, driven by 13.1 percent growth ingas-based industries. As the size of the domestic marketis limited, one of the objectives of industrialization is tomake the mega projects export-intensive. In 2008, nonpetroleumindustrial activities witnessed an impressivegrowth of 38.8 percent as against an annual average growthof 24 percent in the previous four years. Within nonpetroleumindustrial activities, manufacturing accountedfor 63.8 percent, followed by construction (29.7 percent),electricity and water supply (5.3 percent) and mining andquarrying (1.1 percent) in 2008. Manufacturing sectorwitnessed an impressive growth of 40.5 percent in 2008and its share in total GDP was maintained at a little over10 percent. Going by the recent trend, the 2020 vision ofmanufacturing activities contributing to about 15 percentof the total GDP appears attainable if the new gas-basedand other down-stream projects gather momentum. Oman’snatural gas reserves are not sufficient to support a whollygas-based industrial sector. Therefore, Oman signed aMemorandum of Understanding (MoU) with Iran in April2008 to jointly develop the Iran’s Kish gas field. A 200-kmpipeline will transport the gas to Musandam and Sohar onthe northern coast. Sohar is being transformed into a majorindustrial centre with an aluminum smelter, oil refineryand methanol and fertilizer plants. Construction activitiesalso registered spectacular growth of 44.2 percent whileelectricity and water supply grew modestly by 6.3 percentin 2008.Agriculture and FishingOman has limited cultivable land and irrigation facilitiesare difficult to develop. Only certain parts of the countryreceive scanty rainfalls that are hardly sufficient for theagriculture. Underground water that could be harvested incertain pockets has been either depleting the water tableto an uneconomic level or damaging limited arable landdue to seepage of saline water from the sea, particularlyin the coastal areas. In view of the above adverse naturalCentral Bank of OmanAnnual Report 2008 17

CHAPTER IITable 2.2Gross Domestic Product at Current Market Prices(Rial Omani Million)Activities 2004 2005 2006 2007* 2008**% Change(08/07)1. Industry (1.1 + 1.2) 5357.4 7570.1 9028.9 9894.2 15514.9 56.811.1 Petroleum Activities 4077.7 5875.8 6739.9 7229.1 11816.6 63.46- Extraction of crude petroleum &incidental services to oil & gas extraction3831.1 5433.8 6157.7 6520.4 10814.3 65.85- Extraction of natural gas 246.5 442.0 582.2 708.8 1002.3 41.411.2 Non-Petroleum Industrial Activities 1279.7 1694.3 2289.0 2665.1 3698.3 38.77- Mining and Quarrying 24.9 27.8 26.7 37.8 42.0 11.11- Manufacturing 820.7 1006.9 1526.8 1679.4 2359.5 40.50- Electricity & Water supply 122.8 202.7 169.2 185.2 196.8 6.26- Construction 311.4 456.8 566.3 762.7 1100.1 44.242. Agriculture & Fishing 174.4 183.1 191.4 201.5 234.6 16.433. Services 4072.6 4399.7 5175.5 6160.4 7547.1 22.51- Wholesale & Retail Trade 818.1 859.2 1088.6 1434.4 2030.7 41.57- Hotels & Restaurants 70.8 88.7 115.0 127.2 163.7 28.69- Transport, Storage & Communication 620.3 635.6 802.9 992.1 1319.9 33.04- Financial Intermediation 425.2 462.4 546.5 590.0 701.0 18.81- Real Estate Services 510.7 548.0 594.8 665.2 779.9 17.24- Public Administration & Defence 845.1 910.1 1062.6 1230.2 1280.8 4.11- Other Services (Education, HealthCommunity/Personal Services, andPrivate Household)782.2 895.8 965.2 1121.2 1271.2 13.384. Total Non-Petroleum Activities (1.2 + 2 +3) 5526.7 6277.1 7655.9 9027.0 11480.1 27.185. Less Financial Intermediation ServicesIndirectly Measured6. Gross Domestic Product at ProducersPrices (1.1+4-5)188.4 213.6 240.1 293.8 365.1 24.279416.0 11939.4 14155.7 15962.3 22931.6 43.667. Plus :Taxes Less Subsidies on Products 71.0 -56.4 -4.5 48.0 117.4 144.588. Gross Domestic Product at Market Prices (6+7) 9487.0 11882.9 14151.2 16010.3 23049.0 43.96* Provisional ** PreliminarySource: Ministry of National Economy.18 Annual Report 2008 Central Bank of Oman

Output, Employment and Pricesconditions, the country largely depends on importedfoodgrains and other farm products. During the last twoyears, there was steep increase in world food prices, whichseverely affected most of the Gulf countries, includingOman in terms of imported inflation and thereby threatenedthe food security of the country. In order to make thegrowth process in Oman more resilient to the externalprice shocks, there is an imperative need for increasingdomestic production, particularly in the agriculture sector.According to the target set for the agriculture sector inthe Vision 2020, its contribution to GDP is expected to beraised to 3.1 percent by 2020 with an annual growth of notless than 4.5 percent. The vision for fishing sector also aimsat raising its contribution to GDP to about 2 percent by 2020with a targeted annual growth of 5.6 percent. Agricultureand fishing sector, however, has been passing through aphase of stagnation in recent years in terms of real output.The share of agriculture and fishing together in GDP wasonly one percent in 2008 compared to an average share ofabout 1.5 percent in the previous four years.ServicesThe nominal GDP of the Sultanate increased by two anda half times during last five years since 2004, leading tosharp increase in per capita income. As a result, demandfor services went up significantly which facilitated stronggrowth in services in recent years. Domestic supplyof efficient services at competitive prices needs to beaugmented to contain the outflow of domestic incomethrough services import in an open economy environment.Foreign service providers also extend services to Omandue to liberal commitments given under WTO and tradeagreements. This makes the domestic market for servicesmore competitive as well. There should be an endeavourto meet larger percentage of demand for services from thedomestic market so as to sustain stronger growth in servicesand its contribution to Oman’s GDP. Moreover, in order tomake the growth process more sustainable and resilient,services sector’s growth need not depend significantlyon the oil-price driven increase in per capita income.Diversification of the economy is expected to supportsustained growth in services sector in the medium term.In 2008, value added in the services sector grew at a higherrate of 22.5 percent compared to an average growth of 14.4percent in the previous four years. The “wholesale andretail trade” sector, accounting for about 26.9 percent ofthe services sector GDP, registered an impressive growth of41.6 percent in 2008, followed by “transport, storage andcommunication” (33 percent), and “hotels and restaurants”(28.7 percent). These three sectors together accounted for46.6 percent of total services sector GDP and remainedsensitive to fluctuation in domestic demand. In 2008, growthin “financial services” and “real estate services” was alsoimpressive at 18.8 percent and 17.2 percent, respectively.Performance of the financial sector is partly conditionedby favourable oil prices and high overall economic growthin the country. Greater deployment of bank finances forproductive activities may be necessary to strengthen theforces of economic diversification and make the financialsector more resilient and stable.As a part of the diversification programme, the tourismsector has received considerable policy focus in the recentyears. The Sixth Five-Year Development Plan (2001-05) hadset an annual growth target of 6.1 percent in the tourismsector. The actual average annual growth was much higherat 9.9 percent during the same period. The Seventh Five-Year Development Plan (2006-10) retains the priority focuson tourism with a planned annual growth target of 7 percentand proposed investment of RO 777 million, of which RO214 million would come from the public sector and RO 563million from the private sector. During the first three years ofthe Seventh Plan period, “hotels and restaurants” grew at anannual average rate of 27.6 percent.Central Bank of OmanAnnual Report 2008 19

CHAPTER IIGDP at Constant PricesInternationally, GDP at constant prices is considered asan appropriate indicator of growth analyses. In case of oilexporting countries like Oman, petroleum sector has a largecontribution to GDP and high international prices of petroleumproducts in essence add real purchasing power to a significantpart of the nominal GDP. Therefore, both nominal and real GDPdata are used for macroeconomic analysis in such countries.Moreover, national accounts data for Oman, both at currentand constant prices, relate to market prices and not at factorcosts. As net import taxes are very modest in Oman (Tables2.2 and 2.3), annual growth rates of GDP at market prices andat factor costs would be more or less similar.Oman’s GDP at constant prices (Base year: 2000) is availableup to 2007. For the fourth year in succession, Oman’s realGDP exhibited an accelerated growth of 7.7 percent in 2007although nominal GDP growth witnessed deceleration bothin 2006 and 2007. The robust real GDP growth in 2007 couldbe attributed to accelerated growth in the non-petroleumsector, while petroleum sector’s performance continued to beaffected by declining trend in oil production. The real GDPoriginating from petroleum sector, in fact, declined modestlyby 1.7 percent in 2007 over and above a decline of 3.1 percentin the previous year (Table 2.3). In contrast, the non-petroleumactivities witnessed a spectacular growth of 12.6 percent in2007 on top of 9.4 percent in the previous year. As a result,the share of petroleum activities in the real GDP declinedfurther to 30.4 percent in 2007 from 33.3 percent in 2006.In contrast, the share of non-petroleum activities in the realGDP improved to 71.8 percent in 2007 from 68.7 percent inthe previous year indicating the progress on diversification.The real GDP from crude petroleum declined consistentlyfrom the peak level of RO 3,645 million in 2000 to RO 2,620million in 2007, while the same from natural gas steadilyincreased from RO 100 million to RO 424 million during thesame period. Oil production which declined consistentlyfrom the peak of 350 million barrels in 2000 to 259 millionbarrels in 2007, improved considerably by 6.8 percent to 277million barrels in 2008. Despite modest turnaround in crudeoil production in 2008, it was still lower by 20.8 percentcompared to the peak level of production in 2000.Among the non-petroleum activities, while industrial andservices sectors registered impressive growth of 13.3 percentand 12.7 percent, respectively, agriculture and fishing sectorwitnessed a modest growth of 3.7 percent in 2007. Amongnon-petroleum industrial activities, the construction sectorgrew at a very high rate of 28.2 percent in 2007, followed bymining and quarrying (14.2 percent) and manufacturing (6.5percent). Boom in the construction activities was primarilydue to growing demand for residential, commercial andinfrastructure related activities. Among the services, valueaddition in “transport, storage and communication” rose by27.5 percent in 2007, followed by “wholesale and retail trade”(23.9 percent), and financial intermediation (18.8 percent).The progress of economic diversification is clearly visiblefrom the contribution of several non-petroleum sectors to theoverall real GDP during the recent years. The country’s longrungrowth sustainability and resilience critically dependon maintaining growth momentum in the non-petroleumactivities.Saving and Capital FormationCapital is an important factor of production and higherlevels of capital formation generally add to the productioncapacity of a country. Gross fixed capital formation representsthe value of all acquisitions, less disposals, of fixed assetsby all producing units in a country. Fixed assets, for thispurpose, include both tangible and intangible assets thatare produced as output from the processes of productionand used continuously in other processes of production formore than a year. Tangible fixed assets, produced as partof capital formation, primarily include buildings and other20 Annual Report 2008 Central Bank of Oman

Output, Employment and PricesTable 2.3Gross Domestic Product at Constant (2000) Prices(Rial Omani Million)Activities 2004 2005 2006 2007*% Change(07/06)1. Industry (1.1 + 1.2) 4474.8 4723.8 4682.2 4840.1 3.371.1 Petroleum Activities 3164.7 3194.6 3096.1 3043.8 -1.69- Extraction of crude petroleum & incidental servicesto oil & gas extraction2929.1 2895.3 2714.0 2620.1 -3.46- Extraction of natural gas 235.6 299.3 382.1 423.7 10.891.2 Non-Petroleum Industrial Activities 1310.1 1529.2 1586.1 1796.3 13.25- Mining and Quarrying 21.9 23.1 21.1 24.1 14.22- Manufacturing 728.6 787.8 868.0 924.6 6.52- Electricity & Water supply 256.7 277.9 173.8 177.1 1.90- Construction 302.9 440.4 523.2 670.5 28.152. Agriculture & Fishing 166.6 161.8 154.3 160.0 3.69- Agriculture 100.0 98.2 94.6 97.9 3.49- Fishing 66.7 63.6 59.7 62.1 4.023. Services 3817.2 4147.7 4647.1 5235.1 12.65- Wholesale & Retail Trade 784.5 775.8 919.8 1140.0 23.94- Hotels & Restaurants 67.3 79.0 86.4 89.1 3.12- Transport, Storage & Communication 552.2 630.9 762.1 971.8 27.52- Financial Intermediation 355.8 446.7 496.1 589.3 18.79- Real Estate Services 515.9 550.8 583.3 617.6 5.88- Public Administration & Defence 801.2 839.7 954.7 964.1 0.98-Education 423.9 481.3 490.6 495.8 1.06-Health 153.7 169.6 176.9 183.8 3.90-Other Community/Personal Services 118.9 128.0 129.3 133.7 3.40-Private Household with Employed Persons 43.9 45.9 47.9 49.9 4.184. Total Non-Petroleum Activities (1.2 + 2 +3) 5293.9 5838.7 6387.5 7191.4 12.595. Less Financial Intermediation Services IndirectlyMeasured164.0 184.5 196.2 228.5 16.466. Gross Domestic Product at Producers Prices (1.1+4-5) 8294.6 8848.7 9287.4 10006.7 7.747. Plus :Taxes Less Subsidies on Products 67.9 -77.0 10.5 10.7 1.908. Gross Domestic Product at Market Prices (6+7) 8362.4 8771.7 9297.9 10017.4 7.74*ProvisionalSource: Ministry of National Economy.Central Bank of OmanAnnual Report 2008 21

CHAPTER IIconstruction structures (such as roads, ports, dams etc.,)as well as plant, machinery and transport equipments.Intangible fixed assets, on the other hand, include thevalue of expenditures incurred on exploration of minerals,including oil and gas, computer software, entertainments,literary and/or artistic works, etc.Information on Oman’s gross capital formation is availableup to 2007 (Table 2.4). According to the national accountsdata released by the Government, there has been significantrevision of data on gross capital formation following changein the base year. Therefore, new data on capital formationare not comparable to the same released earlier. Gross capitalformation as proportion to GDP increased to 30.5 percent in2007 from 24.2 percent in the previous year mainly due toquantum jump in ‘building and construction’ and ‘machineryand equipments’. An investment rate of 30.5 percentwith real GDP growth of 7.7 percent implies an implicitincremental capital output ratio of 3.96 in 2007 comparedto an average ratio of 4.37 in the previous two years. In2007, while capital formation in the form of “building andconstruction” increased by 34.6 percent, those in the form of“machinery and equipments’ rose by 55.3 percent. Growingpublic investment in creation of physical infrastructure inthe country and the general construction boom contributedto strengthen the country’s capital formation. In 2007, theshare of gross capital formation was 30.2 percent in the oiland gas related activities alone while the remaining partof the investment was in non-oil activities. Governmentinvestment expenditure accounted for 34.7 percent of thetotal capital formation, which explains the predominant roleof the Government in sustaining investment growth in thecountry.Table 2.4Gross Capital Formation and SavingItems 2004 2005 2006 2007*A. Gross Capital Formation at Current Prices (RO mln.) 2426.3 2750.6 3426.7 4884.5(i) Building and Construction 907.8 1222.2 1470.9 1979.8(ii) Machinery & Equipment 1244.6 1231.8 1600.6 2485.9(iii) Intangible Fixed Assets 273.9 296.6 355.3 418.8Change in Inventories** 215.7 -122.8 327.2 64.1B. Gross Capital Formation as % of GDP 25.6 23.1 24.2 30.5C. Gross Domestic Saving (RO mln.) 3842.9 5767.6 7135.4 7465.6Net primary income from abroad -150.0 -373.0 -352.0 -369.0Net current transfers from abroad -739.7 -908.3 -1119.1 -1441.0D. Gross National Saving 2953.3 4486.3 5664.3 5655.7E. Gross Domestic Saving as % of GDP 40.5 48.5 50.4 46.6F. Gross National Saving as % of GDP 31.1 37.8 40.0 35.3* Provisional ** Not included in Gross Capital Formation.Source: Ministry of National Economy.22 Annual Report 2008 Central Bank of Oman

Output, Employment and PricesThe investment needs of the country could be financed byboth domestic savings and inflow of capital. In case of Oman,domestic savings exceed investment levels leading to netoutflow of financial savings from the country for creation ofassets abroad. Oman’s gross domestic saving as percentage ofGDP rose from 40.5 percent in 2004 to 50.4 percent in 2006and then fell modestly to 46.6 percent in 2007. Sustaininga very high level of domestic saving was primarily drivenby large fiscal surpluses resulting from favourable oil prices.Sizeable part of the gross domestic saving, however, movedout of the country in the form of current transfers (i.e.,remittances by expatriates working in Oman) and primaryincome (i.e., net interest and dividend paid on externalliabilities). As a result, Oman’s gross national saving aspercentage of GDP was lower at 35.3 percent of GDP in 2007,implying leakage equivalent of as high as 11.3 percent ofGDP. Even after the leakage, the national saving rate of 35.3percent of GDP was higher than the domestic investmentrate of 30.5 percent of GDP in 2007, leading to creation offoreign assets to the extent of 4.8 percent of GDP (Chart 2.3).Oman has generally been a net exporter of capital, with apart of its national saving getting invested abroad. This isalso corroborated by surplus seen in the current account ofOman’s balance of payments.EmploymentSince 2004, high economic growth in Oman generated largeemployment opportunities for both Omanis and expatriates.In fact, the participation of Omanis in the process of economicdevelopment improved significantly in the recent years andthereby helped them in sharing the benefits of high growth inOman. As the demand for labour exceeded the supply in thedomestic market, a large part of the demand was met fromthe external labour market. This is evident from the sharpincrease in expatriate labour force in Oman, particularly inthe private sector during the recent years (Table 2.5).5550454035302520151050Chart 2.3: Oman’s Saving & Investment RatesPublic SectorOne of the major macroeconomic objectives of theGovernment has been to create adequate employmentopportunities for the Omanis. Employment in the publicsector comprising civil service, Diwan of Royal Court, RoyalCourt Affairs and public corporations rose by 5.8 percentin 2007 compared to an average increase of 4.1 percentduring the previous three years. While the employmentof Omanis in the public sector increased by 7.2 percent,that of expatriates declined marginally by 1.1 percent in2007 over the previous year. The share of Omanis in thepublic sector employment improved further to 84.7 percentin 2007 from 83.6 percent in the previous year. Fall inthe employment of expatriates in the public sector since2005 was mostly in the civil service. The consistent fall inthe share of expatriates in the public sector employmentindicates the progress on Omanisation in this sector.Private Sector2004 2005 2006 2007Employment opportunities created in the private sectorfar exceeded those in the public sector during the recentyears mainly due to progress on diversification and theencouragement being given to the private investment.However, the composition of employment in the privatesector is generally dominated by the expatriates. AlthoughCentral Bank of OmanAnnual Report 2008 23

CHAPTER IIhigh economic growth is a necessary condition for creationof high employment opportunities, the actual compositionof employment in the private sector is broadly governed bymarket forces. Nevertheless, the growth of employment forOmanis in the private sector remained consistently higherthan that in the public sector since 2000 (Chart 2.4). Accordingto the number of Omanis registered with the Public Authorityfor Social Insurance (PASI), their employment in the privatesector increased by 11.7 percent to 147,194 in 2008 on topof 15.3 percent increase in the previous year. The numberof Omanis employed in the private sector for the first timesurpassed the same in the public sector since 2007.Percent1816141210864202000 2001 2002 2003 2004 2005 2006 2007 2008Public SectorPrivate SectorTable 2.5Sector Wise Employment in OmanItems 2004 2005 2006 2007 2008A. Public Sector Employees (A1+A2+A3+A4)* 127121 132414 138806 146908 _Omanis 104223 109424 116054 124405 _Expatriates 22898 22990 22752 22503 _A.1 Civil Service 99386 103707 108995 114624 _Omanis 83883 87891 93507 99896 _Expatriates 15503 15816 15488 14728 _A.2 Diwan of Royal Court 7654 7919 8282 8828 _Omanis 4764 5010 5261 5494 _Expatriates 2890 2909 3021 3334 _A.3 Royal Court Affairs 11890 12388 12884 13177 _Omanis 9198 9959 10504 10764 _Expatriates 2692 2429 2380 2413 _A.4 Public Corporations 8191 8400 8645 10279 _Omanis 6378 6564 6782 8251 _Expatriates 1813 1836 1863 2028 _B. Private Sector Employees 511383 523325 625024 770222 942,129Omanis** 87064 98537 114311 131775 147194Expatriates 424319 424788 510713 638447 794935*Excluding security and defense personnel.Source: Ministry of National Economy.** Registered with Public Authority for Social Insurance (PASI).24 Annual Report 2008 Central Bank of Oman

Output, Employment and PricesDemand for expatriate labour in the private sector exhibitedunprecedented growth since 2006 commensurate withhigh growth in the overall GDP and favourable oil prices.However, the associated costs to the economy were high interms of wage-rent induced cost-push inflation and significantoutflow of foreign exchange from the country in the form ofremittances. In 2008, employment of expatriates in privatesector increased by 24.5 percent over and above 25.0 percentin 2007 and 20.2 percent in 2006. The construction sectorabsorbed the maximum number of expatriates in 2008 with itsshare in the private sector employment rising to 37.5 percent,followed by “wholesale, retail trade and car repairs” (15.5percent), domestic services (12.3 percent), manufacturing(10.6 percent), and agriculture and fishing (8.4 percent). Thesefive sectors together accounted for 84.3 percent of the totalemployment of expatriates in the private sector. The growth ofexpatriate employment in 2008 was the highest in real estateand renting services (85.9 percent), followed by domesticservices (54.1 percent), transport, storage and communication(48.8 percent), and construction (34.7 percent) (Table2.6). Thedominance of expatriates in the private sector employment interms of the level and growth rate indicates that with greaterskill acquisition and training, there could be much greaterabsorption of Omanis in the private sector.Table 2.6Employment of Expatriates* in the Private SectorItems 2007 2008% Change(08/07)Shares ofsectors2008 %Agriculture and Fishing 60850 66522 9.32 8.36Mining and Quarrying 12544 14262 13.70 1.79Manufacturing 68753 84657 23.13 10.64Electricity, Gas and Water Supply 2094 2061 -1.58 0.25Construction 221432 298373 34.75 37.53Wholesale, Retail Trade and Car Repairs 103316 123207 19.25 15.49Hotels and Restaurants 38143 45099 18.24 5.67Transport, Storage and Communication 8276 12314 48.79 1.54Financial Intermediaries 1883 2484 31.92 0.31Real Estate and Renting Services 11274 20962 85.93 2.63Education 4876 3982 -18.33 0.50Health and Social Work 12176 11564 -5.03 1.45Community and Personal Services 6921 6517 -5.84 0.81Domestic Services 63609 98025 54.11 12.33Extra Territorrial Organization & bodies 16560 441 -97.34 0.05More than One Activity 5740 4465 -22.21 0.56Total 638447 794935 24.51 100.00* With valid labour cards.Source: Ministry of Manpower.Central Bank of OmanAnnual Report 2008 25

CHAPTER IIPricesRising inflation has been a major policy challenge in Omansince 2004, which coincided with accelerating growthmomentum in the country and unprecedented rise in food,energy and other commodity prices in the internationalmarkets. Annual inflation measured by movement in theaverage Consumer Price Index (CPI) for the Sultanateaccelerated to 12.4 percent in 2008 as against an averageinflation of 3.1 percent during the previous four years.Inflation in terms of other price indices for Oman alsoexhibited similar trends with Muscat WPI inflation and costof building materials rising by 13.7 percent and 20.2 percent,respectively in 2008 (Chart 2.5). Much of the inflationarypressures during the recent years was imported from abroadand reflected regional trends in the Gulf countries. Withsoftening of inflationary pressures in the internationalmarkets, the CPI inflation in Oman also moderatedconsiderably in the more recent period. Nevertheless, risingprices, particularly for essential commodities, remains amajor policy concern for the policy makers.Analysis of the recent inflationary pressures in Omanreveals that both demand side and supply side factors anddomestic as well as external sources of inflation togethercontributed to the overall inflationary environment (Table2.7). During last two years, pressures from external andsupply side factors have been significant in addition to risingdomestic demand in a fast growing economy like Oman.The external environment turned adverse in 2007 and 2008mainly due to steep increase in world food, energy, metaland other commodity prices. Moreover, there was sustaineddepreciation of the US dollar against major currencies. TheRial Omani, being pegged to the US dollar, also depreciatedwith import-weighted Nominal Effective Exchange Rate(NEER) falling by 4.0 percent in 2007 before appreciatingmarginally by 1.8 percent in 2008. The cumulativedeprecation of Rial Omani since 2001 was 15.2 percent upto the end of 2008, which contributed significantly to theimported inflation. Imported inflation, measured by increasein the unit value index of imports was about 15.4 percentin 2007 and 1.3 percent in 2008. In order to sustain highgrowth momentum in the country, there was rising demandfor all factors of production. Given the limited absorptioncapacity of the economy, surge in domestic demand led tounavoidable cost-push pressures on inflation. The demandfor expatriate labour in the private sector, which witnessedan unprecedented increase by 156,488 in 2008 on top of127,734 in 2007 and 85,925 in 2006, pushed up the pricesof essential commodities as well as house rent significantly.The wage-rent spiral was reflection of capacity constraint ina growing economy like Oman.A commodity-wise analysis reveals that large part of theinflationary trend in Oman was contributed by two majorgroups of items. First, “food, beverages and tobacco”, with30.4 percent weight in Oman’s CPI, increased by 21.5 percentin 2008 over and above 10.8 percent increase in the previousyear, mainly reflecting global price pressures on food items(Tables 2.7 and 2.8). Second, “rent, maintenance, electricity,water, fuel etc.,” with a weight of 21.4 percent in Oman’s CPI,recorded an increase of 11.5 percent in 2008 on top of 6.4percent increase in the previous year. The rent componentalone in this group witnessed large increase of 15.1 percentin 2008 over and above 8.5 percent in 2007. These two groupsof goods and services together had a weighted contributionof 56.9 percent to Oman’s CPI inflation in 2008. Within the“food, beverages and tobacco” group, large increase in priceswas noticed in case of essential commodities such as oil andfats (60.4 percent), cereal products (42.2 percent), dry andcanned leguminous (37.4 percent), eggs (29.3 percent), milkand milk products (26.8 percent), fish and sea products (24.3percent), and meat and poultry (21.0 percent). Inadequatesupply of food items, particularly cereals and edible oilsin the global markets put pressures on domestic prices inthe major exporting countries. Hence, major exporters of26 Annual Report 2008 Central Bank of Oman

Output, Employment and Prices% per annum2520151050Chart 2.5: Annual Inflation in Oman2004 2005 2006 2007 2008CPI-SultanateWPI-MuscatBuilding Material Cost-Muscatsince 2006. In 2008, the Government announced a cap onpermitted increase in house rent in Oman which had asobering impact on increase in house rent. The above analysisclearly suggests the importance of external and supply sidefactors contributing to the inflationary pressures in Oman.Hence, there were limited policy options that could be usedeffectively to contain domestic inflation without hamperinggrowth process.Money supply and credit growth remained strong in 2008essential commodities imposed restrictions on exportsof certain essential commodities so as to keep the pricesunder control in their respective countries. Oman, being animporter of food items, was severely affected due to suchadverse international developments. Increase in rent inOman was mainly due to spurt in demand for residentialhousing resulting from large addition to expatriate labourforce in the private sector during the last three yearsreflecting high growth in demand for money and credit arisingout of high economic growth. In 2008, monetary conditionwas characterized by availability of surplus liquidity exceptfor a temporary period of liquidity tightening in the thirdquarter of the year following intensification of internationalfinancial turmoil in September 2008. Despite limited scopeof conducting independent monetary policy arising from thefixed peg of the RO to the US dollar, the CBO introducedTable 2.7Broad Sources of InflationItems 2004 2005 2006 2007 2008Rising Demand(a) GDP Growth (Nominal) 14.5 25.3 19.1 13.1 44.0(b) Increase in Govt Expenditure 19.5 10.4 17.3 19.1 28.5Monetary Expansion(a) Broad Money (M2) growth 4.0 21.4 24.9 37.2 23.1(b) Credit growth 6.0 11.1 20.7 38.3 42.3Supply Constraints/External Shocks(a) World Food Prices 1 14.0 -0.9 10.5 15.2 23.4(b) World Metal Prices 2 34.6 22.4 56.2 17.4 -8.0(c) House Rent (Oman) 3 -0.6 -0.1 2.5 8.5 15.1(d) Regional Inflation (Middle East) 4 7.3 7.0 7.8 10.8 18.2(e) NEER* Variation -4.0 6.3 -3.1 -4.0 1.8(f ) Change in Import Price 5 29.5 5.1 18.0 15.4 1.3(g) Foreign Labour in Pvt. Sector (Annual absoluteincrease)* Nominal Effective Exchange Rate of RO (import weighted); minus indicates depreciation.Source: 1, 2 and 4: IMF.3: Ministry of National Economy (Rent component in the CPI for the Sultanate).5: Derived from MONE data on value of imports and quantity of imports.17,133 469 85,925 127,734 156,488Central Bank of OmanAnnual Report 2008 27

CHAPTER IITable 2.8Sultanate Consumer Price Index (2000 = 100)Items of Consumption Weights 2007 2008% change08/071 Food, Beverages, and Tobacco 30.385 123.9 150.6 21.55Cereal Products 3.933 119.1 169.4 42.23Meat and Poultry 5.898 137.2 166.0 20.99Fish & Sea Products 1.783 132.7 165.0 24.34Milk, Milk Products 3.221 109.3 138.6 26.81Eggs 0.424 144.3 186.6 29.31Oil and Fats 0.997 113.5 182.1 60.44Fruits 3.718 135.4 155.4 14.77Vegetables 2.347 146.6 160.8 9.69Dry & Canned Leguminous 0.372 118.3 162.5 37.36Nuts 0.483 107.2 119.0 11.01Spices and Salt 0.376 112.3 132.6 18.08Sugar and Sugar Products 1.085 122.7 137.1 11.74Tea and Coffee 0.471 101.8 118.6 16.50Other Food Preparations 2.854 109.0 124.0 13.76Beverages - Non Alchoholic 1.961 100.6 101.8 1.19Tobacco Products 0.462 102.8 106.3 3.402 Clothing Textiles, and Footwear 7.211 98.0 102.2 4.293 Furniture and Housing Materials 4.989 97.4 105.3 8.114 Medical Care 1.727 91.3 93.3 2.195 Transport and Communication 22.194 103.5 106.4 2.806 Recreation and Entertainment 2.673 93.1 98.5 5.807 Educational Services 3.322 113.5 121.8 7.318 Personal Care and Other Services 6.085 135.0 154.8 14.679 Rent, Maintenance, Electricity, Water, Fuel, etc. 21.414 106.6 118.9 11.54GENERAL PRICE INDEX 100.0 111.4 125.2 12.39Note: 1. The weights are based on Household Expenditure and Income Survey, 1999-2000.2. Data are compiled on the basis of 8101 items of goods and services from 1571 selected sources. Data on Rent are collected from a sampleof 1100 rented units.Source: Ministry of National Economy.28 Annual Report 2008 Central Bank of Oman

Output, Employment and PricesTable 2.9Consumer Price Index for Muscat (2000 = 100)Items of Consumption Weights 2007 2008% change08/071 Food, Beverages, and Tobacco 23.877 119.1 145.2 21.91Cereal Products 2.968 122.3 173.5 41.86Meat and Poultry 3.681 133.6 159.4 19.31Fish & Sea Products 1.322 108.8 135.8 24.82Milk, Milk Products 2.471 112.5 144.3 28.27Eggs 0.323 157.8 198.7 25.92Oil and Fats 0.772 122.9 201.7 64.12Fruits 2.637 128.1 146.1 14.05Vegetables 1.987 124.4 140.6 13.02Dry & Canned Leguminous 0.328 118.5 175.1 47.76Nuts 0.423 106.9 123.4 15.43Spices and Salt 0.267 113.6 143.3 26.14Sugar and Sugar Product 0.834 122.2 140.2 14.73Tea and Coffee 0.331 100.2 111.3 11.08Other Food Preparations 3.438 110.1 125.6 14.08Beverages - Non Alchoholic 1.684 100.4 101.7 1.29Tobacco Products 0.411 96.9 99.9 3.102 Clothing Textiles, and Footwear 6.309 99.1 103.3 4.243 Furniture and Housing Materials 4.624 97.8 105.8 8.184 Medical Care 2.699 90.8 91.6 0.885 Transport and Communication 23.570 102.1 105.2 3.046 Recreation and Entertainment 3.288 93.2 98.0 5.157 Educational Services 4.204 112.8 124.3 10.208 Personal Care and Other Services 6.635 139.1 161.6 16.189 Rent, Maintenance, Electricity, Water, Fuel, etc. 24.794 104.7 121.4 15.95GENERAL PRICE INDEX 100.0 108.7 122.6 12.79Note: 1. The weights are based on Household Expenditure and Income Survey, 1999-2000.2. Data are compiled on the basis of 907 items of goods and services from 907 selected sources. Data on Rent are collected from a sample of700 rented units.Source: Ministry of National Economy.Central Bank of OmanAnnual Report 2008 29

CHAPTER IITable 2.10Muscat Wholesale Price Index (2000 = 100)Items of Consumption Weights 2005 2006 2007 2008% Change(08/07)0 Agriculture, Forestry 5.427 130.6 150.8 154.9 189.3 22.211 Ores & Miniral; Electricity; Gas & Water 0.086 107.7 107.0 111.3 138.8 24.712 Food Products, Beverages & Tobacco;Textiles, Apparel & Leather Products32.028 107.5 112.2 125.4 148.1 18.10- Meat, Fish, Fruits, Vegetables, Oils & Fats 7.792 113.7 129.4 150.5 193.6 28.64- Dairy Products 4.996 111.5 113.0 124.3 157.5 26.71- Grain Mill Products, Starches & StarchProducts; Other Food Products4.905 116.0 126.1 133.9 158.0 18.00- Beverages 1.729 114.5 113.7 115.3 117.6 1.99- Tobacco Products 5.567 103.4 106.0 110.2 113.0 2.54- Yarn & Thread; Woven & Tufted Textile Fabrics 5.488 92.3 85.5 109.5 125.4 14.52- Textile Articles Other Than Apparel 0.484 97.5 95.0 98.4 99.9 1.52- Knitted or Crocheted Fabrics; Wearing Apparel 0.137 97.9 98.8 98.8 98.8 0.00- Leather & Leather Products; Footwear 0.930 95.9 94.4 96.4 95.8 -0.623 Other Transportable Goods, Except MetalProducts, Machinery & Equipment43.692 112.3 117.2 119.7 125.5 4.85- Products of Wood, Cork, Straw & Plaiting Materials 1.781 125.3 141.0 162.7 174.2 7.07- Pulp, Paper & Paper Products; Printed Matter& Related Articles1.827 95.9 100.1 96.6 109.2 13.04- Refined Petroleum Products 24.999 116.0 121.4 122.0 122.1 0.08- Basic Chemicals 0.474 108.6 117.3 126.7 156.8 23.76- Other Chemical Products; Man-Made Fibres 7.089 93.9 96.6 99.3 112.7 13.49- Rubber & Plastic Products 2.517 108.8 113.9 117.0 129.0 10.26- Glass & Glass Products & Other Non-MetallicProducts Nec.4.795 124.4 125.9 131.7 146.3 11.09- Furniture; Other Transportable Goods Nec. 0.210 104.4 105.6 101.1 103.9 2.774 Metal Products, Machinery & Equipment 18.767 123.1 151.0 161.6 195.4 20.92- Basic Metals 8.330 144.5 195.1 211.5 272.4 28.79- Fabricated Metal Products, ExceptMachinery & Equipment1.185 124.1 128.4 134.1 200.8 49.74- General Purpose Machinery 2.526 98.0 96.1 99.8 107.3 7.52- Special Purpose Machinery 1.074 97.3 91.2 92.6 97.1 4.86- Electrical Machinery & Apparatus 3.774 113.2 141.1 153.1 155.4 1.50- Radio, Television & Communication Equipment 0.730 80.5 77.6 72.4 68.6 -5.25- Medical Appliances, Precision & OpticalInstruments, Watches & Clocks1.148 106.9 109.5 113.8 128.6 13.01General Price Index 100.0 113.8 123.8 131.3 149.3 13.71Note: 1. Data are compiled on the basis of 787 items from 102 selected sources.2. Annual values of the indices are average of respective quarterly indices.Source: Ministry of National Economy.30 Annual Report 2008 Central Bank of Oman

Output, Employment and Pricesin the early part of 2008, several anti-inflationary measures.These were: (a) hike in reserve requirement from 3 percentto 5 percent effective February 2008; (b) increase in thevolume of absorption of surplus liquidity from the bankingsystem through issuance of CBO CDs; (c) decision to raisethe reserve requirement again from 5 percent to 8 percenteffective August 1, 2008; and (d) tightening of the lendingratio from 87.5 percent to 85 percent effective August 1, 2008and further to 82.5 percent effective November 1, 2008.Following signals emanating from the international marketsabout deepening of recession in the developed countriesand consequent fall in the commodity prices, most of theadvanced countries pursued accommodative monetary policyand cut policy rates in quick succession to contain adverseeffects of the financial crisis on the prospects of growth. Thistogether with quantitative easing followed by many centralbanks of the developed countries resulted in the short termLibor rates to come down significantly. Fall in oil pricesin international markets in the second half of 2008 led toslow down of exports, decline in the Government revenuesand associated impact on growth momentum in most of theGulf countries. While inflation was still at an unacceptablelevel at the end of 2008, it was considered appropriate toreduce repo rate so that banks in Oman can avail liquidityfrom the CBO at reasonable cost to sustain credit growth andthereby maintain growth momentum. Moreover, the reserverequirement was reduced from 8 percent to 5 percent witheffect from December 26, 2008 and the lending ratio wasrestored to 87.5 percent with effect from January 1, 2009.During the first half of 2008, there was significant pressure onRial Omani for revaluation. However, the revaluation pressurereceded by the end of the year following determinationof the authorities to retain the existing peg and slow downof revenues from oil exports due to fall in the oil prices.Recognizing the constraints on independent use of monetarypolicy and adverse consequences of any revaluation of ROon the economy, a number of other policy measures wereintroduced to contain the intensity of inflation in Oman. Theseinclude, inter alia, a wage compensation for the public sectoremployees (higher in low salary brackets and lower in highsalary brackets); subsidy on consumption of certain essentialcommodities; value packs of essential commodities at priceslower than market prices at Government expenses; lifting ofbans on import of certain items like fish; and fillip to ‘originOman’ campaign to enhance awareness among consumersabout local products as opposed to more expensive importeditems. Based on the realistic assessment of sources of inflationand keeping in view the medium to long-term developmentneeds of the country, the Government adopted a prudentpolicy combination that helped avoid the cost of revaluationof RO on the economy arising from contraction of revenuesfrom oil exports, decline in Government expenditure andincrease in remittances by the expatriates due to favorableexchange rate.Since September 2008, inflationary pressures have been abatedsignificantly around the world, particularly in developedcountries. As downside risks to growth increased in viewof prolonged recession extending to 2009, both fiscal andmonetary policy continued to be generally accommodativein most parts of the world with country-specific fine-tuning.In Oman, despite recent moderation in the inflation rate,it remains at an elevated level. The pass-through of fallingprices in the international markets has been significantlymuted in Oman on account of sustained domestic demand.As a result, the inflation differential between the US andOman has widened. In a fixed exchange rate system, thereis a need to reduce inflation rate differential between twocountries so as to reduce pressures on the fixed peg. Hence,liquidity management has to strike a balance betweencontrolling inflation and sustaining growth momentumin the medium term within the limited scope of pursuingindependent monetary policy under a fixed exchange ratesystem.Central Bank of OmanAnnual Report 2008 31

CHAPTER III

OIL and GASDevelopments in World Oil MarketsWorld oil markets witnessed some demand and supplyimbalances in the last two years. The International EnergyAgency (IEA) reported that the average daily demand forcrude oil in 2007 stood at 86 million barrels comparedto an average daily global supply of 85.5 million barrels.The daily average global demand for crude oil wasslightly lower in 2008, registering 85.7 million barrels,compared to a supply of 86.5 million barrels. As theglobal economy slowed down in 2008, together with theprospect of global recession, the demand for crude oil isprojected to decrease to a daily average of 84.4 millionbarrels in 2009.The volatility in world oil demand and supply had theireffects on world oil prices during 2008. Brent price witnesseda sharp increase, from US $ 94.17 per barrel at the end of2007 to US $ 141.53 at the end of June 2008 with surgein prices representing an increase of 50.3 percent in thecourse of six months. Towards the end of 2008, as the globaleconomic downturn deepened, Brent price declined sharplyto reach US $ 41.76 per barrel, representing a notable declineof 70.5 percent from the month of June during the same year.American West Texas oil followed a similar price pattern,increasing from US $ 96 per barrel at the end of 2007 to US $139.10 at the end of June 2008, a rise of 44.9 percent. By theend of December 2008, the price for American West Texas oildeclined to US $ 44.6 per barrel.World Economic OutlookAccording to IMF “World Economic Outlook – April2009”, global economic output is projected to contract by1.3 percent in 2009, notwithstanding the efforts exerted bymany governments to restore the financial sector stabilityand the continued use of macroeconomic policy levers tosupport aggregate demand. Economic globalization hasamplified the knock-on effects of this recession given thatoutput per capita is projected to decline in countries thatrepresent three-quarters of the global economy. The AprilOutlook forecasts that the global economy would come outof recession in 2010 with a projected growth of 1.9 percent,which is relatively small in contrast to previous recoveries.These projections are based on an assessment that financialmarket stabilization would take much longer to recover thanpreviously envisaged.Undoubtedly, the developments in the internationaleconomic and financial fronts would have ramifications onthe world oil markets not only in terms of global demandand supply for crude oil, but also in terms of upstreamand downstream investments. Growing uncertainty inthe global financial market tends to increase the degree ofvolatility in the oil markets as witnessed in 2008 and inthe first half of 2009. When this uncertainty turned intocredit crunch, the oil industry in a number of countriesstarted slowing the upstream investment momentum. Theprospect of global recession in 2009 and the subsequentdecrease in demand for crude oil projected during theyear, coupled with positive growth in non-OPEC supply,have been exacerbating the market imbalance for the crudeoil, even more so as OECD countries continue to buildtheir inventories. Under these conditions, the challengefor oil producing countries is to reduce the demand andsupply imbalances and maintain an oil price in a rangethat is not detrimental to the global economy or their owneconomies.Central Bank of OmanAnnual Report 2008 35

CHAPTER IIIThe Economics of Oil and Gas in OmanThe oil and gas sector continued to dominate the Sultanate’seconomy in 2008, accounting for 51.3 percent of nominalGDP, 79.1 percent of net fiscal revenue, 84.9 percent ofexports of Omani origin, and 76 percent of total merchandiseexports (including re-exports). The Government’s net oilrevenues increased by 43.7 percent in 2008 to reach RO5,285.2 million compared to RO 3,678.2 million realizedin 2007. Overall favourable oil prices, in conjunction withincrease in crude oil production witnessed in 2008 raisedthe share of net oil revenues in total revenues, reaching 67.5percent during the year compared to 62.1 percent in theprevious year. As regards government revenues generatedfrom natural gas, it increased to RO 909.9 million in 2008, upfrom RO 810.9 million in 2007, representing a 12.2 percentgrowth.The indirect contribution of the oil and gas sector inthe form of oil and gas-based industrialization has alsoincreased considerably in recent years. Despite the gradualprogress witnessed in economic diversification front andthe consintent decline in oil production between 2001 and2007, the continued dominance of the oil and gas sector inthe economy in 2008 was further heightened by an increaseof 6.8 percent in oil output and 55 percent increase in oilprice during the year (Table 3.1). In relation to the peak levelof oil production of 350 million barrels in 2000, the level ofoil production in 2007 had fallen to 259.3 million barrels,representing a decline of 25.9 percent over a seven-yearperiod, then increased to 277 million barrels in 2008.Crude OilProductionTable 3.1Oman’s Oil Prices(US $/B)Month 2004 2005 2006 2007 2008January 29.91 39.26 58.94 50.99 87.01February 29.32 41.25 58.06 54.96 86.54March 31.63 47.55 58.18 58.16 88.74April 32.28 48.76 64.53 63.45 90.16May 35.45 46.85 65.39 64.17 97.72June 34.19 52.07 65.62 65.30 104.19July 35.48 53.47 69.59 69.26 119.15August 39.00 56.97 69.21 66.05 128.28September 36.05 57.00 59.95 70.17 133.08October 38.50 54.39 56.21 68.34 113.13November 35.93 51.80 56.30 73.49 95.88December 35.28 53.60 58.28 77.51 68.89Average (Jan-Dec) 34.42 50.26 61.69 65.15 101.06Source: Ministry of Oil and Gas and Ministry of National Economy.The Government of Oman continued with a strategyanchored on minimizing production costs of oil byutilizing the latest technology as well as maintaining asustainable level of production over the medium-termand long-term. Within this framework and shown in Table3.2, Petroleum Development Oman Co. (PDO) and otheroil producing companies (Occidental Oman, OccidentalMukhaizna, Daleel Petroleum, Rak Petroleum, BTT Omanand Petrogas) based in the Sultanate managed to produce277 million barrels of oil and condensates in 2008compared to 259.3 million barrels in 2007, representingan increase of 6.8 percent (Chart 3.1). Average productionper day thus increased from 710.4 thousand barrels in2007 to 756.8 thousand barrels in 2008.The aggregate number of oil producing fields stood at 128in 2008, of which 108 were under PDO and accountedfor 84.4 percent of the total production. The decliningtrend in crude oil production that started in 2001 wasreversed in 2008, owing mostly to increased application36 Annual Report 2008 Central Bank of Oman

Oil and GasTable 3.2Oil Production & Exports(Million Barrels)Year Production % Change Exports % Change2004 285.0 -4.7 263.6 -5.42005 283.0 -9.0 262.1 -6.02006 269.2 -4.7 233.2 -11.02007 259.3 -3.7 222.0 -4.82008 277.0 6.8 216.7 -2.4Source: Ministry of Oil and Gas and Ministry of National Economy.ProductionMillion Barrels290285280275270265260255250245Chart 3.1: Oil Production and Prices2004 2005 2006 2007 2008ProductionPriceUS $ / b120100806040200Pricesof Enhanced Oil Recovery (EOR) techniques by PDO. Theincreased EOR application, together with the introductionof new technologies to optimize its operations andimprove wells and reservoirs would continue in 2009with the objective of reversing decline in oil productionfrom matured oil fields.PDO announced that its exploration operationsundertaken in 2008 have led to new discoveries of oil andnatural gas at the “Taleea” and “Malan” fields. Anothernew field named “Rabab” was discovered in the south ofOman and is believed to hold significant volumes of oiland gas.The second largest oil producing company in Oman afterPDO is Occidental Oman with its operations centered atthe Mukhaizna oil field in south-central Oman, the Safahfield in the north of the country, and adjoining areas.According to the company, after assuming the operationof Mukhaizna field in 2005, it proceeded to pursue astrategy of aggressive drilling and development program,including a major pattern of steam flood in order toenhance oil recovery in this field. Occidental Omanplans to gradually increase its production by expandingthe steam flood project.ReservesThe efforts exerted by PDO in oil exploration throughseismic acquisition, seismic processing, special studiesand exploration drilling continued in 2008. These effortstranslated into new discoveries, adding 117.5 million barrelsof oil reserves in 2008 and thus increased the total reservesto 4.978 billion barrels in 2008, up from 4.860 billion barrelsin 2007. According to PDO’s agreement signed among thefour shareholders (Shell, Total, Partex , and the Governmentof Oman) in 2005, the production sharing agreementwas extended for another 40 years with one of the termsexpecting the company to sustain the liquid reserves ataround 4.7 billion barrels of oil and condensates over the40-year period.New ProjectsIn 2008, PDO continued to implement new projects with thepurpose of increasing crude oil production and reserves. Tothat end, the development of Musallem oil field with newproduction facilities and drilling wells was completed duringthe year. The year 2008 also witnessed the completion of aproject undertaken by Occidental Oman that uses extraneouswater injection in Jalal block number 9 in addition to startingthe development of Wadi Rafsh field during the same year.Central Bank of OmanAnnual Report 2008 37

CHAPTER IIIOther oil companies also undertook some major activitiesin 2008 with Ras Al Khaima (RAK) Oil Company launchingits drilling platform in Pukha West under block 8 with therequired 12-inch oil pipeline built during the year. As forDaleel Oil Company, it installed a number of pumps totransport oil from the field to the export port of Mina alFahal.Oil and Gas ExportsThe 6.8 percent increase in crude oil production witnessedin 2008 did not translate into increase in exports for crudeoil, primarily due to increased use of crude in domesticrefineries. In 2008, aggregate crude oil exports stood at216.7 million barrels, slightly lower than the 222.0 millionbarrels of oil exported in 2007, representing a decline of 2.4percent (Chart 3.2). Despite the surge in oil prices witnessedin 2008 and additional revenues generated from natural gasexport, the share of oil and gas exports in total exports ofCountry ofDestinationTable 3.3Direction of Oil Exports(In Million Barrels)2004 2005 2006 2007 2008Japan 40.8 43.1 22.7 29.0 30.4China 106.4 84.3 92.0 99.3 105.9Korea, South 41.9 41.1 34.2 15.6 23.5Philippines - - - - -Taiwan 12.1 16.00 11.2 8.1 10.7Thailand 43.4 44.00 43.2 29.3 25.2Malaysia - 6.9 12.0 6.3 6.8USA 4.8 - - 6.1 -Singapore 3.1 7.5 5.3 2.1 3.5Others 11.1 19.2 12.5 16.2 10.7Total 263.6 262.1 233.2 222.0 216.7Source: Ministry of Oil and Gas and Ministry of National Economy.Omani origin increased only slightly to 84.9 percent in 2008as compared to 84.8 percent in 2007 and in terms of share intotal exports that include re-exports, it also increased slightlyto reach 76 percent in 2008 as against 75.8 percent in 2007.China occupied the first place as the main importer of Omanicrude oil with its share in Oman’s total exports of crude oilincreasing from 44.7 percent in 2007 to 48.9 percent in 2008(Chart 3.3). Japan came second with 14.0 percent share in2008 followed by Thailand with 11.6 percent and SouthKorea with a share of 10.8 percent. As shown in Table 3.3,a few other countries also imported crude oil from Oman in2008 in small amounts.RefineryThe Sultanate’s oil refining capacity has grown significantlysince 1982 when only 50,000 barrels of crude oil perday were refined by Oman Oil Refinery Company. In thecourse of the last five years, Oman experienced a steadyincrease in oil refining capacity from an aggregate of 28.9million barrels in 2004 to 37.7 million barrels in 2008.The oil refining capacity in Oman was boosted in 2006,as Sohar Refinery Company came on stream. In 2007, theGovernment of Oman merged Oman Refinery Company(ORC) and Sohar Refinery Company in order to realize theeconomies of scale in the industry. The merged company isnow called Oman Refinery and Petrochemicals Company(ORPC) with one branch in Mina al Fahal and anotherbranch in Sohar. Currently, the Mina al Fahal branchhas a refining capacity of 106,000 barrels per day andproduces among others, gasoline, gas oil, jet fuel, LPG andlong residue. Current capacity for Sohar Refinery standsat 116,400 barrels per day and is designed to maximizepropylene yield and it produces LPG, gas oil, gasoline, fueloil, and jet fuel. Sohar Refinery is designed to supply inputraw materials to Oman Propylene Company and AromaticsLtd. Table 3.4 provides relevant data on input materialsand output products for Oman Refinery Company.38 Annual Report 2008 Central Bank of Oman

Oil and GasMillion Barrels300250200150100500Chart 3.2: Omani Crude Oil Productionand Exports2004 2005 2006 2007 2008ProductionExportsExports as % of Production (Right Scale)959085807570PercentOthers9.7%Chart 3.3: Direction of Oil Exports 2008Thailand11.6%Japan14.0%Taiwan4.9%China 48.9 %Japan 14.0 %South Korea 10.8 %South Korea10.8%China48.9%Thailand 11.6 %Taiwan 4.9 %Others 9.7 %Natural GasNatural gas is another important source of energy in Oman.The supply of natural gas to the government gas networkcomes from PDO and was boosted by 30 percent in 2005upon the commissioning of the gas processing plant at SaihNihayda and the completion of the 265-kilometer “loop”pipeline. The year 2008 continued to witness additionalefforts by PDO to book more natural gas reserves throughexploration programs. Production of natural gas witnesseda slight decline in 2008, reaching 1068.8 billion cubic feets(219.9 billion cubic feets of associated and 848.9 billion cubicfeets of nonassociated), as against 1070.7 billion cubic feets(218.7 billion cubic feets of associated and 852 billion cubicfeets of non-associated) in 2007 (Table 3.5). The number ofnon-associated gas fields in 2008 stood at 14, out of which 5fields belonged to PDO and 7 to Occidental Oman Company,and one each to Rak Petroleum and BTT Oman.The natural gas produced by PDO is used for LNG trainsas well as for optimizing oil production by increasing oilreservoir pressure through gas injection. Additionally, anTable 3.4Oman Refinery Company - Crude Oil Input and Output by Type of Product(In Thousand Barrels)Input/Output 2004 2005 2006 2007 2008Input (Crude Oil) 28945.3 31573.4 31027.4 24669.7 37667.6Output 28945.3 31573.4 31027.4 24669.7 37667.6GasolineRegular 90 1269.1 1356.9 1374.3 1013.8 2783.5Super 97 3945.6 4079.4 3703.7 2893.8 3730.6DP Kerosene 1406.9 1770.4 2338.9 2160.0 3036.7Gasoline 6442.4 7089.3 6750.4 2848.6 8131.5Butane 472.8 580.2 630.0 914.5 915.3Long Residue (Bunker) 14246.6 15445.2 14946.8 13177.4 18560.6Change in Intermediate Products 66.3 8.00 139.1 344.2 28.4Fuel and Uses of ORC 1095.4 1244.0 1144.2 682.6 481.1Source: Ministry of Oil and Gas and Ministry of National Economy.Central Bank of OmanAnnual Report 2008 39

CHAPTER IIIincreasing part of natural gas is being used as fuel to generatepower and in desalination plants, cement factories and otherindustrial projects. As the domestic industry continues togrow and the economy continues to diversify away fromoil, more demand for natural gas is expected, especially inprojects that are gas-based. Natural gas that was produced inOman in 2008 was used in LNG production, exports, and indomestic industries, as well as oil fields.New Gas projectsWithin a framework of increasing natural gas production andtransportation capacity within Oman, a number of projectswere implemented in 2008, complementing prior projectssuch as the 676 kilometers gas pipeline from Sehroll toSalalah built in 2003 and another gas pipeline from Fahudto Sohar inaugurated during the same year. Other majorprojects executed between 2003 and 2006, included QalhatLNG third train that started production in 2005, and projectsTable 3.5Production & Uses of Natural Gas(million cubic feet)2007 2008*% Changes2008/2007Production 1,070,736 1,068,799 -0.2– Associated 218,651 219,943 0.6– Non Associated 852,085 848,856 -0.4Uses: 1,070,736 1,068,799 -0.2A- GovernmentGas System271,484 312,167 15.0B- OLNG 351,802 339,842 -3.4C- QLNG 138,368 131,724 -4.8D- Exported (UAE) 33,829 -100.0E- Oil Fields 171,499 169,441 -1.2– Fuel 72,352 67,303 -7.0– Re-injection 99,147 102,138 3.0F- Flared 49,607 49,601 0.0G- Other 54,117 66,023 22.0*ProvisionalSource: MONE, Monthly Statistical Bulletin.on infrastructure to meet the rising demand in natural gas.Major drilling campaigns and engineering projects also tookplace in 2006 and 2007 in a number of oil fields managedby PDO.In 2008, PDO implemented several projects aimed atenhancing the efficiency of the gas infrastructure in Omanand subsequently increasing production capacity to meetrising demand and to provide upcoming industrial projectswith the required energy. Among these projects was theinstallation of new gas pressure reduction station in Barikand Sehnahida oil fields. Moreover, Oman Gas Companycontinued the execution of several projects in 2008, includingthe expansion of natural gas transportation facilities. Thecompany also completed the installation of a pressure stationin Buraimi.LNG ExportsThe export of Liquefied Natural Gas (LNG) in 2008 amountedto 8.6 million tons (6.2 million from Oman LNG Company–first and second Trains- and 2.4 million tons from QalhatLNG Co. -3rd Train), slightly lower than 9.1 million tonsof exports in 2007, representing a decrease of 5.8 percent.The destination for Oman LNG exports in 2008 includedKorea, Japan, China, Taiwan, India, Turkey and Spain. Some250 thousand metric tons of byproducts of LNG were alsoexported to UAE in 2008 compared to 273 thousand metrictons in 2007.Mining and QuarryingAlthough the hydrocarbon sector remains the largest naturalresource-based sector in Oman, Mining and Quarrying sectoralso plays an important role in the Omani economy. Inorder to promote this sector, the Government undertook anintensive programme of geological surveys and exploration40 Annual Report 2008 Central Bank of Oman

Oil and Gasin recent years. These studies have already producedsome result, with a number of minerals including copper,chromite, nickel, iron, gold and silver being discovered.Oman is also endowed with deposits of non-metallicminerals such as large quantities of gypsum and limestone,which are being used in the production of cement. Highquality marble is also quarried and sold both in the domesticand international markets. Work on Geological Mapping andGround Geophysics undertaken in previous years resultedin the discovery of new potential areas for copper and golddeposits.In 2008, Oman’s gold production declined to 1,381 metrictons from 4,017 metric tons in 2007. The production ofsilver also fell, amounting to just 282 metric tons in 2008compared to 1,626 metric tons in 2007 (Table 3.6). Oman’sproduction of copper stood at 39.8 thousand metric tonsin 2008 compared to 40.3 thousand metric tons in 2007.With regard to chromite production, it reached around784 thousand metric tons in 2008 compared to about 408thousand metric tons in 2007. Chromite is fully exportedand the main importers include Japan, the UK, Germany andsome other EU countries. The production of Iron (Laterite)Table 3.6Oman’s Mining and Quarrying Production(Metric Ton)Description 2007 2008Silver 1,626 282Gold 4,017 1,381Building Materials 41,280,912 5,1153,786Chromite 407,822 784,082Clay 76,747 183,325Sand 22,029 19,486Gypsum 327,041 321,746Iron (Laterite) 295,012 301,117Quartz 211,879 176,518Limestone 3,607,648 3,604,452Marble 311,861 457,146Salt 10,452 10,444Copper 40,334 39,819* Source: Ministry of Commerce and Industry.witnessed a slight increase in 2008 when it reached 301thousand metric tons in 2008 compared to about 295thousand metric tons in 2007. A share of the iron producedwas exported while the remaining share was consumed inthe domestic economy.Central Bank of OmanAnnual Report 2008 41

CHAPTER IV

PUBLIC FINANCEOverall AssessmentNotwithstanding the global crisis, Oman’s strong fiscal positionwitnessed since 2004 continued in 2008, mainly due tooverall favourable oil prices that prevailed during the greaterpart of the year and a fiscal policy that aimed at sustaining asurplus position and reducing public debt in time of growingpublic revenues. Trends in the global oil prices are critical tothe overall growth in the Omani economy, particularly withrespect to government revenues. In addition to rising publicrevenues generated from oil proceeds in 2008, governmentrevenues generated from other sources such as the gas sectorand non-hydrocarbon sources also grew during the year, furtherstrengthening the Sultanate’s fiscal position.Key fiscal indicators in Table 4.1 capture the Sultanate’sfiscal performance over the last five years. Fiscal balance (netof transfer to Reserves) as percentage of GDP remained inpositive territory between 2004 and 2008. In 2008, it stood at1.2 percent of GDP compared to 0.3 percent in 2007. Totalrevenues (net of transfer to Reserves) as percentage of GDPremained significant at 34 percent as against 37 percent in2007 (Chart 4.1). Total expenditure as percentage of GDPstood at 32.8 percent in 2008, down from 36.7 percent in 2007.Current expenditure as percentage of GDP which witnesseda sustained decline since 2004, stood at 19.2 percent in 2008as against 24.1 percent in 2007. Investment expenditure aspercentage of GDP on the other hand, fluctuated between 2004and 2008. In 2008, it stood at 9.9 percent of GDP compared to10.6 percent in 2007. Share of oil revenues in total revenuesremained significant during the last five years and stoodat 67.5 percent in 2008, up from 62.1 percent in 2007. Theincrease in share of oil revenues to total revenues witnessedin 2008 owed primarily to highly favourable oil prices, giventhat the average Omani crude oil price during the year was55 percent higher over the previous year’s price. Share ofTable 4.1Indicators of Fiscal ManagementFiscal Indicators 2004 2005 2006 2007 2008*Fiscal Balance as % of GDP 2.4 2.5 0.3 0.3 1.2Total Revenues as % of GDP 42.6 38.0 35.2 37.0 34.0Oil Revenues as % of GDP 30.6 26.6 22.8 23.0 22.9Total Expenditure as % of GDP 40.2 35.4 34.9 36.7 32.8Current Exp.as % of GDP 28.1 26.8 25.0 24.1 19.2Investment Exp.as % of GDP 10.9 8.1 8.5 10.6 9.9Share of Oil Revenues in Total Revenues 71.9 70.1 64.8 62.1 67.5Share of Current Exp.in Total Expenditure 69.8 75.6 71.5 65.6 58.5* Provisional.Central Bank of OmanAnnual Report 2008 45

CHAPTER IVcurrent expenditure in total expenditure decreased to 58.5percent in 2008 from 65.6 percent in 2007. In fact, currentexpenditure as a share of total expenditure also witnesseda sustained year-on-year decrease since 2004, in line withthe government policy of expenditure rationalization wherelong-term investment priority is increasingly becoming thedriving force behind resource allocation.Additional fiscal indicators are captured in Table 4.2 wherefiscal balance (net of transfer to Reserves) points to a surplusof RO 272.7 million in 2008 compared to RO 40.2 millionin 2007. Public revenues witnessed year-on-year growthover the five-year period, reaching RO 7,829.4 million in2008, up from RO 5,920.6 million realized in 2007 (Chart4.2), representing an increase of 32.2 percent over the year.The largest revenue component in 2008 was that of revenuesgenerated form crude oil, which rose from RO 3,678.2 millionin 2007 to RO 5,285.2 million in 2008, owing largely to thesteep rise in average oil prices by 55 percent. Gas revenuesand other current revenues also contributed to the overallincrease in public revenues in 2008.The sustained increase in public revenues witnessed in thecourse of last five years was also matched by similar increasein government expenditure over the same period. In 2008,total expenditure reached RO 7,556.7 million comparedto RO 5,880.4 million in 2007, representing an increaseof 28.5 percent. The two main components under totalexpenditure, namely current and investment expendituresalso witnessed year-on-year increases between 2004 and2008. Current expenditure increased by 14.5 percent toreach RO 4,416.9 million in 2008 compared to RO 3,857.5million in 2007, while investment expenditure increasedby 34.4 percent to RO 2,280.8 million in 2008 from RO1,697.3 million in 2007. It is worth noting that the 34.4percent increase in investment expenditure compared toan increase of 14.5 percent in current expenditure testifiesthe Government’s efforts to direct significant resources tolong-tem investments in infrastructure and other areasthat are critical for the country’s long-term development.Rising government expenditure in the last five years wasnot limited to current and investment expenditure alone,but also extended to participation and support to the privatesector, reflecting stated government policy to promote theprivate sector as envisaged in the country’s Vision 2020.This policy was carried out through various supportschemes and participations to the private sector, whichtogether amounted to RO 859.0 million in 2008, up fromRO 325.6 million in 2007, representing a notable increaseof 164 percent.45Chart 4.1: Ratio of Revenue to GDP9000Chart 4.2: Overall Fiscal Balance408000357000% of GDP30252015(in Million RO)60005000400030001020005100002004 2005 2006 2007 2008Ratio of Total Revenue to GDP (%)Ratio of Oil Revenue to GDP (%)Ratio of Other Revenue to GDP (%)0-10002004 2005 2006 2007 2008Total RevenueTotal ExpenditureDeficit/Surplus46 Annual Report 2008 Central Bank of Oman

Public FinanceTable 4.2Public Finance(Rial Omani Million)Items 2004 2005 2006 2007 2008*EstimatedBudget 2009REVENUES 4040.2 4510.5 4979.9 5920.6 7829.4 5614.0Net Oil Revenues 2904.9 3161.9 3225.9 3678.2 5285.2 3522.0Gas Revenues 250.9 393.6 613.5 810.9 909.9 670.0Other Current Revenues 850.0 888.3 1073.4 1344.9 1552.4 1355.0Capital Revenues 16.6 35.0 49.0 66.2 68.3 54.0Capital Repayments 17.8 31.7 18.1 20.4 13.6 13.0TOTAL EXPENDITURE 3809.9 4207.6 4936.1 5880.4 7556.7 6424.0Current Expenditure 2661.2 3179.4 3531.0 3857.5 4416.9 4020.0Defence & National Security 1143.6 1404.2 1549.6 1663.4 1775.1 1545.0Civil Ministries 1304.4 1531.9 1735.0 1898.7 2344.9 2149.0Interest Paid on Loans 74.4 66.8 55.6 77.7 50.8 54.0Gas Production Expenditures 22.2 46.4 51.1 54.9 64.3 76.0Oil Production Expenditures 116.6 130.1 139.7 162.8 181.8 196.0Investment Expenditure 1034.8 966.5 1199.5 1697.3 2280.8 1919.0Development Expenditure for Civil Ministries 422.3 475.1 576.4 800.2 1188.1 800.0Capital Expenditure for Civil Ministries 24.8 26.0 28.4 38.3 47.1 21.0Oil Production Expenditures 257.4 249.5 322.5 476.9 649.1 679.0Gas Exploration 12.4 0.0 0.0 0.0 0.0 0.0Gas Production Expenditures 235.7 171.2 272.2 381.9 396.5 419.0Program on Human Res.Development 51.2 44.7 0.0 0.0 0.0 0.0Cost of Buying & Transporting Gas 31.0 0.0 0.0 0.0 0.0 0.0Participation & Support to Private Sector 113.9 61.7 205.6 325.6 859.0 485.0SURPLUS/DEFICIT 230.3 302.9 43.8 40.2 272.7 -810.0FINANCING -230.3 -302.9 -43.8 -40.2 -272.7 810.0Net Grants Received 8.3 -5.6 -36.8 4.6 -20.3 0.0Drawing from Reserves 0.0 0.0 0.0 0.0 0.0 710.0Net loans Received -84.9 -151.1 195.5 3.2 44.0 100.0Development Bonds(Net) 88.5 -8.0 -80.0 -130.0 -80.0 0.0Remaining Surplus Brought from Previous Year 11.4 0.0 0.0 100.0 18.0 0.0Change in Government Accounts -253.6 -138.2 -122.5 -18.0 -234.4 0.0* Provisional.Source: Ministry of Finance.Central Bank of OmanAnnual Report 2008 47

CHAPTER IVTable 4.3 captures the extent of expansionary fiscal policypursued between 2004 and 2008 as it compares expendituregrowth and nominal GDP growth over the last five-yearperiod. The data indicate that the rate of public expendituregrowth in 2004, 2006 and 2007 exceeded nominal GDPgrowth while the reverse was the case in 2005 and 2008. Thefive-year average points to a 19 percent public expendituregrowth as against 22.2 percent in nominal GDP growth.As regards the 2008 approved budget, the main assumptionson its formulation were based on an annual average Omanicrude oil price of US $ 45.0 per barrel and an average crude oilproduction of 790,000 barrels per day. While the assumptionon crude oil price was highly conservative, the estimate foroil production was fairly close to the mark. The conservativecrude oil price assumption applied in formulating thebudget has been a hallmark of the government policy, whichtends to provide it with spending flexibility, in particularas actual oil prices outweigh assumption prices made underthe budgets. In 2008, actual average Omani crude oil pricestood at US $ 101.06 per barrel, which happened to be about125 percent higher than the budget assumption price of US $45.0 per barrel of crude oil while actual crude oil productionduring the year amounted to 756,800 barrels per day ascompared to an estimate of 790,000 barrels per day under thebudget. Given the ample margin between the assumed oilprice under the budget and the actual price in 2008, plus thefact that over 67.5 percent of public revenues were generatedfrom oil sales during the year, the Government proceededwith highly expansionary fiscal policy.RevenuesRising public revenues generated from crude oil exports aswell as from non-oil revenue sources allowed the Governmentto expand its net total revenues to RO 7,829.4 million in2008, up from RO 5,920.6 million in 2007. The significantincrease in oil revenues witnessed in 2008 reflected both a55.1 percent increase in average oil price as well as a modestincrease in average daily oil production over the previousyear. Another important hydrocarbon source of revenues tothe Government pertained to natural gas which increased toRO 909.9 million in 2008, up from RO 810.9 million in 2007,representing a 12.2 percent growth and reflecting a slightincrease in production, as well as optimization in exportcontracts renegotiations. Government revenues generatedthrough taxes, fees, and other non-tax sources are featuredunder the sub-component of other current revenues. Theserevenues stood at RO 1,552.4 million in 2008 compared toRO 1,344.9 million in 2007, representing an increase of 15.4percent and ranked second in terms of size after oil revenues.The remaining sub-components of public revenues consistedof capital revenues and capital repayments, which wererelatively much smaller in comparison to the other sourcesof public revenues generated in 2008 and stood at RO 68.3million and RO 13.6 million, respectively.Other Current RevenuesTable 4.3Nominal GDP and Expenditure GrowthItems 2004 2005 2006 2007 2008*Nominal GDP Growth (%) 13.7 24.8 15.5 12.9 44.0Expenditure Growth(%) 19.5 10.4 17.3 19.1 28.5* ProvisionalSource: Ministry of Finance & Ministry of National Economy.Other current revenues which witnessed a 15.4 percentincrease in 2008, were driven by rising revenues generatedthrough taxes, fees, and non-tax sources as shown in Table 4.4However, as share of total revenues, other current revenuesstood at 19.8 percent in 2008, down from 22.7 percent in2007. The decrease in other current revenues as share of totalrevenues witnessed in 2008 reflected the effect of the surgein oil revenues and its relative contribution to total revenues48 Annual Report 2008 Central Bank of Oman

Public Financeduring the year. Nonetheless, other current revenueswitnessed a year-on-year nominal increase between 2004and 2008, which was indicative of a growing tax base and anexpanding diversification of sources of public revenues.At sub-component level, revenues generated through taxesand fees rose to RO 694 million in 2008, up from RO 528.5million in 2007, representing a 31.3 percent growth. Undertaxes and fees revenues, with the exception of licenses feeson communication services, all sub-components registeredincrease in 2008, albeit at various degrees. Income tax oncompanies and establishments increased by 26.9 percentto reach RO 237.4 million in 2008 compared to RO 187.1million in 2007. Payroll taxes increased by 11.9 percent toRO 101.7 million in 2008 from RO 90.9 million in 2007 whilerevenues generated from custom duties registered a notableincrease of about 42 percent to RO 226.6 million in 2008compared to RO 159.6 million in similar revenues realizedin 2007. The remarkable increase in revenues generatedthrough custom duties was indicative of large imports theSultanate witnessed in 2008.The non-tax revenues component under current revenuesstood at RO 858.5 million in 2008, slightly higher than theRO 816.4 million achieved in 2007, representing an increaseof 5.2 percent. After privatizing the electricity sector, thisChart 4.3: Compositional Shifts in Total Expendituresource of revenues to the Government became non-existentsince 2006. Revenues generated from government investmentregistered a 52.6 percent increase, reaching RO 600.1 millionin 2008, up from RO 393.3 million in 2007 while revenueson bank deposits and lending fell by almost half to RO 25.7million in 2008 from RO 46 million in 2007. Other revenuesunder non-tax revenues also registered a decline of about39.9 percent to RO 171.6 million in 2008 from RO 285.5million generated in 2007.ExpenditureThe expansionary fiscal policy witnessed between 2004and 2007 was also evident in 2008 during which totalgovernment expenditure grew by 28.5 percent to reach RO7,556.7 million, up from RO 5,880.4 million in 2007. In fact,expenditure growth witnessed in 2008 was the highest since2004. The fiscal expansion witnessed in 2008 was drivenby increases in both current and investment expenditures.Current expenditure grew by 14.5 percent, reaching RO4,416.9 million in 2008 compared to RO 3,857.5 million in2007. Investment expenditure, on the other hand, grew by34.4 percent to RO 2,280.8 million in 2008 from RO 1,697.3million in 2007 (Charts 4.3 and 4.4). It is worth noting thatin recent years, as was also the case in 2008, resourcesallocated to investment expenditure had been growing atChart 4.4: Components of Fiscal Expenditure80608000% Share in Total Expenditure7060504030201050403020100Annual Growth (%)(in Million RO)700060005000400030002000100002004 2005 2006 2007 2008-1002004 2005 2006 2007 2008Share of Current Expenditure in Total Expenditure (Left Scale)Share of Investment Expenditure in Total Expenditure (Left Scale)Growth in Investment Expenditure (Right Scale)Growth in Current Expenditure (Right Scale)Current ExpenditureInvestment ExpenditureParticipation & Subsidy to Private SectorCentral Bank of OmanAnnual Report 2008 49

CHAPTER IVa high rate, reflecting the government policy of channelingmore resources to strategic and long-term developmentprojects.Since 2004, both current and investment expenditurecontinued to grow with the exception of 2005 wheninvestment expenditure declined, mainly on the account ofsignificant reduction in gas production expenditure as majorlong-term projects under this sector and other supportingprojects that had been undertaken in earlier years hadalready come on stream. With respect to the hydrocarbonsector, as oil prices continued to increase between 2004 and2008 and more revenues were also being generated from thegas sector through long-term contract re-negotiation, therewas an added incentive to increase investment expenditurein this sector in order to identify new opportunities andoptimize existing ones.Current Expenditureabout 7.0 percent. Current expenditure on both oil and gassectors also increased in 2008 with the former at RO 181.8million in 2008 as against RO 162.8 million in 2007 and thelatter at RO 64.3 million as against RO 54.9 million duringthe corresponding years.As proportion of total expenditure, aggregate currentexpenditure declined to 58.5 percent in 2008 from 65.6percent share in 2007, and when measured as percentageof GDP, it also declined to 19.2 percent in 2008, from 24.1percent in 2007. The share of current expenditure ondefense and national security in total expenditure stood at23.5 percent in 2008 as against 28.3 percent in 2007, andin terms of percentage of the GDP, it stood at 7.7 percentas against 7.2 percent during the same period. Currentexpenditure on civil ministries accounted for 31 percentof total expenditure in 2008 as against 32.3 percent in2007 and as percentage of GDP, it stood at 10.2 percent in2008 compared to 11.9 percent in 2007.The increase in current expenditure in 2008 was alsoreflected under all its sub-components with the exceptionof interest paid on loans, which declined to RO 50.8 millionin 2008 from RO 77.7 million in 2007. The decline ininterest paid on loans in 2008 was indicative of the overallcontinued strong fiscal position witnessed by the Sultanatein recent years and decline in public debt. Expenditurerelated to civil ministries accounted for the largest subcomponentunder current expenditure and reached RO2,344.9 million in 2008 as against RO 1,898.7 million in2007, representing a marked increase of 23.5 percentcompared to 9.4 percent growth in 2007. The significantincrease in expenditure related to civil ministries in 2008owed mainly to subsidies and other current transfers aswell as high increase in public expenditure on goods andservices. As regards current expenditure on defense andnational security, it reached RO 1,775.1 million in 2008, upfrom RO 1,663.4 million in 2007, representing a growth ofCivil Current ExpenditureTable 4.5 provides a breakdown of civil currentexpenditure by types of expenses. Expenditure on totalwages, salaries allowances and others reached RO 1,368.7million in 2008, up from RO 1,347.9 million in 2007,representing a 1.5 percent growth (Chart 4.5). With theexception of the government contribution to the pensionfund, which declined in 2008, all other items includingsalaries and wages, allowances, and other remunerationincreased over the period. As regards expenditure ongoods and services, it increased to RO 520.5 million in2008, up from RO 405.5 million in 2007, representinga 28.4 percent growth. With reference to subsidies andother current transfers, there was a notable 214.0 percentincrease with the total amount reaching RO 455.7 millionin 2008 as compared to RO 145.3 million in 2007.50 Annual Report 2008 Central Bank of Oman

Public FinanceWhile Table 4.5 provides the breakdown of civil currentexpenditure by types of expenses, Table 4.6 provides thebreakdown of similar expenditure by function. Out of thevarious listed expenditure functions, the largest pertains toeducation affairs and services which points to a sustainedgrowth between 2004 and 2008. In 2008, this expenditurereached RO 743.1 million, representing a year-on-yeargrowth of 13.6 percent and amounting to 3.2 percent ofGDP compared to 4.1 percent of GDP in 2007. The secondlargest item pertains to expenditure on social security andwelfare, which almost doubled to reach RO 501.3 million in2008 from RO 259.8 million in 2007. Expenditure on generalpublic services increased between 2004 and 2007 when itstood at RO 328.3 million in 2007 and fell by a small marginto RO 321.7 million in 2008. Civil current expenditure onhousing also witnessed continuous increase between 2004Table 4.4Breakdown of Other Current Revenues(Rial Omani Million)Items 2004 2005 2006 2007 2008*A. Taxes and Fees Revenues 240.5 337.2 357.2 528.5 694.0Income Tax on Companies and Establishments 65.3 79.0 85.4 187.1 237.4Payroll Tax ** 49.1 71.2 78.2 90.9 101.7Fees on Licences and Others 55.1 58.9 79.0 90.9 128.3Licences Fees on Communication Services 0.0 39.6 0.0 0.0 0.0Custom Duties 71.0 88.5 114.6 159.6 226.6B. Non-Tax Revenues 609.5 551.1 716.2 816.4 858.5Electricity Revenues 116.1 14.0 0.0 0.0 0.0Water Revenues 32.3 36.2 40.4 42.3 42.0Postal Revenues 3.4 3.5 3.2 3.1 3.1Airport Revenues 18.6 1.3 8.5 0.8 0.7Port Revenues 0.2 0.2 0.3 0.3 0.3Public Communication Services Toll 0.0 24.0 68.8 33.1 0.0Surplus from Public Authorities 15.0 7.6 5.4 5.9 6.7Rent from Government Real Estate 5.9 6.7 8.0 6.1 8.3Income from Government Investments 319.8 302.0 369.6 393.3 600.1Interest on Bank Deposits and Lending 9.7 37.3 73.2 46.0 25.7Others 88.5 118.3 138.8 285.5 171.6Total 850.0 888.3 1073.4 1344.9 1552.4* Provisional.** Company participation in technical/training projects.Source: Ministry of Finance.Central Bank of OmanAnnual Report 2008 51

CHAPTER IVTable 4.5Breakdown of Civil Current Expenditure by Type of Expenses(Rial Omani Million)Items 2004 2005 2006 2007 2008*A. Total Wages, Salaries, Allowances and Others 805.6 938.1 1227.5 1347.9 1368.7Salaries and Wages 428.9 500.4 518.4 639.7 734.6Allowances 274.1 310.9 360.9 398.9 443.5Other Remuneration 61.0 62.9 72.1 95.4 110.2Contribution to Pension Fund 41.6 63.9 276.1 213.9 80.4B. Expenditure on Goods and Services 353.2 345.2 381.8 405.5 520.5Purchase of Goods 141.5 98.2 88.9 99.6 120.3Purchase of Services 173.1 199.9 235.6 253.9 335.1Expenses of Government Services 38.6 47.1 57.3 52.1 65.1C. Subsidies and Other Current Transfers 145.6 248.6 125.8 145.3 455.7Total Civil Current Expenditure 1304.4 1531.9 1735.1 1898.7 2344.9* Provisional.Source: Ministry of Finance.Table 4.6Breakdown of Civil Current Expenditure by Function(Rial Omani Million)Items 2004 2005 2006 2007 2008*General Public Services Sector 199.2 223.2 249.0 328.3 321.7Public Order and Safety 38.7 40.3 43.7 49.9 58.1Education Affairs & Services 418.1 489.5 559.9 654.0 743.1Health 160.2 183.4 199.5 223.8 256.6Social Security and Welfare 91.7 262.5 335.0 259.8 501.3Housing 124.7 168.9 217.8 246.1 314.2Cultural and Religious Affairs 43.5 50.1 56.0 64.6 66.0Fuel and Energy 180.9 62.0 6.2 3.6 2.4Agriculture, Forestry and Fishing 16.7 18.8 20.7 23.5 25.5Mining, Manufacturing and Construction 0.0 0.0 0.8 0.0 0.0Transport and Communication 17.7 19.1 25.1 23.7 31.1Other Economic Affairs 13.0 14.1 21.3 21.4 24.9Total Civil Current Expenditure 1304.4 1531.9 1735.0 1898.7 2344.9* Provisional.Source : Ministry of Finance.52 Annual Report 2008 Central Bank of Oman

Public FinanceChart 4.5: Breakdown of Total Salaries, Wages,Allowances and Others for the year 200854%6%Salaries and wagesAllowancesand 2008, reaching RO 314.2 million in 2008 with a year-onyeargrowth of 27.7 percent. Expenditure on health was alsomarked by a sustained increase in the course of five years,reaching RO 256.6 million in 2008, which represented ayear-on-year growth of 14.7 percent and 1.1 percent of GDPas compared to 1.4 percent of GDP in 2007. The remainingexpenditure by functions also witnessed year-on-yearincrease in 2008 with the exception of fuel and energy.Investment Expenditure8%Other Remunerations32%Contribution to Pension FundInvestment expenditure grew between 2004 and 2008 withthe exception of 2005 when it witnessed a small decline. In2008, investment expenditure reached RO 2, 280.8 millioncompared to RO 1,697.3 million in 2007, representing anincrease of 34.4 percent. The increasing trend in investmentexpenditure was also reflected in terms of its share in totalexpenditure, which stood at 30.1 percent in 2008 as against28.9 percent in 2007. As share of GDP, it slightly declined,registering 9.9 percent in 2008 from 10.6 percent in 2007.Under investment expenditure, development expenditureon civil ministries continued to represent the largest sharein 2008, accounting for 52.1 percent during the year (Chart4.6). This component of investment expenditure amountedto RO 1,188.1 million in 2008 compared to RO 800.2 millionin 2007, representing a year-on-year growth of 48.5 percent.The expenditure on oil production at RO 649 million wasthe second largest expenditure and constituted 28.5 percentof the total investment expenditure in 2008 when it reachedRO 649.1 million compared to RO 476.9 million in 2007.Investment expenditure in gas production also witnesseda modest increase, reaching RO 396.5 million in 2008compared to RO 381.9 million in 2007 (Chart 4.7). The basisfor sustaining investment expenditure in gas productionwas equally justified by the efforts to enhance and increaseproduction, in particular, given the prospect for liquefiednatural gas demand as a source of clean energy and the needto diversify the source of energy to fuel for various industrialand development projects that have been undertaken inOman.Civil Development ExpenditureThe breakdown of civil development expenditure classifiedby function is given in Table 4.7. Total expenditure onthis front amounted to RO 1,188.1 million in 2008 asagainst RO 800.2 million in 2007. As seen in Table 4.7,there were four large items under the civil developmentexpenditure. Expenditure on housing represented thelargest item, reaching RO 394.4 million in 2008 as againstRO 231.4 million in 2007. Transport and communicationexpenditure reached RO 377.0 million in 2008, up from RO264.2 million in 2007, reflecting the Government’s priorityto develop, expand, and modernize public infrastructure.As regards expenditure on general public services, itincreased by 72.9 percent to RO 151.8 million in 2008from RO 87.8 million in 2007. Expenditure on educationaffairs and services also grew, reaching RO 109.0 millionin 2008, up from RO 81.0 million in 2007. Expenditureson all other items increased between 2007 and 2008 withthe exception of public order and safety, and fuel andenergy. In sum, the increasing trend in civil developmentexpenditure between 2004 and 2008 mirrored the overallexpenditure trend over the five-year period.Central Bank of OmanAnnual Report 2008 53

CHAPTER IVChart 4.6: Investment Expenditure for the Year 2008Chart 4.7: Share of Investment Expenditure onOil & Gas Production in Total Investment Expenditure52%2%52504846%Percent464442Civil Development ExpenditureOil and Gas Production ExpenditureCivil Capital Expenditure40382004 2005 2006 2007 2008Participation and Support to Private SectorThe year 2008 witnessed a significant increase ingovernment participation and support to the privatesector. This expenditure category points to an aggregate ofRO 859.0 million in 2008 as against RO 325.6 million in2007, representing an increase of about 164 percent (Table4.8). Expenditure on participation in domestic, regionaland international interests accounted for the largest shareat RO 739.9 million in 2008 compared to a modest amountof RO 187.9 million in 2007. While subsidy on soft loans toprivate sector witnessed a marginal increase to reach RO14.2 million in 2008, Government support to electricitysector decreased to RO 104.9 million in 2008 from RO123.9 million in 2007.Government DebtThe strong fiscal position that the Sultanate enjoyed in2008 was also reflected in government debt indicatorsduring the year. As shown in Table 4.9, total public debtdecreased to RO 964.8 million in 2008 from RO 1,000.9million in 2007. With the Government pursuing its debtrestructuring policy, principal repayment and interestpayments decreased to RO 303.5 million and RO 50.8million in 2008 from RO 324.8 million and RO 77.7million in 2007, respectively. More importantly, thedebt to GDP ratio and debt services ratio decreased to 4.2percent and 1.1 percent, respectively in 2008 from 6.3percent and 2.2 percent in 2007 (Chart 4.8). The year-onyeardecrease in debt to GDP ratio and debt services ratiowitnessed between 2004 and 2008 reflected the overallgovernment strategy to restructure its public debt in linewith revenue surpluses that were being generated throughincreasingly favourable oil prices in the course of the lastfive years. The overall level of debt to GDP ratio anddebt service ratio in the last few years are considered tobe on the lower side by international standards.Budget for the Year 2008The Sultanate of Oman’s budget for the year 2009 wasprepared in the backdrop of global financial turmoil, theonset of global recession, the prospect of lower inflationarypressure, and highly volatile oil prices, which reached ahistorical peak of over US $ 147 per barrel in July 2008only to drop to below US $ 45 per barrel in Decemberof the same year. Given this scenario, the Government54 Annual Report 2008 Central Bank of Oman

Public FinanceTable 4.7Breakdown of Civil Development Expenditure by Function(Rial Omani Million)Items 2004 2005 2006 2007 2008*General Public Services Sector 44.6 59.3 58.9 87.8 151.8Public Order and Safety 2.1 5.4 8.9 8.8 6.4Education Affairs & Services 42.4 47.4 83.3 81.0 109.0Health 20.3 14.6 8.0 14.3 19.7Social Security and Welfare 1.5 1.1 1.9 2.5 3.1Housing 108.3 126.7 151.7 231.4 394.4Cultural and Religious Affairs 7.4 11.7 11.8 12.8 18.8Fuel and Energy 68.5 36.7 48.7 21.9 15.9Agriculture, Forestry and Fishing 13.7 11.2 5.1 5.6 11.7Mining, Manufacturing and Construction 2.8 1.7 2.3 1.4 3.4Transport and Communication 88.4 139.5 170.3 264.2 377.0Other Economic Affairs 22.3 19.8 25.5 68.5 76.9Total Civil Development Expenditure 422.3 475.1 576.4 800.2 1188.1* ProvisionalSource: Ministry of Finance.Table 4.8Government Participation and Support to Private Sector(Rial Omani Million)Items 2004 2005 2006 2007 2008*Participation in Domestic, Regional and InternationalInterests99.3 46.6 62.6 187.9 739.9Subsidy on Soft Loans to Private Sector and Housing 14.6 15.1 15.1 13.8 14.2Government Support to Electricity Sector 0.0 0.0 127.9 123.9 104.9Total Participation & Support to Private Sector 113.9 61.7 205.6 325.6 859.0* ProvisionalSource: Ministry of Finance.Central Bank of OmanAnnual Report 2008 55

CHAPTER IVTable 4.9Government Debt IndicatorsItems 2004 2005 2006 2007 20081. Stock of Debt (RO mln.) 1319.1 1018 1127.6 1000.9 964.82. Principal Repayments (RO mln.) 373.3 538.6 105.6 324.8 303.53. Interest Payments (RO mln.) 74.4 66.8 55.6 77.7 50.84. Debt Indicators*(a) Debt to GDP ratio (%) 13.9 8.6 8.0 6.3 4.2(b) Debt Services Ratio (%)** 3.4 4.9 0.6 2.2 1.1*Since non-Government debt is not included in deriving these indicators, they do not reflect the debt of Oman as a whole, and hence, they are strictlynot comparable with standard published debt indicators for other countries.** Relating to external debt of the Government only. Debt- service ratio implies ( principal repayments plus interest payments) as percentage of exportof goods and services.Sources: Ministry of Finance.Chart 4.8: Government Debt to GDP Ratioin the level of spending than the approved expenditure161412and Debt Service Ratiounder the budget. This trend in budget flexibility tends tobe more pronounced depending on how higher the actual10oil price is than assumed price under the budget.In percent864202004 2005 2006 2007 2008Governmnet Debt to GDP RatioDebt Service RatioThe prospect for lower oil prices in 2009 in contrast to2008 prompted the Government to maintain the sameprice assumption as in the 2008 budget. The averageprice assumed under the 2009 budget remained at US $45 per barrel, in conjunction with an estimated higherdecided to slightly reprioritize its expenditure, but withoutcompromising on key projects and to remain within theframework of the Seventh Five-Year Development Plan(2006-2010). The key features of the 2009 budget includean assumed oil price of US $ 45 per barrel, oil productionforecast of 805,000 barrels per day, and a projected fiscaldeficit of RO 810 million.crude oil production of 805,000 barrels per day comparedto an estimate of 790, 000 barrels of oil per day in 2008.Estimated total revenues under the 2009 budget stoodat RO 5,614 million, up from RO 5,400 million underthe 2008 budget, representing a modest increase of4.0 percent. Given the assumptions under the budget,net oil revenues are expected to decrease to RO 3,522million under the 2009 budget from RO 3,610 millionIt is worth noting that when comparing approved budgetexpenditure against actual expenditure in recent years,the recurrent trend is of a sustained actual overshooting ofexpenditure against approved budgets. In 2008, preliminaryfigures on actual expenditure point to 17.6 percent increaseestimated under the 2008 budget, representing a declineof 2.4 percent. As share of total revenues, oil revenuesare expected to remain the dominant component at 62.7percent. Revenues from natural gas on the other hand,are expected to increase under the 2009 budget to RO56 Annual Report 2008 Central Bank of Oman

Public Finance670 million compared to RO 620 million under the 2008budget. The prospect for revenue increase from the naturalgas sector in 2009 can be explained by two main factors,namely the commissioning of gas fields such as Kautherafter drilling and exploration campaigns undertakenin earlier years and improved terms of contracts andagreements with customers.Other current revenues are expected to grow to RO 1,355million under the 2009 budget from RO 1,130 million underthe previous year’s budget, representing an increase of19.9 percent. Despite the prospect of economic slowdownand low oil prices in 2009, the Sultanate is still expectedto achieve a reasonable growth during the year with anexpanded base for taxes and fees revenues as well as nontaxrevenues. Capital revenues are expected to reach RO 54million while revenues from capital repayments have beenestimated at RO 13 million under the 2009 budget. In sum,estimated total revenues under the 2009 budget are expectedto increase by 4.0 percent, notwithstanding the 2.4 percentestimated decline in oil revenues.Aggregate public expenditure under the 2009 budget isestimated at RO 6,424 million, up from an estimate of RO5,800 million under the 2008 budget. Current expenditureunder the 2009 budget is projected at RO 4,020 millioncompared to RO 3,550 million under the previous year’sbudget, representing an increase of 13.2 percent. Undercurrent expenditure, the budget for civil ministriesrepresent the largest share and is expected to increase toRO 2,149 million in 2009 compared to RO 1,905 millionunder the 2008 budget, representing a 12.8 percentgrowth. Projected expenditure on defense and nationalsecurity is estimated to increase by 13.6 percent, from RO1,360 million in 2008 budget to RO 1, 545 million underthe 2009 budget. With regard to current expenditure onthe hydrocarbon sector, the budget for both oil and gasproduction are pitched higher in 2009, reflecting theexpansion of operational expenses to meet the increase inoil production from an actual average of 756,800 barrelsper day in 2008 to an average projection of 805,000 barrelsper day in 2009.On the investment expenditure front, the Governmentof Oman decided, as a matter of policy, to continue withkey infrastructure and development projects and evento add new projects in 2009 despite the projected globalrecession during the year. This policy is long-term drivenand based on the future developmental requirements of thecountry and the understanding that the global economy isnot going to remain in recession indefinitely. Favourableoil prices witnessed in recent years, had allowed theGovernment to accumulate surpluses that would assistin the financing of possible deficits in future years andstay on the developmental course with minor recourse todebt financing. Accordingly, investment expenditure isestimated at RO 1,919 million under the 2009 budget, upfrom RO 1,865 million under the previous year’s budget,representing an increase of about 3 percent. Investmentexpenditure on civil ministries are estimated to increaseby 10.2 percent to RO 821 million under the 2009 budgetcompared to an estimate of RO 745 million under the2008 budget. As regards investment expenditure on oilproduction, it is expected to reach RO 679 million in 2009,up from RO 670 million under the 2008 budget. Amongothers, the 1.3 percent estimated increase in oil productioninvestment expenditure reflect additional activities on thedevelopment of old oil fields, and exploration of new oilfields, using advanced technologies to increase productionin the future. Unlike investment expenditure allocated underoil production, investment expenditure in gas productionis expected to decrease by 6.9 percent to RO 419 millionunder the 2009 budget from an estimate of RO 450 millionunder the previous year’s budget. Notwithstanding the 6.9percent decline in gas investment expenditure under the2009 budget, investment in this sector remains relativelyCentral Bank of OmanAnnual Report 2008 57

CHAPTER IVlarge during the year, testifying to the efforts exerted by theGovernment to enhance production in the coming years inorder to diversify the sources of government revenue andmeet rising energy demand within the domestic economy.Another expenditure item that witnessed a notable increaseunder the 2009 budget in comparison to the previous year’sbudget is the expenditure on participation and supportto the private sector. Under the 2009 budget, expenditureunder this item is expected to reach RO 485 million, upfrom RO 385 million under the 2008 budget. The RO 100million increase in budget on participation and support toprivate sector under the 2009 budget includes governmentparticipation in domestic, regional and internationalinstitutions, as well as continued support to the electricitysector.million is expected to be financed through drawing fromgovernment reserves and RO 100 million through externalborrowing. The estimated RO 810 million in deficit underthe 2009 budget compares with an estimated deficit of RO400 million under the previous year’s budget. Despitethe estimate of budget deficit for 2009, it is important tonote that recent trends pertaining to the Sultanate’s fiscalperformance points to actual fiscal surpluses despiteprojected deficits under the budgets. The main factorbehind this divergence reflects the highly conservative oilprices that are usually assumed in the budget preparation.As oil prices have recovered considerably in 2009,currently above the assumed budget price, and providedthe recovery is sustained for the remaining part of the year,the actual pressure on overall fiscal balance could be muchless than that anticipated in the beginning of the year.The overall fiscal balance estimated under the 2009 budgetamounts to a deficit of RO 810 million, of which RO 71058 Annual Report 2008 Central Bank of Oman

CHAPTER V

MONEY, BANKING AND FINANCIAL INSTITUTIONSThe global monetary and financial conditions changeddramatically during the course of 2008. After a phase ofhigh economic growth and bullish asset prices, the globaleconomy encountered sharp corrections in asset prices,which in turn led to growing concerns about the healthof the financial systems and deceleration in economicgrowth. The year 2008 started with the concern relating toinflation, which seemed to magnify at some stage underthe pressure of rising food and commodity prices. The subprimerelated financial crisis that started in the US in August2007, however, gradually started to engulf the entire worldfinancial system and the deepening of the crisis during 2008gradually shifted the policy focus of national authorities frommanagement of inflation to preventing financial instabilityand economic slowdown. As the intensity and complexityof the crisis appeared to be unprecedented in the recenthistory, the global policy response came in the form of use ofconventional as well as unconventional measures, ensuringeasy availability of low cost liquidity in the financial systemalongside large fiscal stimulus packages. Emerging anddeveloping economies, which had all along experienced thebenefits of growing globalization started to face the pressuresof contagion from the global financial crisis.Oman’s monetary and financial sector environment in 2008was characterized by high growth in money and credit,which reflected the pressures of fast expansion in aggregatedemand in an economy witnessing strong economic growth.The rising inflationary trend of the previous years continuedand by mid 2008 the inflation rate crossed the double digitlevel, necessitating the introduction of appropriate monetaryand credit policy measures. The domestic banking systemlargely remained insulated from the global financial crisis,primarily on account of no direct exposure to the troubledassets and the failing international financial institutions.After September 2008, however, the global credit squeezeintensified, limiting the access of local banks to internationalmarkets for funds. Sharp downward correction in oil pricescommencing from the last quarter of the year, and significantdeceleration in global demand conditions under the influenceof intensifying economic slowdown and rising unemploymentstarted to gradually affect the economic outlook in Omantowards the end of 2008. The policy response of the CentralBank of Oman to this change in external environment andthe domestic economic outlook came in the form of easingthe liquidity conditions for the banking system, in both thelocal currency and US dollar in particular. CBO’s policyrates also fell significantly following the sharp easing of theinterest rates in the US. The banking system of Oman endedthe year with major strides in banking aggregates and recordprofits, which to a large extent reflected the beneficial impactof a strong economy. Recognizing the importance of strongcapital and sound asset quality, particularly in the face ofan adverse external environment, the CBO emphasizedappropriate recognition of losses arising from the correctedasset prices, besides additional provisioning throughconservative allocation of profits made during 2008. For asmall open economy, a sound and resilient financial systemis an essential precondition to promote economic growth, andfurther intensification of the global financial crisis and theassociated contraction in the global economy could increasethe challenges for the banking sector of Oman, as it has toshift emphasis from growth as a source of profit to soundnessand stability as the means to contain the adverse effects ofcontagion from the global crisis.The institutional framework of the financial sector in theSultanate of Oman comprised the Central Bank of Oman,Central Bank of OmanAnnual Report 2008 61

CHAPTER Vcommercial banks, specialized banks, non-bank financeand leasing companies and money exchange establishmentsdealing solely in money exchange business and a fewauthorised to engage in remittance transactions as well.The Omani banking system went through several roundsof mergers since the 1990s with a few bank exits and newentrants, and as at the end of 2008, the number of commercialbanks stood at 17, of which 7 were locally incorporatedand 10 were branches of foreign banks. Commercial banksoperated in Oman with a network of 395 branches, anincrease of 33 branches over the previous year. Local banks,in addition, had 13 branches and one representative officeabroad. The locally incorporated commercial banks wereBank Muscat, National Bank of Oman, Oman InternationalBank, Oman Arab Bank, Bank Dhofar, Bank Sohar and AlAhli Bank. Foreign banks included HSBC Bank Middle East,Standard Chartered Bank, Habib Bank, Bank Melli Iran, BankSaderat Iran, National Bank of Abu Dhabi, Bank of Baroda,State Bank of India, Bank of Beirut and Qatar National Bank.Commercial banks in total had 787 ATMs (of which 382 wereoff-site), 17 on-site banking facilities, 3 kiosk machines and 47cash deposit machines. As at the end of 2008, 12 commercialbanks had approval to engage in specific investment bankingactivities on a tiered licensing system. Despite the relativelylarge number of commercial banks, the three largest banksaccounted for 66 percent of total assets, 66 percent of totalcredit, 62 percent of total deposits and had combined assetsof RO 9.15 billion (US $ 23.8 billion) as at the end of 2008.Commercial bank’s liabilities are dominated by customerdeposits, and accounted for 62 percent of total liabilities.On the assets side, total credit accounted for 67 percent oftotal assets, which was equivalent to 40.2 percent of totalGDP and 80.6 percent of non-oil GDP in 2008. Commercialbanks’ core capital and reserves stood at RO 1.8 billion in2008 with the Basel II capital adequacy ratio for banks inOman averaging 14.7 percent as compared to the mandatedratio of 10 percent. As at the end of 2008, there were 2Government owned specialized banks in operation, namely,Oman Housing Bank and Oman Development Bank, togetheroperating with a network of 22 branches. With regard to nonbankingfinancial intermediaries, there were six finance andleasing companies licensed by the Central Bank engaged inleasing business, hire purchase, debt factoring and similarcredit based operations. They had 33 branches, all based inOman. As at the end of December 2008, money exchangeestablishments stood at 39 of which 16 operated underthe license of money changing and draft issuance businessand the remaining 23 engaged in money changing only.There were in total 131 branches of the sixteen exchangeestablishments. Besides the above, the broad financial sectoralso included several insurance companies, public andprivate sector Pension Funds, capital markets, brokeragecompanies and the Muscat Securities Market.Monetary and Banking IndicatorsGiven the uncertainty in the global financial situation,monitoring and maintenance of domestic financial stabilitywarrants continuous attention. The Central Bank of Omanis committed to deepening and strengthening financialsector reforms so that efficient and competitive financialintermediation evolves in tune with real sector objectivesso as to ensure growth with stability. In the years ahead,the economy will rely on the ability of financial marketsto allocate resources adequately and efficiently towardsproductive purposes. With a wider range of instruments andmarket players in the financial sector, it needs to be ensuredthat development takes place in an efficient and orderlymanner. In recent years, the financial sector in Oman hasundergone major structural transformation leading to greaterderegulation, financial innovations, tailor made creditproducts, advances in technology, risk–based supervisionand most modern payment and settlement systems. Thewide spread use of ATMs, credit and debit cards, smartcards, phone and internet banking, payment of utilitiesand electronic payment for government services have all62 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial Institutionscombined to add depth and sophistication to the financialsystem. The increase in financial deepening in recent yearsand the attainment of overall efficiency in the use of resourcessuggest that financial intermediation in Oman has beenrelatively efficient. The process of financial deepening thatevolved over the recent period can be broadly summarizedin a few indicators presented in Table 5.1. Some of theimportant yardsticks used to analyse the extent of financialdeepening have included the growth in deposits and credit,the ratio of bank deposits and credit to GDP, broad moneyto GDP, currency with the public to GDP and the incomevelocity of money and the money multiplier.Significant growth was witnessed over the recent years inboth commercial bank credit and deposits mirroring thefinancial intermediation role in line with high economicgrowth. Money supply growth responded to the growingmoney demand associated with expansionary fiscal policyand high growth in nominal GDP, with M2 registering growthrates of 37.2 percent and 23.1 percent in the years 2007 and2008, respectively. With surplus liquidity held by commercialbanks, particularly at the short end of the market and parkedwith CBO in the form of clearing balances, and with theincrease in CBO’s foreign assets, reserve money increasedsignificantly in 2008. The ratio of net foreign assets of CBO toreserve money was comfortably placed during the five yearperiod at over twice the level of reserve money impartingconfidence to the fixed exchange rate peg. Since 2004, theratio of net foreign assets of the banking system to totalmoney supply has remained stable at 0.6 imparting strengthTable 5.1Select Monetary and Banking Indicators2004 2005 2006 2007 2008Number of commercial banks 14 13 14 17 17Number of branches of commercial banks 330 329 338 362 395Commercial bank deposits (in RO million) 3078 3761 4685 6491 8579Commercial bank credit (in RO million) 3506 3896 4703 6505 9257Number of cheques cleared (in 000) 1772 1800 1873 2158 2468Average amount per cheque 1240 1394 1496 1672 1987Reserve money (in RO million) 503 526 727 1235 2061Currency with public (in RO million) 329 383 471 563 629Narrow money M1 (in RO million) 907 1128 1230 1921 1995Broad money M2 (in RO million) 2944 3573 4461 6120 7533Ratio of NFA of CBO to reserve money 2.7 3.2 2.7 3.0 2.1Ratio of NFA of banking system to M2 0.6 0.6 0.6 0.6 0.6Indicators of dollarizationCommercial bank deposits in forex to total deposits (%) 18.5 23.4 28.8 17.3 15.0Commercial bank credit in forex to total credit (%) 21.8 21.3 20.4 23.6 21.1Financial deepening indicatorsBank credit to GDP (%) 36.9 32.8 33.2 40.6 40.2Bank deposits to GDP (%) 32.4 31.7 33.1 40.5 37.2Quasi-money to GDP (%) 21.5 20.6 22.8 26.2 24.0Broad money to GDP (%) 31.0 30.1 31.5 38.2 32.7Currency with public to GDP (%) 3.5 3.2 3.3 3.5 2.7Currency with public to reserve money (%) 65.4 72.8 64.8 45.6 30.5Currency with public to broad money (%) 11.2 10.7 10.6 9.2 8.3Income velocity of broad money 3.2 3.3 3.2 2.6 3.1Money multiplier (M2 over reserve money) 5.9 6.8 6.1 5.0 3.7Central Bank of OmanAnnual Report 2008 63

CHAPTER Vto the monetary system. On the issue of dollarization in theeconomy, it is internationally acknowledged that a certaindegree of dollarization is inevitable given the openness ofthe economy and the effects of globalization. Interest ratedifferentials between the Rial Omani and pegged currency,the US dollar, also has an impact on the extent of dollarization.The rising trend in the share of foreign currency depositsto total deposits witnessed during the period 2003 to 2006reversed course in the years 2007 and 2008, declining from apeak of 28.8 percent share in 2006 to just 15 percent in 2008.The narrowing of the interest rate differentials between timedeposits designated in local currency and the US dollar, withthe US dollar rates lagging behind the Rial Omani interestrates, particularly in 2008, was a major factor in minimizingthe extent of dollarization in the economy.The ratio of bank credit to overall GDP increasedsignificantly from 33.2 percent in 2006 to 40.6 percentin 2007 and remained at around the same level in 2008.Despite the sharp increase in credit during 2008, the ratioof bank credit to GDP remained unchanged because of thesignificant rise in oil GDP associated with the high price ofcrude oil witnessed during the year. When seen in relationto non-oil GDP, however, particularly since bank credit ismainly used to finance non-oil economic activities, theratio is seen to have improved from 61 percent in 2006 to72 percent in 2007 and further to 80.6 percent in 2008. Theratio of bank deposits to GDP and broad money to GDP, afterhaving significantly risen in 2007, slowed down in 2008mainly due to the financial uncertainties associated withthe global financial markets turmoil during the last quarterof the year. The ratio of currency with the public to GDPdeclined over the years from 3.5 in 2004 to 2.7 in 2008. Theuse of currency as a mode of settling financial transactionsgenerally comes down as part of financial deepening inthe economy. Similarly, the currency component in broadmoney also registered a continuous decline over the yearsfrom 11.2 percent in 2004 to 9.2 percent in 2007 and furtherto 8.3 percent in 2008. The income velocity of money (ratioof GDP at current prices to M2), which indicates the numberof times money balances turn over, facilitating settlementof transactions associated with the growth in nominal GDP,declined from 3.3 in 2005 to 3.2 in 2006 and further to 2.6in 2007, mainly due to money stock growing faster than thenominal GDP growth. During 2008, however, income velocityof money increased to 3.1 with GDP growing faster than thegrowth in broad money requiring money to change handsmore frequently. The money multiplier, which explains byhow much the base money created by the Central Bank hasexpanded through the banking system, continued to declinefrom 6.8 in 2005 to 5.0 in 2007 and further to 3.7 in 2008(Chart 5.1). The fall in money multiplier was mainly due tothe high level of excess reserves held by commercial banksin their clearing account with the CBO, given their surplusRial Omani liquidity situation.CBO’s Monetary PolicyConsistent with the overall objectives of achieving growthwhile ensuring price and financial stability, monetarymanagement during the year 2008 had to be proactive inkeeping pace with the evolving domestic and internationalchallenges, arising out of increasing sophistication ofdomestic financial markets and its integration withinternational markets.Oman operates with a fixed exchange rate with its currency,the Rial Omani, pegged to the US dollar since 1973. Theparity underwent a change in January 1986, and since thenit has remained unaltered at US $ 2.6008 per Rial Omani.The fixed rate conditions the monetary policy frameworkwhose main objective is to protect and defend the peg.Under these conditions, CBO’s monetary policy essentiallymeans domestic liquidity management, since the fixed pegitself limits the independent conduct of monetary policy, interms of flexibility to change domestic policy rates in relation64 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial InstitutionsPercentChart 5.1 (a): Income Velocity and8Money Multiplier765432102003 2004 2005 2006 2007 2008Income Velocity of M2Money Multiplier for M2PercentChart 5.1 (b): Extent of Dollarisation353025201510502003 2004 2005 2006 2007 2008Com. bank deposits in forex to total deposits %Com. bank credit in forex to total credit %50Chart 5.1 (c): Currency & Deposit Ratios50Chart 5.1 (d): Broad Money &Bank Credit to GDP Ratio4040Percent3020Percent3020101002003 2004 2005 2006 2007 2008RO Time Deposits as % of M2RO Demand Deposits as % of M2Currency as % of M202003 2004 2005 2006 2007 2008Bank credit to GDP %Broad Money to GDP %to the policy rates of the Fed. Any mismatch in domesticliquidity, that is supply of Rial Omani liquidity in relationto demand, has to be corrected through effective liquiditymanagement operations, in order to prevent the possibilityof domestic liquidity mismatch leading to offsetting capitalflows, that could exert pressures on the fixed peg. The fixedpeg and the concomitant stability of the exchange rate hassignificantly contributed to the conducive atmosphere forpromoting trade, investment and growth. The monetarydiscipline embodied in the peg has also ensured orderlymonetary conditions in the system.from direct to indirect instruments in consonance with theincreasing market orientation of the economy. Certificates ofdeposit auctions are the main open market type operationsconducted by the CBO to absorb Rial Omani liquidity andthese auctions were held on a weekly basis for differentmaturities of 28 days, 91 days and 182 days. Banks can usethese CDs as well as other Government papers as collateralunder repo transactions for meeting their temporary liquidityneeds. Direct instruments, primarily in the form of reserverequirements and lending to deposit ratios supplement theindirect instruments of monetary policy.The liberalization of the economy was accompanied byderegulation of interest rates and with it a comprehensiverecast of monetary policy operations was effected. TheCentral Bank’s monetary policy witnessed a distinct shiftThe case for price stability as the dominant objective ofmonetary policy began to assume importance due to therising inflationary trend in the recent past. The fact thataround mid 2008, the inflation rate touched the double digitCentral Bank of OmanAnnual Report 2008 65

CHAPTER Vmark, warranted timely introduction of appropriate antiinflationarymonetary and credit policy measures by theCBO. The sharp growth in credit and money supply had tobe contained, in order to check the fast growth in aggregatedemand. Accordingly, the CBO decided to raise the reserverequirement ratio for commercial banks from 5 percent to 8percent of deposit liabilities. Further, the lending ratio wasalso to be tightened in two phases from 87.5 percent to 85percent effective from August 2008 and then to 82.5 percentfrom November 2008.Before the beneficial effects of these measures in containinginflation could be fully realized, the international financialmarket conditions turned into serious stress in October2008, and ensuring availability of adequate liquidity forsmooth functioning of the banking system became theoverriding concern for all Central Banks. In view of thedifficult conditions facing the global financial marketsand in particular the credit squeeze, the Central Bank ofOman shifted its approach and pursued an accommodativemonetary policy stance with an explicit policy preferencetowards ensuring adequate flow of credit to the productivesectors of the economy and for a softer interest rate regime.In order to provide for greater flexibility for banks in theircredit deployment, the CBO reduced the reserve requirementfor banks from 8 percent of deposit liabilities back to theerstwhile 5 percent. The CBO also eased the lending ratiolimitation for banks from 85 percent to 87.5 percent to avoidthe possibility of any regulatory induced credit contraction.Another important measure taken in consultation with theGovernment was to keep the window open to sell upto USdollar 2 billion to the local banks, allowing them to meettheir US dollar liquidity needs, if any.With a view to further strengthen the consultative processon monetary policy issues, the Central Bank of Oman set upa Monetary Policy and Banking Development Committee(MPBDC). The Committee meets at least once in a quarterduring a year (in practice more frequently) to reviewmonetary developments and liquidity management issuesand advises on the stance of monetary policy and relatedbanking issues. A system is also in place to monitor dailyliquidity conditions through the assessment of informationrelated to commercial bank’s daily clearing balances withthe CBO as well as domestic inter-bank transactions withdaily volumes and interest rates for different maturities. Aset of liquidity indicators prepared on a monthly basis setsthe ground for an overall judgment and assessment of theliquidity situation in the system. More advanced methodsto put in place an efficient short-term liquidity managementexercise which would involve liquidity forecasting anddefining procedures to project the behaviors of the demandand supply components of liquidity is actively beingconsidered.Monetary AggregatesMonetary aggregates continued to expand at a strong paceduring 2008, albeit with some moderation during the latterpart of the year, but still ended with a broad money growthof 23.1 percent on a year-on-year basis. Accretion to bankdeposits, led by time deposits, remained buoyant during theyear. Credit aggregates posted major growth during the yearproviding the major link in the money transmission process.With non-oil GDP growth at 27.2 percent during 2008,monetary aggregates rose in tandem to finance the activitiesin the real sector.Monetary BaseThe monetary base (Mo) or reserve money comprised centralbank liabilities that support the expansion of broad moneyand credit. It includes all central bank issued currencythat is included in the monetary aggregates as well asother depository corporations’ (commercial banks) depositholdings at the Central Bank. It is often referred to as high-66 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial InstitutionsTable 5.2Monetary Base and its Sources(Rial Omani Million)2006 2007 2008Absolute Change2007/06 2008/07Currency Issued 560.6 663.1 780.6 102.5 117.5Banks deposits with CBO* 166.1 571.8 1280.5 405.7 708.7Monetary Base (M0) 726.7 1234.9 2061.1 508.2 826.2Central Bank AssetsForeign assets 1928.2 3662.1 4401.1 1733.9 739.0Claims on Government 0.3 0.3 5.0 0.0 4.7Fixed and other assets 202.7 170.4 222.9 -32.3 52.5Less:Central Bank LiabilitiesNet Worth (capital and reserves) 823.2 975.5 1156.4 152.3 180.9Government deposits 204.5 398.1 875.3 193.6 477.2Foreign liabilities 0.6 0.8 1.2 0.2 0.4Other liabilities 376.2 1223.5 535.0 847.3 -688.5*Excludes CDs issued by CBO which are shown under other liabilities.powered money, because changes in the monetary baseusually lead to increase in money and credit that are largerthan the changes in the monetary base due to the moneymultiplier effect.and broad money (M2) refer to money held by the nonbankpublic at a point in time in the economy. The degreeof liquidity of the financial asset, be it cash, transferabledeposits, time deposits etc, would determine under whichmeasure of money supply these instruments would fit. InOman, narrow money (M1) is defined to include currencyExpansion in reserve money as at the end of 2008 on a yearon-yearbasis was marginally lower at 66.9 percent thanthe 70 percent increase registered in the previous year. Inabsolute terms, however, reserve money rose by RO 826.2million in 2008 compared to RO 508.2 million in 2007 (Table5.2). On the components side, bankers’ deposits with the CBOmainly in the form of clearing account balances expanded byheld by the public and Rial Omani demand deposits of theprivate sector and public enterprises. Quasi-money, on theother hand, comprises Rial Omani savings and time deposits,certificates of deposits issued by commercial banks, margindeposits and foreign currency designated deposits. Thebroad measure of money (M2) is the aggregates M1 plusquasi-money.RO 708.7 million compared to RO 405.7 million increase in2007. Growth in currency issued at 17.7 percent during 2008was marginally lower than 18.3 percent a year ago. On thesources side, reserve money continued to be driven by CBO’sincrease in foreign assets resulting from surplus positions inOman’s balance of payments.The high economic growth witnessed in Oman in therecent years and the resulting increase in money demandtranslated into a sustained growth in money supply. During2008, M1 when measured on a year-on-year basis, grew by63.5 percent in March, 43 percent in June, 31.6 percent inSeptember and dropped to 3.8 percent at the end of the yearNarrow and Broad Money(Appendix Table). Quasi-money witnessed an impressiveand continuous growth over the year and during the yearMoney aggregates such as narrow money (M1), quasi-money2008 it rose by 31.9 percent. The impetus for the growthin quasi-money was seen mainly in the increase in timeCentral Bank of OmanAnnual Report 2008 67

CHAPTER VTable 5.3Components of Broad MoneyA. (Rial Omani Million)End of the Period 2004 2005 2006 2007 2008Money Supply y( (M1)907.4 1128.1 1229.6 1921.3 1994.9Currency with public 329.1 383.2 470.9 563.4 628.6Demand deposits in local currency 578.3 744.9 758.7 1357.9 1366.3Quasi Money2036.9 2445.0 3231.7 4198.5 5538.4Savings deposits in local currency 734.0 851.3 1008.6 1408.6 1641.8Time deposits in local currency 850.4 791.2 962.6 1778.3 2897.2Deposits in foreign currency 421.1 764.8 1213.1 954.0 905.5Margins 31.4 37.7 47.4 57.6 93.9Broad Money (M2) 2944.3 3573.1 4461.3 6119.8 7533.3B. (Percentage To Total)End of the Period 2004 2005 2006 2007 2008Money Supply y( (M1)30.8 31.6 27.6 31.4 26.5Currency with public 11.2 10.7 10.6 9.2 8.3Demand deposits in local currency 19.6 20.9 17.0 22.2 18.2Quasi Money69.2 68.4 72.4 68.6 73.5Savings deposits in local currency 24.9 23.8 22.6 23.0 21.8Time deposits in local currency 28.9 22.1 21.5 29.1 38.5Deposits in foreign currency 14.3 21.4 27.2 15.6 12.0Margins 1.1 1.1 1.1 0.9 1.2Broad Money (M2) 100.0 100.0 100.0 100.0 100.0Source: Central Bank of Oman.68 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial Institutionsand saving deposits in local currency. Foreign currencydesignated deposits, however, declined to RO 905.5million in 2008 from RO 954 million in the previous yearin response to the fall in US dollar interest rates. It maybe noted that the share of quasi-money in the total moneystock increased to 73.5 percent in 2008 from 68.6 percent in2007 (Table 5.3). The broad measure of money M2 as at theend of 2008 stood at RO 7533.3 million, up from RO 6119.8million a year ago, representing an annual expansion of23.1 percent.balance of payments and government finance statistics. Theprimary source of monetary expansion during the year 2008was the accretion in bank credit to the private sector withdomestic claims on the private sector increasing by RO 2.6billion followed by claims on public enterprises by RO 104.3million (Table 5.4). Net claims on the Government, however,declined by RO 1.25 billion during the period. Monetaryexpansion was also driven by the increase in net foreign assetsof the banking system by RO 466.6 million. The accretion tonet foreign assets was solely on account of the expansion inCBO’s net foreign assets by RO 738.6 million offset partly byMonetary Surveythe reduction in commercial banks net foreign assets by RO272 million. Other items net, comprising the non-monetaryMonetary Survey covers both the Central Bank andthe commercial banks balance sheets and facilitatesmacroeconomic analysis by linking monetary statistics to theliabilities of the banking system increased by 18.5 percentover the year, mainly due to the augmentation of capital andreserves of the Central Bank as well as commercial banks.Table 5.4Monetary SurveyEnd of the Period(Rial Omani Million)Change in% Changemillion RO2004 2005 2006 2007 20082008/072008/071. Broad money (A+B) 2944.3 3573.1 4461.3 6119.8 7533.3 1413.5 23.1A. Money 907.4 1128.1 1229.6 1921.3 1994.9 73.6 3.8a) Currency with public 329.1 383.2 470.9 563.4 628.6 65.2 11.6b) Demand deposits in RO 578.3 744.9 758.7 1357.9 1366.3 8.4 0.6B. Quasi Money 2036.9 2445.0 3231.7 4198.5 5538.4 1339.9 31.9(of which foreign cy. deposits) (421.1) (764.8) (1213.1) (954.0) (905.5) (48.5) (-5.1)2. Foreign Assets (net) 1639.4 2259.8 2745.3 3894.7 4361.3 466.6 12.0Central Bank 1382.8 1674.9 1927.6 3661.3 4399.9 738.6 20.2Commercial Banks 256.6 584.9 817.7 233.4 -38.6 -272.0 -116.53. Domestic Assets 1304.9 1313.3 1716.0 2225.1 3172.0 946.9 42.6a) Claims on Government (net)(i-ii) -83.8 -457.0 -652.1 -1153.5 -2405.4 -1251.9 108.5i) Government borrowings 443.5 254.9 228.9 151.8 166.5 14.7 9.7Less: ii) Government deposits 527.3 711.9 881.0 1305.3 2571.9 1266.6 97.0b) Domestic claims on Pvt. Sector 3258.8 3666.8 4405.6 6025.3 8676.9 2651.6 44.0c) Claims on Public enterprises 87.3 111.8 195.8 364.8 469.1 104.3 28.6d) Other items (net) (-) 1957.4 2008.3 2233.3 3011.5 3568.6 557.1 18.5i) Central Bank 971.3 1124.1 1252.4 2700.1 2901.0 200.9 7.4ii) Commercial banks 986.1 884.2 980.9 311.4 667.6 356.2 114.4Source : Central Bank of Oman.Central Bank of OmanAnnual Report 2008 69

CHAPTER VFinancial MarketsWell developed financial markets enable the Central Bank toeffectively conduct monetary policy and assist in improvingthe allocative efficiency of resources. They also strengthen theprice discovery process of various financial instruments andare at the core of the transmission mechanism of monetarypolicy. During 2008, global financial markets witnesseduncertain conditions as the crisis in the US sub-primemortgage market deepened and spilled over to markets forother assets. The increased complexity of financial productsand markets posed new challenges to the regulators to keeppace with evolving risks to markets and institutions througha restructuring of the regulatory overlay of the global financialsystem making it more robust without crippling its ability toinnovate and spur economic growth. Financial markets inOman remained orderly and broadly stable during the year,facilitated by CBO’s prudential regulations, timely measuresand active liquidity management.Money MarketThe money market is a segment of the financial market inwhich financial instruments with high liquidity characteristicsand short maturities are traded. Money market is generallyexpected to perform three broad functions. Firstly, it providesan equilibrating mechanism between demand and supplyof short term funds and secondly provides a focal point forCentral Bank’s intervention for influencing liquidity andinterest rates. Thirdly, market participants are providedaccess to fulfill their borrowing and lending requirementsat an efficient market clearing price. A developed moneymarket enhances the effectiveness of monetary policytransmission to the real sector of the economy. The moneymarket instruments mainly comprise call money, shorttermdebt instruments such as negotiable certificates ofdeposit, treasury bills, bankers’ acceptances, Repos etc.The CBO undertakes liquidity management operationsto smooth out short-term fluctuations in bank liquidity toavoid excessive adjustment cost to the banking system.For absorption of liquidity from the banking system, CBOissues on weekly basis its certificates of deposit (CDs) whileinjection of liquidity is mainly done through repurchaseagreements (Repos) in government securities and CDs ofthe CBO. An intra-day liquidity facility by way of Repos isalso provided to banks. Rediscounting of commercial paperssuch as bills of exchange and promissory notes, promissorynotes accompanied by Trust Receipts, are technically stillin operation, although this facility has not been used bycommercial banks for a long time. The CBO brought aboutsome policy changes in the pricing of these facilities inthe year 2008 in order to ensure that there is a reasonableconnect between US dollar and Rial Omani interest rates.Accordingly, the pricing of Repo and commercial paperfacilities have been aligned with USD Libor with suitablespread and a base minimum. The rates are announced on aweekly basis taking into account the prevailing Libor rates.Further, in line with the sharp decline in US dollar rates,the CBO gradually lowered the cut-off rates in respect of theCDs.During the year 2008, CBO’s liquidity managementoperations continued to be characterized by more absorptionthan provision of liquidity, indicating ample availability ofRial Omani liquidity in the banking system. Banks accessedthe CBO only occasionally for short-term funds through therepo of CDs and the maturities were mostly overnight orof two days duration. Demand for investment in CDs weremainly for 28 days maturity with relatively smaller amountsinvested under the 91 days and 182 days maturity band.Banks’ investment in CDs of all maturities indicated higheroutstanding during the first half of the year but eased in thesecond half touching a low of RO 390 million as at the end ofDecember 2008. Month-wise details of liquidity absorptionand injection by CBO during the year 2008 are presented inTable 5.5.70 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial InstitutionsTable 5.5Absorption and Injection of Liquidity by CBO during 2008Liquidity Absorption (CBO CD’s)Liquidity Injection28 Day CDs 91 Day CDs 182 Day CDsOutstanding(Repos With CBO)**MonthAmountIssuedWeightedAverageAmountIssuedWeightedAverageAmountIssuedWeightedAverageCDs at theend of theAmountRepoed RepoMonthDuring theRateInterestMonthDuring theRateInterestMonthDuring theRateInterest(RO Million)Month*the MonthDuring(% p.a)Rate(RO Million) (% p.a) (RO Million) (% p.a) (RO Million) (% p.a)(RO Million)January 1,407.3 1.485 10.0 1.600 - - 1241.8 10.0 5.245February 1,182.4 0.800 - - - - 1341.4 - 4.166March 829.0 0.746 - - - - 870.0 - 3.918April 1,598.5 0.672 153.0 0.968 124.0 1.173 1246.5 - 3.750May 539.0 0.757 73.0 1.045 76.0 1.332 968.0 55.0 3.594June 696.0 0.726 142.0 1.120 102.0 1.462 1366.0 31.0 3.448July 341.0 0.760 43.5 1.344 48.5 1.794 741.5 - 3.468August 271.0 0.772 76.0 1.362 46.0 1.750 929.0 - 3.464September 115.5 0.787 10.0 1.289 - - 641.5 545.0 3.644October 328.0 0.815 25.0 1.262 - - 639.0 - 4.904November 402.0 0.850 155.5 1.383 42.0 2.126 831.0 - 2.744December 57.0 0.910 77.0 1.502 18.0 2.220 390.0 - 1.968* Includes CDs of all maturities.** Includes repos in all instruments such as CBO CDs, GDBs, and T.Bs which are mostly of one to two day durations. Excludes intra-day repos.With no fresh issues of Treasury bills during the year, giventhe Government’s comfortable fiscal position, the domesticinter-bank call money market remained in focus. However,the inter-bank market continued to remain shallow andlacked sufficient depth, with transactions confined mainlyto overnight tenors. In the background of excess liquidity,interest rates in the overnight domestic inter-bank call moneymarket generally remained low. However, during 2008overnight call money rates remained above the CBO CD ratesfor the major part of the year barring the last two months ofthe year. This phenomenon was a welcome sign given that forthe most part of the previous year the inter-bank Rial Omanicall money rate remained below the CBO CD rates leading toa situation where banks may have accessed CBO for parkingtheir excess liquidity before making any serious attempts toclear liquidity mis-matches in the inter-bank market.Capital MarketIn order to strengthen and bring about a vibrant and efficientfinancial system, it is necessary for both money markets andcapital markets to develop and operate side by side. In fact,an active money market is a prerequisite for the developmentof the government securities market. The money marketsupports the bond market by increasing the liquidity ofsecurities while the bond market provides benchmarks forpricing corporate debt. Equity issues by corporates throughinitial public offerings as well as enhancement of capitalthrough rights issue and private placements for a numberof companies set the tone during 2008. With regard togovernment securities, after a gap of three years there wasone issue of Government development bond amounting toRO 80 million during the year 2008. As on December 31,Central Bank of OmanAnnual Report 2008 71

CHAPTER V2008, the outstanding Government development bondsamounted to RO 352 million. The holding pattern based onprimary issuance of the outstanding GDBs is given in Table5.6 (a).agreement on issuing capital market indexes with DowJones, the leading global index provider. Dow Jones wouldbe issuing two indices, the first (DJ-MSM Composite Index)would measure the performance of all listed companies,while the second (DJ-MSM Blue Chip Index) is related toMuscat Securities Markethyperactive companies. Furthermore, MSM became anaffiliate member of the World Federation of Exchanges (WFE).Royal Decree (53/88) issued in June 1988 established theMuscat Securities Market (MSM) as a Government entity,both to regulate and to provide operational facilitiesand mechanisms for licensing of intermediaries and forIt is also a member in the Arab Stock Exchange Federation,the Federation of European Asian Stock Exchanges andan affiliate member of the International Organization ofSecurities Commissions.the trading, settlement and registration of securities.The MSM commenced operations on May 20, 1989. InNovember 1998, the Capital Market Law was promulgatedby Royal Decree No. 80/98 separating the regulatoryand exchange functions of the MSM. Accordingly, theCapital Market Authority (CMA) was established as theGovernment regulator with the mandate of regulating thecapital market and carrying out licensing for the issuanceand trading of securities and licensing of credit ratingagencies, while the MSM provided facilities for trading ofsecurities, settlement of transactions and publication ofinformation related to the activities of the capital market.Muscat Securities Market implemented several activities invarious technical, legislative and information areas during2008. In coordination with the CMA, Muscat Securities Marketupdated some laws, regulations and instructions related to thecapital market with regard to internet trading rules and tradingsurveillance regulations. MSM also increased its share in thecapital of Muscat Depository Company from 40 percent to 60percent in 2008 and handed the responsibility of clearing andsettlement processes to Muscat Depository Company.Within the framework of cooperation between GCC stockexchanges, MSM signed joint listing MoUs with DohaSecurities Market and Dubai Financial Market during 2008.Another significant development for the MSM was the recentThe activities of the Muscat Securities Market reflected apositive trend over the years as can be seen in Table 5.6.(b).The General Price Index (MSM 30) registered a continuousTable 5.6 (a)Holding Pattern of Outstanding GovernmentDevelopment Bonds (2008)Amount(Rial Omani Million)PercentageBanksLocal 99.064 28.14Abroad 53.701 15.26Govt Entities (local) 3.600 1.02Pension FundsLocal 104.327 29.64Abroad 14.274 4.05Other Financial InstitutionsLocal 15.152 4.30Abroad 6.005 1.71Non Financial InstitutionsLocal 26.403 7.50Abroad 2.733 0.78IndividualsLocal 24.109 6.85Abroad 2.632 0.75Total Local 272.655 77.45Total Abroad 79.345 22.55Total Local + Abroad 352.000 100.00%72 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial InstitutionsTable 5.6 (b)Stock Market Indicators2004 2005 2006 2007 2008MSM 30 Share Price Index 3375.05 4875.11 5581.57 9035.48 5441.12Number of shares traded (Million) 345.4 515.4 1113.0 3422.2 4440.8Total turnover of trading (RO Million) 759 1407 1128 2663 3663Average value of trading per day (RO Million) 3.06 5.52 5.44 10.74 14.77Market capitalization (RO Million) 3587 5878 6220 10273 7912Source: MSM Annual Report 2008.rise from 3375 in 2004 to 9035 in 2007, the highest level sincethe beginning of market operations. During 2008, however,securities markets world wide saw major corrections asa fall out of the global financial crisis. The MSM 30 shareprice index fell from 9035.48 at the end of 2007 to the levelof 5441.12 at the end of 2008, registering a drop of 39.8percent. The decline was broad based among the varioussector-wise indices. The ‘industrial sector index’ recordedthe steepest fall at 46.9 percent from 8137.06 to 4321.64.This was closely followed by the ‘Banking and Investmentcompanies index’ which fell by 46.2 percent from 12312.8 to6620.92. The ‘Services and Insurance sector index’ recordedthe lowest fall at 28.5 percent from 3533.14 to 2527.87.Foreigners participation in the stocks of listed companiesin MSM declined to 23.9 percent in 2008 from 27.6 percentin the previous year. The melt-down in performance of theMSM was reflected in the market capitalization of the listedsecurities which dropped by 23.1 percent to reach RO 7.9billion compared to RO 10.3 billion in 2007. Accordingly,the market capitalization to GDP ratio, which is indicativeof the size of the market, declined from 0.64 in 2007 to 0.34in the year 2008.The primary market witnessed a slump in 2008. The numberof issues approved by the Capital Market Authority droppedfrom 31 in 2007 to 17 in 2008. The issues comprise of two IPOsof companies (Voltamp and Sohar Power) that transformedfrom private companies into public joint stock companies,one issue of convertible bonds and 14 issues pertaining torights issue and private placement of shares. As regards thesecondary market, the market turnover of trading rose by 37.6percent to reach RO 3.66 billion in 2008 compared to RO 2.66billion during 2007. The number of shares traded increasedto 4.4 billion from 3.4 billion in the previous year with theaverage value of trading per day also rising from RO 10.74million in 2007 to RO 14.77 million in 2008.Foreign Exchange MarketIn an open economy environment, the foreign exchangemarket assumes critical importance for stability of the financialsystem since banks’ balance sheets are influenced by foreigncapital flows and various other external transactions. Capitalflows pose various challenges for liquidity management sincethese have implications for the conduct of domestic monetarypolicy. The foreign exchange market is relatively significant asthe economy is mainly foreign trade oriented and has an opencurrent and capital account. The Government is the mainsupplier of foreign exchange due to its dollar denominated oilrevenues which it sells to the Central Bank in lieu of its RialOmani requirements, while commercial banks are the mainsource of foreign exchange demand. During 2008, the CentralBank purchased US $ 12.31 billion from the Governmentwhile sales of US dollars to commercial banks amounted to US$ 12.02 billion. Banks participate as intermediaries for theircorporate customers, importers, exporters, as well as engageCentral Bank of OmanAnnual Report 2008 73

CHAPTER Vin foreign exchange transactions on their own account. Thesetransactions arise from balance of payment flows in the formof trade, workers’ remittances, profit transfers, investmentsand various other capital account transactions. The foreignexchange market is predominantly dollar denominated asit acts as the main intervention currency for internationaltrade and is the anchor currency under the fixed peg. Dollardeposits accounted for around 90 percent of the total foreigncurrency deposits held with commercial banks, while dollardenominated credit as a proportion of total foreign currencycredit stood at 97 percent as at the end of 2008.Interest Rate Structure and DevelopmentsIn line with the increasing reliance on indirect instrumentsof monetary policy and with the growing market orientationof monetary policy operations, deregulation and refiningthe interest rate structure in the economy has been a keyobjective of financial sector reforms initiated by the CentralBank of Oman. CBO started the process of deregulation ofinterest rates in 1993, first on the deposit front, and soonfollowed it with lending rates, except with regard to thepersonal loan segment. Initially an interest rate ceiling of 13percent per annum in the year 1999 was applicable solely tothe personal loan category, and over the years this ceiling hasbeen reduced and currently stands at 8 percent per annumwith effect from 14 June 2008. The deregulation of interestrates has improved the competitiveness of the financialenvironment and strengthened the transmission mechanismof monetary policy. Market determined interest rates havealso enabled better price discovery and made the resourceallocation process more efficient.In view of the fixed exchange rate of the Rial Omani to theUS dollar, interest rates in Oman are expected to be broadlyin conformity with the interest rates of the US. However,it is seen that interest rate differentials exist mainly in theshort end of the market. Several factors may play a role inreducing arbitrage opportunities in response to divergencein interest rates such as transaction costs, risk premiums,local liquidity situation, information asymmetry, presenceof lottery schemes and regulatory constraints such as netopen position limitations.It was seen that despite the general firming up of RialOmani deposit interest rates the overall weighted averageRial Omani deposit rates lagged far behind in terms of theiralignment with US dollar denominated deposits, exceptduring the last quarter of 2008 (see Table 5.7d). While theweighted average interest rate on total Rial Omani depositsstood at 1.855% and 2.065% in December 2006 and 2007respectively, foreign currency deposit rates averaged4.554% and 3.788% for the similar period. The interestrate differential in favour of the US dollar continued uptoSeptember 2008 but subsequently reversed and as at theend of December 2008 the weighted average interest rateon Rial Omani deposits stood marginally higher at 2.512%compared to foreign currency deposit rates at 2.407%.An analysis of the distribution pattern of Rial Omani depositsand lending given in Tables 5.7(a) to 5.7(c) highlights someinteresting features. The major portion of Rial Omani deposits(48.7%) at the end of December 2008 fetched interest ratesof 2 percent and less. This could largely be attributed tothe negligible interest rates paid on Rial Omani currentand saving deposits, which together constituted about 48percent of total Rial Omani deposits as at the end of 2008.The existence of lottery schemes in lieu of interest rateson savings deposits by local banks was also a factor whichresulted in low interest rates. On the other hand, a large partof Rial Omani lending (35.4%) was effected at the interestrate range of over 7% to 8%. The interest rate ceiling of 8percent for the personal loan segment and the tendency forthe bulk of personal loans to be contracted at the ceiling rateswas attributed for this bunching. A fairly large proportionof Rial Omani lending was also witnessed in the ‘over 5%74 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial InstitutionsTable 5.7 (a)Weighted Average Interest Rate On Rial Omani Total DepositsPercent per annumRate of Interest (% per annum)December-2006 December-2007 December-2008Amt in RO Mln % Share Amt in RO Mln % Share Amt in RO Mln % ShareUpto 2% 1,829.1 54.9 2,707.0 50.4 3,554.2 48.7OVER 2% TO 3% 373.7 11.2 768.4 14.3 483.0 6.6OVER 3% TO 4% 304.7 9.2 487.4 9.1 685.6 9.4OVER 4% TO 5% 741.6 22.2 871.4 16.2 840.9 11.5OVER 5% TO 6% 74.1 2.2 492.5 9.2 1,382.9 19.0OVER 6% TO 7% 7.7 0.2 39.7 0.7 345.8 4.8OVER 7% TO 8% 0.7 0.0 0.7 0.0 0.7 0.0OVER 8% TO 9% 2.5 0.1 2.8 0.1 3.1 0.0OVER 9% TO 10% 0.0 0.0 0.0 0.0 0.0 0.0OVER 10% 0.0 0.0 0.0 0.0 0.0 0.0Total 3,334.1 100.0 5,369.9 100.0 7,296.2 100.0Weighted average interest rate 1.855% 2.065% 2.512%Rate of Interest (% per annum)Table 5.7 (b)Weighted Average Interest Rate On Rial Omani Total LendingPercent per annumDecember-2006 December-2007 December-2008Amt in ROMln% ShareAmt in ROMln% ShareAmt in ROMln% ShareUpto 5% 428.5 11.5 446.0 9.0 524.3 7.2OVER 5% TO 7% 990.8 26.5 1,450.5 29.2 2,164.3 29.6OVER 7% TO 8% 385.0 10.3 702.0 14.1 2,585.5 35.4OVER 8% TO 9% 1,281.0 34.2 1,867.9 37.6 1,568.9 21.5OVER 9% TO 10% 313.8 8.4 248.6 5.0 223.6 3.1OVER 10% TO 11% 131.6 3.5 94.7 1.9 94.2 1.3OVER 11% TO 12% 87.8 2.3 57.2 1.2 46.1 0.6OVER 12% TO 13% 79.7 2.1 55.3 1.1 36.9 0.5OVER 13% 45.6 1.2 47.0 0.9 57.9 0.8Total 3,743.8 100.0 4,969.2 100.0 7,301.7 100.0Weighted average interest rate 7.404% 7.290% 7.099%to 7%’ interest interval, which may indicate the averagelending rates to corporates (Chart 5.2).weighted average interest rates on Rial Omani time depositsmarginally increased over the recent period from 4.001%in 2006 to 4.144% in 2007 and further to 4.480% in 2008.With regard to Rial Omani time deposits, it is seen thataround 67 percent of such deposits were contracted at interestrates ranging above 4 percent per annum during 2008. TheThe relatively higher inflation rate during 2008 (based onCPI for Oman) implied a negative real interest rate duringthe year. Negative real return on financial savings such asCentral Bank of OmanAnnual Report 2008 75

CHAPTER VRate of Interest (% per annum)Table 5.7 ( c )Weighted Average Interest Rate On Rial Omani Time DepositsPercent per annumDecember-2006 December-2007 December-2008Amt in RO Mln % Share Amt in RO Mln % Share Amt in RO Mln % ShareUpto 2% 85.0 6.6 139.3 6.5 179.1 4.7OVER 2% TO 3% 70.0 5.5 242.1 11.2 447.4 11.7OVER 3% TO 4% 302.2 23.6 380.1 17.7 645.0 16.8OVER 4% TO 5% 735.6 57.6 859.0 39.9 825.6 21.6OVER 5% TO 6% 74.1 5.8 492.0 22.8 1,382.5 36.1OVER 6% TO 7% 7.7 0.6 39.7 1.8 345.8 9.0OVER 7% TO 8% 0.7 0.1 0.7 0.0 0.7 0.0OVER 8% TO 9% 2.6 0.2 2.8 0.1 3.1 0.1OVER 9% TO 10% 0.0 0.0 0.0 0.0 0.0 0.0OVER 10% 0.0 0.0 0.0 0.0 0.0 0.0Total 1,277.9 100.0 2,155.7 100.0 3,829.2 100.0Weighted average interest rate 4.001% 4.144% 4.480%Table 5.7 (d )Weighted average Interest Rates(percent per annum)Endof thePeriodTotal RODepositsDepositsTotal FcyDepositsTotalDepositsTotal ROLendingLendingTotal FcyLendingTotalLending(RO+Fcy)Spread Spread Spread(1) (2) (3) (4) (5) (6) (4)-(1) (5)-(2) (6)-(3)Mar-20061.4773.6291.9617.0685.3286.6895.5911.6994.728Jun-20061.5314.0352.0657.3515.9767.0685.8201.9405.003Sep-20061.8114.5462.5357.4656.0697.1655.6531.5234.631Dec-20061.8554.5542.6337.4046.0247.1225.5481.4704.489Mar-20071.8164.2392.4547.3935.9147.0765.5771.6754.622Jun-20071.9164.4182.5077.3866.0577.1025.4711.6384.595Sep-20071.9954.3632.5457.3386.0377.0635.3431.6754.517Dec-20072.0653.7882.3637.2905.9466.9735.2252.1574.610Mar-20081.7292.6061.8626.9164.2666.2965.1881.6614.434Jun-20081.7212.3461.8136.6632.8865.8264.9420.5404.013Sep-20081.9802.4582.0526.6572.8025.7904.6770.3443.738Dec-20082.5122.4072.4967.0993.2066.2774.5880.7993.78176 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial InstitutionsPeriodTable 5.7 (e)Overnight Domestic Inter-Bank Lending RatesDaily avg.Amount inRO Mln2007 2008MonthlyWeightedavg InterestRate*Daily avg.Amount inRO MlnMonthlyWeightedavg InterestRate*Jan 34.8 3.579 50.6 1.563Feb 23.4 3.481 42.3 0.956March 26.0 3.394 29.9 0.801IQ Avg 28.1 3.484 40.9 1.107April 27.0 3.249 45.4 0.642Percent876543210Chart 5.2: Weighted Average Interest RatesMar.06 Jun.06 Sep.06 Dec.06 Mar.07 Jun.07 Sep.07 Dec.07 Mar.08 Jun.08 Sep.08 Dec.08Total R.O. DepositsTotal RO LendingSpreadMay 14.7 2.738 59.1 0.879June 13.6 2.636 79.3 0.662IIQ Avg 18.4 2.874 61.3 0.728July 12.1 2.323 66.6 1.622August 44.1 3.436 69.0 0.908September 46.0 2.601 69.5 2.113IIIQ Avg 34.1 2.787 68.4 1.548October 22.2 2.250 77.7 1.464November 13.0 1.893 39.1 0.341December 8.3 1.470 24.1 0.292IVQ Avg 14.5 1.871 47.0 0.699* Weighted by individual transaction amounts.deposits could encourage higher consumption, speculativeasset prices build up and possible outflow of funds in searchof better returns abroad. Given the importance of the bankingsystem as an instrument of economic growth, the pricing ofdeposits and loans assumes critical importance.combined) which dropped from 4.610% in 2007 to 3.781%in 2008. It is expected that the interest rate spreads wouldnarrow further with banks pricing deposits and loans morecompetitively.Overnight domestic inter-bank lending rates generallyremained depressed during the year as a result of thecomfortable liquidity situation that banks were placed in.As could be seen from Table 5.7(e), the weighted averageovernight inter-bank rates continued to decline during theyear, from an average of 1.107% in the first quarter of 2008to 0.699% in the last quarter of the year. During the monthof December 2008, the rate further softened to 0.292%.With regard to the Central Bank’s policy rates, the weightedaverage interest rate as at the end of December 2008 on 28days, 91 days and 182 days CDs stood at 0.910%, 1.502%and 2.220%, respectively. The weighted average repo rateon instruments repoed with the CBO softened considerablyThe spread between average lending and average depositrates in Oman has remained relatively high, although theduring the year from 5.245% in January 2008 to 3.448% inJune 2008 and further to 1.968% in December 2008.magnitude has consistently narrowed in recent period. Theaverage interest rate spread between Rial Omani lendingRegulatory and Supervisory Initiatives of the CBOand deposits narrowed from 5.548% in December 2006 to5.225% in December 2007 and further reduced to 4.588%in December 2008. A similar but more pronounced trendwas evident between total lending (RO and foreign currencycombined) and total deposits (RO and foreign currencyOperational environment and consequently regulatory reviewsturned out to be more complex in the course of 2008. Duringthe first half of the year, CBO’s policy initiatives convergedtowards introduction of anti-inflationary monetary and creditCentral Bank of OmanAnnual Report 2008 77

CHAPTER Vpolicy measures such as raising the reserve requirement forbanks and tightening of the lending ratio. During the latter partof the year, however, following the global financial turmoil,the CBO shifted its approach and pursued an easy monetarypolicy stance by relaxing both the reserve requirement ratioand the lending ratio to ensure adequate flow of credit to theproductive sectors of the economy. These measures were takenin addition to liberalized swap and direct lending facilities inthe form of US dollar liquidity.Personal loans, including vehicle loans and housing loans,continued to receive special attention during the year. Whilethe cap on other personal loans (non-housing) was persistedwith at 40 percent of total credit of a bank, residentialhousing loan ceiling was raised from 5 percent to 10 percentof total credit. In respect of vehicle loans under the personalloan segment, a 20 percent margin, as in the case of housingloans, was mandated besides compulsory life insurance ofborrowers. The personal loan interest rate ceiling was alsoreduced from 9% p.a. to 8.5% p.a. in March 2008 and to 8%p.a. in June 2008.In pursuance of its commitment to adopt the global bestpractices in banking regulation and supervision, Central Bankof Oman mandated implementation of Basel II (InternationalConvergence of Capital measurement and Capital standards)in January 2007 with standardized approach for credit andmarket risk and basic indicator approach for operational risk.Banks opting to migrate to advanced approaches could applyto CBO for prior approval. With the inclusion of additionalcapital for market and operational risks, the overall minimumcapital requirement for banks under the Basel II regime wasmoderated to 10 percent from 12 percent with effect from2007. Regarding Pillar III (Market discipline) requirements,after extensive consultations with the auditing communityin Oman, the modalities and formats for disclosures underBasel II were finalized. All banks have complied with therequirement of disclosures as part of their annual financials.The Pillar II of Basel framework covering internal capitaladequacy assessment processes (ICAAP) in banks andsupervisory review was focused in 2008. The Central Bankfurther encouraged banks to adopt sophisticated approachesand models in risk assessment and management. To enablebanks for a smooth transition to advanced approachesto assess credit risk, probability of default (PD) and Lossgiven Default (LGD) modeling for corporate and retail loansare being attempted in consultation with internationalconsultants as part of the Bank Credit Statistical Bureau(BCSB) upgradation project. In this context, CBO has takeninitiatives to adopt risk-based supervision to supplement theobjectives of Basel II and the road map is being finalized forsmooth implementation.The Central Bank’s initiatives in promoting financial stabilitycontinued during the year. In view of the on-going globalfinancial crisis and the significant decline in oil prices,banks and finance companies were advised to follow aprudent approach to valuations, assessment of impairmentand recognition of the same in financial statements, whileat the same time being conservative in declaring dividendsso as to preserve capital. CBO institutionalized the practiceof meeting the Board of Directors of locally incorporatedbanks on an annual basis for an exchange of views andconcerns. It is expected that such initiatives would helpin improvement in the corporate governance practices andoverall functioning of banks. The Annual Bankers Meetinghas now emerged as a key forum for exchanging views onimportant matters such as developments in the monetaryand banking sector, challenges for maintaining financialstability, systemic issues and concerns, views on majorpolicy initiatives and appraising the banks with internationaldevelopments. Annual meeting with the external auditors isanother useful interaction which helps in appreciating thenew developments in accounting and regulatory domains. Inaddition, the annual tripartite meetings with the commercialbanks, finance and leasing companies and the external78 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial Institutionsauditors at the time of finalization of the financials are alsoproving to be useful for discussing bank-specific issues andconcerns.During the year, several steps were taken in furtheranceof enhancing customer service standards and practices inbanks. Customer grievance redressal practices in banks werereviewed and detailed guidelines were issued on a systematicapproach in dealing with customer complaints. Banks’practices with regard to dormant/inoperative accounts werealso reviewed. The emphasis was that while operationalcontrol over such accounts was important, maximum effortswere to be made to contact the holders and revive operations.Balances in such accounts were to be treated as continuingliabilities.Central Bank OperationsA five year comparative position of the balance sheet ofthe Central Bank of Oman for the period 2004 to 2008 isgiven in Table 5.8(a). The financial statements have beenprepared in accordance with the Banking Law of 2000 andInternational Financial Reporting Standards (IFRS), exceptfor the accounting treatment of revaluation gains and losseson foreign currencies, bullion and derivatives which arerecognized through the statement of changes in capital andreserves in accordance with the requirements of the BankingLaw 2000. The presentation of the balance sheet shown inTable 5.8(a) marginally differs from the presentation of theaudited financial statements appearing separately under“Central Bank Accounts and Regulations” section, in order tofacilitate analysis and to be consistent with the requirementsof monetary statistics analysis.Total assets of the Central Bank of Oman stood at RO 4629million as at the end of December 2008 compared to RO3832.8 million a year ago, registering an increase of 20.8percent over the year. Foreign assets accounted for around 95percent of total assets and increased by 20.2 percent over theyear. The large increase in the foreign assets of CBO duringthe previous year 2007 was to a large extent the reflectionof the robust balance of payments surplus position recordedduring the year. During 2008, however, with the reducedoverall balance of payments surplus, the increase in foreignassets of CBO was also moderate. Changes in CBO’s foreignassets are largely determined by three specific factors, viz.Government sale of foreign currency to CBO in lieu of theirRial Omani requirements, commercial banks purchase andsale of foreign currencies from/to CBO to meet their customersimport demand, exports and various forms of remittances, andfinally variations in the amount of foreign currency depositsof the Government held with CBO. If the foreign currencydeposits of the Government held with the CBO are nettedout, the Central Bank’s own foreign assets level stood at RO3581 million as at the end of 2008 (see Table 5.8 b). Withinthe components of foreign assets, placements abroad stoodat RO 1138.9 million as at the end of 2008. The Bank holdsthese placements mostly in US dollars and with approvedcounterparties subject to a system of credit risk evaluation.Investments in foreign securities by the CBO increased overthe years from RO 1024.7 million in 2004 to RO 2255.5million in 2007 and further to RO 3246.2 million as at theend of 2008. The Bank invests only in securities which carrya minimum credit rating as specified by the Bank’s investmentguidelines. Foreign securities include amounts relating to theBank’s pension scheme.On the liabilities side, currency issued by the CBO registeredan increase of 17.7 percent, from RO 663.1 million as atthe end of 2007 to RO 780.6 million at the end of 2008.The networth of the Bank comprising capital and variousreserves, increased by 18.5 percent from RO 975.5 millionto RO 1156.4 million. While capital remained unchangedat RO 400 million, general reserve increased from RO 229.1million to RO 320.5 million. The Banking Law 2000 requiresthat the general reserve of the Bank should be maintained atCentral Bank of OmanAnnual Report 2008 79

CHAPTER VTable 5.8 (a)Central Bank of Oman Assets and Liabilities(Rial Omani Million)2004 2005 2006 2007 2008Growth (%)2007/06 2008/07Foreign Assets1383.7 1675.9 1928.2 3662.1 4401.1 89.9 20.2a) Bullion 0.2 0.2 0.3 0.3 0.3 0.0 0.0b) IMF Reserve assets 43.4 19.0 16.9 14.7 15.7 -13.0 6.8c) Placements abroad 315.4 334.4 516.6 1391.6 1138.9 169.4 -18.2d) Securities 1024.7 1322.3 1394.4 2255.5 3246.2 61.8 43.9Due from Government 3.6 0.8 0.3 0.3 5.0 0.0Due from Banks and other Institutions* 0.3 15.4 55.7 0.4 54.3 -99.3Fixed Assets 5.1 5.2 5.4 5.6 10.3 3.7 83.9Other Assets 104.8 129.1 141.6 164.4 158.3 16.1 -3.7Total Assets / Liabilities 1497.5 1826.4 2131.2 3832.8 4629.0 79.8 20.8Currency Issued 382.2 459.5 560.6 663.1 780.6 18.3 17.7Net Worth 750.8 739.8 823.2 975.5 1156.4 18.5 18.5a) Capital 300.0 300.0 300.0 400.0 400.0 33.3 0.0b) General Reserves 123.5 150.3 191.1 229.1 320.5 19.9 39.9c) Others 327.3 289.5 332.1 346.4 435.9 4.3 25.8Due to Government 85.9 168.3 204.5 398.1 875.3 94.7 119.9Due to banks and other institutions 121.0 66.3 166.1 571.8 1280.5 244.3 123.9Foreign Liabilities 0.9 1.0 0.6 0.8 1.2 33.3 50.0Other Liabilities 156.7 391.5 376.2 1223.5 535.0 225.2 -56.3a) CDs 59.0 273.7 249.0 1083.1 390.0 335.0 -64.0b) Others 97.7 117.8 127.2 140.4 145.0 10.4 3.3* Includes US Dollar liquidity support scheme for local banks.Table 5.8 (b)Central Bank’s Own Foreign Assets(Rial Omani Million)Dec. 2007 Dec. 2008Absolute Change2008/20071. Gross Foreign Assets3662.1 4401.1 739.0a) Bullion 0.3 0.3 0.0b) IMF Reserve Assets 14.7 15.7 1.0c) Placements abroad 1391.6 1138.9 -252.7d) Securities 2255.5 3246.2 990.7Less:Foreign cy. deposits from Government 348.5 820.1 471.6Foreign cy. deposits from local banks - - -2. Central Bank’s own foreign assets3313.6 3581.0 267.4Source : Central Bank of Oman.80 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial Institutionsnot less than 25 percent of the currency in circulation. Asof 31 December 2008 the general reserve was 41.06 percent(2007 – 34.55%) of the currency in circulation. Among otherreserves, the Bond Price Fluctuation Reserve increased fromRO 43.5 million to RO 50.5 million, while the CurrencyFluctuation Reserve was augmented from RO 51 millionto RO 54 million. Central Bank dues to banks and otherinstitutions, mostly related to commercial banks clearingaccount balances with CBO (as part of reserve requirement)and capital deposits held with CBO, and such balancesincreased significantly from RO 571.8 million to RO 1280.5million. As part of monetary policy operations and effectiveliquidity management, the Central Bank issued its owncertificates of deposit and the outstanding amount at the endof 2008 stood at RO 390 million. CBO’s profits for the year2008 rose by 25.2 percent to RO 101.4 million compared toRO 81.02 million in the previous year.Commercial Bank OperationsThe banking system in Oman has been shielded from theadverse contagion effects of the crisis in the global financialmarkets. While a well functioning surveillance framework,sound regulatory structure and prudent banking practiceshave limited the concerns relating to financial stability, theOmani economy has to contend with the challenges associatedwith the global and regional slowdown in economic activity,lower oil prices, contraction in world demand and trade, andgreater risk aversion influencing capital flows. The bankingindustry in Oman, however, continues to be resilient, drawingnecessary support from the expansionary fiscal policy andsupportive domestic liquidity conditions. More importantly,it is gratifying that none of our banks was exposed to thetoxic financial assets or to the distressed global financialinstitutions.Favourable macroeconomic conditions continued to underpinthe business and financial performance of commercialbanks, which is evident from strong balance sheet expansionduring the last several years. Operations during the yearwere marked by significant growth in all important bankingaggregates including credit, foreign assets, deposits, capitalas well as profits. Credit, accounting for 67 percent of totalassets, increased significantly during the year to reach RO9256.7 million as at the end of 2008 (Table 5.9(a) & 5.9(b)).The credit growth underlying this balance sheet expansionremained ahead of the business cycle of the economy, withtotal credit increasing by 42.3 percent in 2008 on top of the38.3 percent increase registered in the previous year. Withinthe credit portfolio, while credit to the Government declinedby 28.6 percent, credit to the private sector increased by 43.6percent and to the public enterprises by 28.6 percent. Assetsheld in the form of cash and deposits with the CBO increasedto RO 1430.4 million at the end of December 2008 from RO666.7 million a year ago, which was significantly higherthan the required reserves to be held with CBO, indicativeof the excess liquidity with commercial banks at the shortend of the market. International assets of commercial banksin the form of non-resident credit, investment in foreignsecurities and nostro balances increased by 32.6 percent (RO530 million) over the year. However, international liabilitiesof banks increased even faster mainly through larger foreignborrowings resulting in a decline in the net foreign assetposition by RO 272 million (see Table 5.9c).On the liabilities side, aggregate deposits held withcommercial banks increased significantly on a year-on-yearbasis by 32.2 percent to RO 8579.2 million. In particular,government deposits rose by 87 percent to a level of RO1696.6 million, representing 19.8 percent of total deposits.Deposits of the private sector, which constituted 74 percentof total deposits, increased by 19.7 percent over the year toreach RO 6354.8 million. Within private sector deposits, theelement of foreign currency designated deposits declined by9.7 percent with the declining interest rates on US dollardeposits. Core capital and reserves of commercial banksCentral Bank of OmanAnnual Report 2008 81

CHAPTER Vincreased by 23.5 percent to RO 1.8 billion as at the end ofDecember 2008.mind while drawing inferences and interpreting the data onthe sectoral flow of bank credit.Assets quality of the banking system continued to showimprovement during the year with gross non-performingloans (NPLs) of commercial banks recording an absolutedecline of RO 26 million or 8.1 percent, from RO 320 millionin December 2007 to RO 294 million in December 2008. Thereduction in NPLs was mainly on account of recoveries andless accretion of new NPLs. The gross NPLs (net of reserveinterest) accounted for 2.44 percent of gross loans (net ofreserve interest) at the end of December 2008 compared to 3.2percent at the end of December 2007. The loan loss coverage,taking into account general provisions as well, improvedfrom 107.6 percent in December 2007 to 119.3 percent inDecember 2008. In retrospect, CBO’s prudential requirementof general provisions on the performing loan portfolio (atthe rate of 1% on performing non-personal loans and 2% onperforming personal loans), introduced in 2004, proved tobe extremely useful in providing the much-needed cushionfor banks to meet the challenges of any economic downturn.Banks operating in the Sultanate had accumulated generalprovisions of RO 124.3 million as at the end of the year.Sectoral flow of Bank creditThe sectoral deployment of outstanding bank credit is givenin Table 5.10. It may be noted that the classification of creditby commercial banks based on industry, purpose of creditsanctioned or occupation of the borrower may not be precise,because there could be borrowers engaged in multipleactivities spread across diverse industrial or occupationalgroups. Allocation of credit facilities among multiple usesmay also lead to an element of distortion in figuring out theend use of credit. Further, with partnerships or proprietorshipbusiness, the borderline between business and personaltransactions tend to get blurred, leading to a certain degreeof misclassification. These limitations will have to be kept inPersonal loans continued to hold the major share of totalcredit at RO 3569 million (38.6%) as at the end of the year(Chart 5.3). This was followed by the manufacturing sector(9.3%), construction sector (8.7%), services sector (7.6%),import trade (7.1%), mining and quarrying (5.0%), financialinstitutions (4.8%) and wholesale and retail trade (4.6%).The pattern of credit flows become more clear from theincremental bank credit during the year. The major increaseduring the year stemmed from the personal loan segment withan additional net credit disbursement of RO 969.3 million.Outstanding credit for manufacturing stood at RO 858.1million, a rise of 37.7 percent, i.e., an additional credit outlayof RO 234.8 million. Off-take of credit by the constructionsector more than doubled during the year with an accretion ofRO 433.5 million. Non-resident lending to corporates outsideOman also recorded an increase, though not significant, fromRO 169.6 million in December 2007 to RO 188.4 million as atthe end of December 2008. The level of gross non-performingloans as per the industry-wise exposure data reveal that NPLsunder ‘agriculture and allied activities’ was relatively high at21.5 percent, followed by ‘wholesale and retail trade’ at 12.1percent, ‘export trade’ at 4.8 percent, ‘manufacturing’ at 3.8percent and the personal loan category at 2.3 percent.Commercial Banks’ ProfitabilityDuring 2008, the performance of the banking sector exhibitedseveral improvements. The momentum of high growth inprofitability of banks was maintained. Profits of commercialbanks increased during the year, over and above the strongperformance of the previous year. With the economy doingwell with high growth of GDP, recoveries on previousloan loss provisions significantly aided the augmentationof bank profits in the recent years. Substantial increase innon-interest income and containment of expenditure in82 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial Institutionsgeneral, coupled with a decline in the growth under interestexpenses on deposits, worked in favour of high profitability.Although interest income recorded a lower growth than inthe previous year, it still made a positive contribution tobanks’ overall earnings.Table 5.9 (a)Combined Balance Sheet of Commercial Banks(Rial Omani Million)2004 2005 2006 2007 2008% Change2008/2007Cash and deposits with CBO 167.8 140.3 248.9 666.7 1430.4 114.5Due from banks abroad 545.6 741.3 1209.6 1350.2 1604.6 18.8Total Credit 3505.7 3896.4 4703.0 6505.4 9256.7 42.3a) Credit to Private Sector 3274.1 3658.6 4397.0 6101.2 8759.4 43.6b) Credit to public enterprises 87.3 111.8 195.8 364.8 469.1 28.6c) Credit to Government 144.3 126.0 110.2 39.5 28.2 -28.6Securities 503.1 597.5 723.1 1401.5 996.9 -28.9a) Treasury Bills 149.0 6.0 0.0 0.0 0.0 -b) Government Bonds 146.5 122.1 118.4 112.0 133.3 19.0c) Other domestic securities 30.9 44.4 51.6 87.1 96.8 11.1d) Foreign securities 121.7 154.8 302.5 92.6 347.6 275.4e) Others * 55.0 270.2 250.6 1109.8 419.2 -62.2Fixed assets 35.4 37.4 36.5 73.8 99.2 34.4Other assets 131.1 217.0 330.9 338.0 390.6 15.6Total assets / liabilities 4888.7 5629.9 7251.9 10335.7 13778.4 33.3Total Deposits3078.3 3761.5 4684.9 6491.4 8579.2 32.2a) Government deposits 441.4 543.5 676.5 907.2 1696.6 87.0b) Deposits of public enterprises 136.8 137.9 144.4 275.2 527.8 91.8c) Deposits of private sector 2500.1 3080.1 3864.0 5309.0 6354.8 19.7i) Demand 625.8 854.1 894.3 1542.9 1547.5 0.3ii) Savings 757.5 876.7 1035.4 1449.3 1687.5 16.4iii) Time 1116.8 1349.3 1934.3 2316.8 3119.8 34.7(of which in foreign currency) (433.2) (748.9) (1191.4) (862.0) (778.8) (-9.7)Due to banks abroad 313.5 194.7 539.6 1110.5 1920.3 72.9Core Capital and Reserves 587.3 781.7 900.0 1458.2 1801.0 23.5Supplementary Capital 100.3 119.2 122.8 282.7 333.7 18.0(of which general provisions) (22.7) (46.9) (60.5) (87.0) (124.3) (42.9)Specific provisions and reserved interest 357.0 278.1 255.9 216.7 226.1 4.3Other liabilities 452.3 494.7 748.6 776.2 918.1 18.3* Includes investment in CDs issued by CBO.Source : Central Bank of Oman.Commercial banks’ profits after provisions and taxes, rosefrom RO 213.7 million in 2007 to RO 234.1 million in theyear 2008, giving a rise of 9.5 percent (Table 5.11). Net profitsof local banks stood at RO 218.2 million (93.2%) while thatof foreign banks amounted to RO 15.9 million (6.8%). Theinterest income from core activities including loans andCentral Bank of OmanAnnual Report 2008 83

CHAPTER VSource of FundsDec.2007Table 5.9 (b)Sources and Uses of Bank Funds(Rial Omani Million)Dec.2008Uses of FundsTotal deposits 1806.5 2087.8 Cash on hand and Deposits with CBO 417.8 763.7Balances due to banks abroad 570.9 809.8 Balances due from banks abroad 140.6 254.4Capital, Reserves and Provisions 678.9 403.2 Total Credit 1802.5 2751.3Other liabilities 27.5 141.9 Investments including CDs 678.4 -404.6Net fixed assets 37.4 25.4Other assets 7.1 52.5Total sources of funds 3083.8 3442.7 Total uses of funds 3083.8 3442.7Dec.2007Dec.2008advances, investments and placement with banks remainedthe dominant component, accounting for 71.7 percent oftotal income of commercial banks. The growth rate of interestincome at 18.8 percent in 2008 was substantially lowerwhen compared with the growth rate of 34 percent in 2007mainly due to the softer interest rate environment duringthe year. Interest income of commercial banks stood at RO614.4 million in 2008 compared to RO 517.2 million in theprevious year. With the diversification of banks’ portfolio,non-interest income has evolved as an increasingly importantsource of income for banks. The composition of non-interestincome showed that foreign exchange earnings, fees andTable 5.9 (c)Non-Resident Assets and Liabilities ofCommercial Banks(Rial Omani Million)Dec.2007Dec.2008AbsoluteChangeForeign Assets 1625.4 2155.4 530.0Due from banks abroad 1350.2 1604.5 254.4Credit extended abroad 169.6 188.4 18.8Investment in foreignsecurities92.6 347.6 255.0Other assets 13.0 14.8 1.8Foreign Liabilities 1392.0 2194.0 802.0Deposits 85.4 71.9 -13.5Long term bonds 111.7 111.7 0.0Due to banks abroad 1110.5 1920.3 809.8Other liabilities 84.4 90.1 5.7Net Foreign Assets 233.4 -38.6 -272.0Inflow during the 12 monthperiod584.3 272.0Table 5.10Distribution of Commercial Bank Creditby Economic Sectors(Rial Omani Million)End of Period 2006 2007 2008Import Trade 416.4 505.4 655.3Export Trade 14.0 26.9 24.5Wholesale & Retail Trade 202.4 238.4 423.9Mining and Quarrying 188.1 396.7 459.7Construction 274.5 376.2 809.7Manufacturing 366.4 623.3 858.1Electricity, gas and water 172.4 176.0 202.3Transport and Communication 65.5 55.5 158.0Financial Institutions 234.0 277.3 446.0Services 313.1 370.6 707.6Personal Loans 1824.6 2599.7 3569.0Agriculture and allied activities 38.6 40.6 42.4Government 110.2 39.5 28.2Non-Resident lending 49.6 169.6 188.4All Others 433.2 609.7 683.6Total Credit 4703.0 6505.4 9256.7Source: Central Bank of Oman.84 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial Institutions8%Chart 5.2: Sectoral Distribution ofCommercial Bank Credit(December 2008)9%Personal LoansManufacturingConstructionServices38%9%commissions and ‘other income’ including recoveries,accounted for about 11 percent, 21 percent and 68 percent,respectively. Income from foreign exchange operationsresulting from valuation changes and currency conversion5%7%Import TradeWholesale & Retail TradeOthers24%charges increased by 35.3 percent during the year to reachRO 25.7 million. Fee based income such as commissionson letters of credit and guarantees, remittances and othertransfers increased significantly during the year from RO 36.2million in 2007 to RO 50.3 million in 2008. Other income,notably recoveries on previous loan loss provisions, and toa lesser extent service charges and miscellaneous incomesuch as insurance recovery charges, rentals from real estate,lockers, card products etc. increased by 29.9 percent to RO166.6 million.On the expenditure side, interest expenses increased fromRO 225.3 million in 2007 to RO 252.4 million in 2008, arise of 12 percent over the year. The rate of increase in thisregard was significantly lower than the 56.5 percent growthregistered in the previous year. Operating expenses ofTable 5.11Profitability of Commercial Banks(Rial Omani Million)2006 2007 2008% Change2007/2006% Change2008/20071. Interest Income 385.9 517.2 614.4 34.0 18.82. (Interest Expenses) (144.0) (225.3) (252.4) (56.5) (12.0)3. Net Interest 241.9 291.9 362.0 20.7 24.04. Foreign Exchange Earnings 11.9 19.0 25.7 59.8 35.35. Fees and Commissions 25.0 36.2 50.3 44.7 39.06. Other Income 93.5 128.3 166.6 37.2 29.97. Gross Income (3+4+5+6) 372.3 475.4 604.6 27.7 27.28. Operating Expenses 137.6 183.8 226.3 33.6 23.1a) Administrative Costs 128.1 171.9 212.0 34.2 23.3b) Depreciation 8.9 10.5 14.2 18.0 35.2c) Others 0.6 1.4 0.1 133.3 -92.99. Gross Profits (7-8) 234.7 291.6 378.3 24.3 29.710. Provision for doubtful debts * 46.7 42.6 104.9 -8.8 146.211. Profits after provisions (9-10) 188.0 249.0 273.4 32.5 9.812. Provision for Taxes 25.1 35.3 39.3 40.6 11.313. Net Profit after Provisions & Taxes (11-12) 162.9 213.7 234.1 31.2 9.5* Gross provisions made during the year. Recoveries on previous loan loss provisions are reflected under other income.Source : Central Bank of Oman.Central Bank of OmanAnnual Report 2008 85

CHAPTER Vcommercial banks rose by 23.1 percent during 2008 comparedwith 33.6 percent in the previous year. Operating expensescomprised broadly wage expenses and non-wage expensessuch as rents, establishment expenses, head office expenses,advertisement, legal charges etc. The wage bill of commercialbanks (salaries and other staff costs) increased by 27.8percent, from RO 99.9 million in 2007 to RO 127.7 millionin 2008. Rents paid and other occupancy costs also movedup during the year from RO 13.7 million to RO 16.9 million.Depreciation charges on banks’ property and equipmentincreased by 35.2 percent to RO 14.2 million in 2008. Grossprovisions made during the year increased significantly, fromRO 42.6 million in 2007 to RO 104.9 million in 2008. Besidesthe normal provisioning associated with specific and generalprovisions for possible credit losses, the year 2008 witnessedadditional provisioning requirements of depreciation invalue of investments, provision for impairment of associatesas well as provision for impairment of placements. Provisionfor taxes during the year increased by 11.3 percent to RO 39.3million. Cash dividends paid to shareholders by the localbanks declined by 10 percent from RO 110.3 million to RO99.3 million. On the other hand, stock dividends inclusiveof mandatory convertible bonds, increased from RO 24.4million in 2007 to RO 38.7 million in 2008, a rise of 58.6percent. Foreign banks profit remittances amounted to RO2.23 million despite overall profits of RO 15.9 million, withthe banks choosing to retain the profits to enhance their corecapital and reserves position within Oman.Specialized BanksAt the end of 2008, there were two specialized banksoperating in Oman with a branch network of 22 branches.Both the specialized credit institutions are Governmentowned banks, namely, the Oman Housing Bank (OHB) andOman Development Bank (ODB). Oman Housing Bankprovides finance by way of long term soft housing loansto all segments of Omani society in various regions for theconstruction of suitable housing. The citizens under thelower income category qualified for the major part of loans.Mortgage loan accounts as at the end of 2008 stood at RO156.3 million compared to RO 146.2 million a year ago, arise of nearly 7 percent. The capital of OHB remained at RO30 million while total share holders equity comprising sharecapital, reserves and retained earnings amounted to RO 96.9million as at the end of December 2008.Oman Development Bank is primarily engaged in providingloans to development projects, including activities relatedto agriculture and fisheries, health, tourism, professionalactivities and traditional craftsmanship in Oman. Sector-wise,the loans and advances granted to agriculture and fisheries,industrial activities and the services sector dominated thecredit profile. As at the end of 2008, the total net loans andadvances including staff housing loans, stood at RO 58.3million compared to RO 33.2 million a year ago, registeringa significant rise of 75.6 percent. The share capital of ODBremained at RO 40 million while total shareholder’s equitystood at RO 60.5 million as at the end of the year.Money Exchange CompaniesMoney exchange business is carried out by two types ofinstitutions in Oman, namely, those who are engaged inmoney exchange and remittances and the others who areexclusively dealing in money exchange activities. As at theend of December 2008, money exchange establishmentsstood at 39 of which 16 operated under the license of moneychanging and draft issuance business and 23 firms engagedin money changing only. There were in total 131 branches ofthe sixteen exchange establishments. Exchange companieslicensed under money changing and draft issuance areannually examined by the Central Bank of Oman to ensurethat they keep proper books and records and comply with theregulations and remain solvent. The total assets of the sixteenestablishments engaged in money changing and remittance86 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial Institutionsamounted to RO 29 million as at the end of 2008. The assetprofile mainly included balances held with banks at RO 17.1million and cash on hand at RO 7.9 million. The total capitaland reserves of these companies at the end of 2008 amountedto RO 14.2 million.Finance and Leasing Companies (FLCs)There are currently six finance and leasing companies operatingunder the license of the Central Bank of Oman. They mainlyoperate in three market segments, namely, retail financing,where the financing is to individual customers for purchasingautomotive and electronic goods; equipment leasing, wherethe financing is to small and medium enterprises (SMEs) forexpansion, modernization and replacement requirements; andfactoring and working capital financing to SMEs for domesticas well as cross-border trade or for the execution of projects,usually against assignment of receivables.The robust macroeconomic growth witnessed by theSultanate during the first three quarters of 2008 despite theadverse effects of the global financial crisis in the latter partof the year, helped continue the strong growth of the financeand leasing sector. The retail vehicle financing industrycontinues to be the most competitive segment of the market.The SME equipment finance market also witnessed significantgrowth and strong business confidence. FLCs continued topursue their geographic expansion plans with the number ofbranches increasing to 33 in 2008 from 31 in the previousyear. Total combined assets of finance and leasing companiesincreased to RO 577.1 million in 2008 from RO 413.8 millionin 2007, constituting a rise of 39.5 percent (Table 5.12). Thecontinued government thrust on economic diversificationand development of infrastructure to meet the needs ofindustrialization, tourism, commercial projects etc. openedup opportunities for diversified growth and further creditoutlays. Total outstanding credit (net of provisions) extendedTable 5.12FLC Indicators (Rial Omani Million)2004 2005 2006 2007 2008Total Assets (Liabilities) 189.0 219.7 277.6 413.8 577.1Loan/Lease Portfolio (net of provsions and reserve interest) 175.3 201.2 267.3 398.2 558.5Cash and Bank Balances 8.7 13.0 2.8 4.7 5.9Loan Loss Provisions (net of reserve interest) 19.6 22.1 24.1 24.4 30.8Loan Loss Provisions (net of reserve interest) as % of GrossFinancing and Leasing Activities (net of reserve interest)10.1 9.9 8.3 5.8 5.2Borrowings from Banks & Financial Institutions 97.7 113.4 155.3 223.0 325.8Paid Up Capital 39.3 48.0 49.6 57.5 73.3Capital & Reserves* 57.8 69.9 73.5 87.9 123.1Net Profit After Tax 6.5 7.7 8.6 13.1 17.2Weighted Average Rate of Interest Charged (% per annum) 12.0 11.1 11.3 11.4 11.1Number of Branches (Including Head Office) 24 27 27 31 33* Includes proposed cash dividends.Source: FLC Annual Reports, 2008.Central Bank of OmanAnnual Report 2008 87

CHAPTER Vin the form of hire purchase, lease financing and factoringrose by 40.3 percent, from RO 398.2 million in 2007 to RO558.5 million in 2008.Further, the overall performance of FLCs improved in 2008with profits and asset quality indicators showing significantimprovements. Net profit after tax of FLCs amounted to RO17.2 million in 2008 as against RO 13.1 million in 2007,reflecting an increase of 31.3 percent. The quality of FLCsloan portfolio also improved during 2008 with gross nonperformingloans (NPLs) declining to RO 24.5 million or4.1 percent of the gross loan portfolio compared to RO 25.7million or 6 percent of gross loans in the previous year.Further, the level of loan loss provisioning earmarked forfinance and leasing activities stood at RO 30.8 million in2008 as against RO 24.4 million in 2007.On the liabilities side, the FLCs have been steadilyincreasing their paid up capital primarily through stockdividends and right issues in order to meet the minimumpaid up capital requirement of RO 10 million before the endof June 2009 as stipulated by the CBO. The consolidatedpaid up share capital of all six FLCs amounted to RO 73.3million in 2008 as compared to RO 57.5 million in 2007,up by RO 15.8 million (27.5%). The aggregate capital andreserves as at the end of 2008 increased even faster at 40percent, from RO 87.9 million in 2007 to RO 123.1 millionas at the end of 2008. The deposit base of the industryalso rose from RO 40.5 million in 2007 to RO 63 millionin 2008 but was still within the limit within which FLCsare authorized to accept deposits from corporates. It may benoted, however, that while FLCs have sought new avenuesfor diversifying borrowing portfolios and optimizinginterest costs, borrowings from banks and other financialinstitutions continue to remain the main source of fundingfor the sector, increasing from RO 223 million in 2007 toRO 325.8 million in 2008. As regards the annual interestrate charged on credit, the weighted average rate of interestcharged per annum moderated to 11.1 percent during 2008as against 11.4 percent in 2007.The institutional and regulatory framework of the financingand leasing industry has been strengthened over the pastfew years with the phased introduction of strengthenedcapital norms and stricter provisioning requirements. FLCswere mandated in 2008 to raise the minimum paid upcapital to RO 20 million before the end of June 2012 with aview to strengthen the financial stability of the industry.Payment and Settlement SystemThe smooth functioning of the payment and settlementsystem is a pre-requisite for financial stability. In thiscontext, large value payments, which involve systemicrisk, are particularly important. With the introduction ofRTGS, whereby a final settlement of individual inter-bankfund transfers are effected on a gross real time basis duringthe day, a major source of systemic risk in the financialsystem has been significantly reduced. The CBO’s pursuitof completing the payments system agenda laid down inthe Payment System Strategy 2003 continued through 2008.The different components of payments systems are beingdeveloped under the ‘National Payments Systems’ (NPS)umbrella.Operations of two elements, viz. Real Time Gross SettlementSystem and Automated Clearing House (ACH) launched in2005 and 2006 respectively are now in their prime (Table5.13). RTGS offers high value payment system settlementfacilities not only on transaction to transaction basis butalso to deferred net settlement system (DNSS) like chequeclearingand ATM/POS transactions. ACH offers an electronicplatform for presenting interbank retail payments, such aspayroll, utility bills, dividends, interest payment etc. inbatches for deferred net settlement. All banks operating inOman are members of RTGS and ACH.88 Annual Report 2008 Central Bank of Oman

Money, Banking and Financial InstitutionsQuarterPayment and Settlement SystemsTable 5.13 (a)RTGS Business TrendsNo. ofTransactionsValue(RO Million)QI-06 90,551 18,079QII-06 97,503 15,125QIII-06 91,650 14,347QIV-06 83,536 15,917QI-07 79,813 18,516QII-07 88,701 22,645QIII-07 85,701 24,101QIV-07 92,088 20,763QI-08 90,793 21,703QII-08 101,298 28,319QIII-08 95,070 24,725QIV-08 87,718 18,858Table 5.13 (b)ACH Business TrendsThe third element of NPS, namely Cheque Imaging System(CIS) commenced live operations under Phase 1 (coveringMuscat region clearing) on 29 January, 2009. The CISreplaced the paper-based cheque clearing system withelectronic image based clearing. It is an electronic platformfor banks presenting inter-bank cheques through electronicimages to drawee banks for payment and receivingconfirmation of payment or otherwise, over the system. Itsintroduction has ushered in benefits in the form of sameday cheque realization and containment of risks associatedwith loss of instruments and frauds that may occur withphysical handling and movement of cheques.The work on enhancement in the ATM Switch is beingfinalized and implementation will commence shortly.The improved switch incorporates the latest in credit/debit/smart card technologies, while complying withinternational security standards.QuarterNo. ofTransactionsValue(RO 000’s)QI-07 79,839 39,963QII-07 96,851 42,878QIII-07 116,633 45,389QIV-07 132,253 51,728QI-08 113,988 55,783QII-08 116,449 60,007QIII-08 147,535 77,866QIV-08 145,534 87,847Table 5.13 (c)Cheque ClearingYearNo. of ChequesValue(RO 000’s)2002 1,817,689 2,127,3222003 1,816,851 2,161,2562004 1,772,193 2,211,3822005 1,799,921 2,497,9172006 1,873,446 2,792,4612007 2,158,189 3,611,3642008 2,467,857 4,898,158Central Bank of OmanAnnual Report 2008 89

CHAPTER titlVItle

FOREIGN TRADE AND BALANCE OF PAYMENTSDevelopments in the balance of payments are vital for asmall open economy like Oman because the performanceof the overall macro economy depends critically on thestrength and resilience of the balance of payments position.The higher the degree of openness, the larger could be thecontribution of traded goods, services and capital flowsto gross national product (GNP), since the transmission ofglobal shocks through various channels could be faster andstronger in such economies. In view of the fixed exchange ratearrangement in Oman, strength of the balance of paymentsis most critical for ensuring credibility of the peg and forsustaining the commitment to openness as a key vehicle forattaining diversified growth of the country.Oman’s balance of payments position in 2008 wasconditioned primarily by favourable movements in worldoil prices and by notable year-on-year (y-o-y) growth innon-oil exports (52.1 percent) and re-exports (51.1 percent).The impact of strong growth in exports, both oil and nonoil,however, was offset considerably by a surge in imports,which partly reflected investment needs of ongoing projectsand strong growth in domestic demand in the wake of robusteconomic growth. The current account surplus increasedfrom 6.2 percent of nominal GDP in 2007 to 9.1 percent in2008 despite larger outflows caused by higher growth inremittances (41.2 percent) as well as investment incomepayments (7.6 percent) in the form of interest and dividends,together with significant decline in investment incomereceipts (51.8 percent).The capital and financial account, however, reverted backto its earlier outflow trend seen in 2005 and 2006, recordinga net outflow of RO 1,145 million in 2008 as against a netinflow of RO 1,444 million in the preceding year. The overallposition in the balance of payments account, which reflectsthe combined effects of the current, capital and financialaccounts, showed a smaller surplus of RO 702 million in2008 as against a surplus of RO 2,404 million in 2007. As atthe end of 2008, the gross official foreign exchange reservesof the Central Bank of Oman stood at RO 4,401.1 million,providing cover for roughly 6 months of merchandiseimports, which provides credibility in sustaining the peg ofthe Rial Omani with the US Dollar.Foreign TradeMerchandise trade continued to be the dominant componentof Oman’s balance of payments in 2008, with the tradebalance position dictating the overall balance of paymentsposition. Merchandise exports and imports combined stoodat about 101.5 percent of the nominal GDP signifying thehigh degree of trade openness, and highlighting the relativesignificance of international trade in aggregate domesticoutput. Merchandise exports (f.o.b.) alone stood at about62.9 percent of GDP, denoting the major share of exports indomestic production, whereas merchandise imports (c.i.f.)amounted to roughly 38.6 percent of GDP, signifying theimportant influence of imports in meeting consumptionand investment demand. Oil exports accounted for about65 percent, while oil and gas exports combined accountedfor 76 percent of total exports signifying the degree ofconcentration in terms of dependence on oil exports in trade(Table 6.1 and Chart 6.1). Despite the rising contribution ofnon-oil exports (excluding re-exports) to domestic economicactivities, the value of non-oil exports however remainedmodest at 8.5 percent of GDP as at the end of 2008.Merchandise Trade BalanceThe merchandise trade balance for Oman, which reflectsthe difference between merchandise exports and imports(recorded and unrecorded), registered a robust surplus ofCentral Bank of OmanAnnual Report 2008 93

CHAPTER VITable 6.1Trade Transactions(Rial Omani Million)2004 2005 2006 2007 2008% Change2008/07Imports (c.i.f.) 3381.9 3449.3 4244.4 6161.5 8896.3 44.4Exports (f.o.b)* 5144.9 7186.9 8299.5 9493.9 14503.0 52.8Crude Oil 3490.9 5071.1 5528.3 5553.5 8415.9 51.5Refined Oil 61.5 88.3 47.4 466.0 1007.0 116.1LNG 634.0 888.4 1144.6 1180.4 1601.3 35.7Non-oil 420.3 555.3 812.3 1290.7 1962.9 52.1Re-exports 538.2 583.8 766.8 1003.3 1515.8 51.1Trade Balance 1763.0 3737.6 4055.1 3332.4 5606.6 68.2(Exports+Imports) as % of GDP 89.7 89.5 91.3 97.9 101.5Trade Balance as % of GDP 18.4 31.4 29.5 20.9 28.4Non-oil Exports as % of GDP* 10.1 9.6 11.2 14.3 15.1*Includes re-exports.Import figures in this table include both “recorded” and “unrecorded” imports, and hence, they may not tally with imports figure in some othertables which may relate only to recorded imports. Similarly, import figures in this table are on c.i.f. basis, and, therefore, may not tally with importand trade balance figures in other tables where imports could be on f.o.b. basis.Source: Directorate General of Customs and Ministry of National Economy.Chart 6.1: Degree of Trade Opennessand Oil Domination of ExportsChart 6.2: Growth in Importsand Non-oil ExportsPercent (%)1009590858075Percent (%)70605040302010702001 2002 2003 2004 2005 2006 2007 20080-102001 2002 2003 2004 2005 2006 2007 2008Degree of Openness (Exports plus Imports as % of GDP)Oil and Gas Exports as % of Total ExportsGrowth in Non-oil Exports of Omani OriginImport Growth (Recorded + Unrecorded)RO 5,606.6 million in 2008 (Table 6.1). While import growthremained high on account of strong domestic demand, nonoilexport receipts registered marked increase, reflecting thesustained progress being made on diversification of Oman’sand elevated level of domestic oil production driven byenhancements in productivity, implementation of innovativetechnologies, and by new production sharing agreementsthat cover new development and exploration activities.non-oil export basket (Chart 6.2). Crude oil exports witnesseda significant growth of 51.5 percent to RO 8,415.9 million in2008, compared to RO 5,553.5 million in the previous year.This could be attributed to higher international oil pricesOman’s merchandise trade surplus increased by 68.2 percentto RO 5,606.6 million in 2008 from its level of RO 3,332.4million in 2007 (Chart 6.3 and Chart 6.4). This outcome was94 Annual Report 2008 Central Bank of Oman

Foreign Trade and Balance of PaymentsChart 6.4: Merchandise Trade BalanceRO Million160001400012000100008000600040002000RO Million6000500040003000200010003530252015105Percent (%)02001 2002 2003 2004 2005 2006 2007 200802001 2002 2003 2004 2005 2006 2007 20080ExportsImports (c.i.f)Trade Surplus (RO Million)Trade Surplus as % of GDPthe result of a 52.8 percent growth in merchandise exportsvis-à-vis the 44.4 percent expansion in imports duringcontinued to dominate the performance of overallOmani merchandise exports in 2008.2008. The surplus position in the trade balance in terms ofnominal GDP stood at 24.3 percent in 2008 as against 20.8Oil Exportspercent in 2007.World oil prices continued its surge from late 2007 to theExports (of goods)end of the third quarter of 2008. Average Omani crudeoil prices rose from US $ 77.51 per barrel in DecemberThe nominal value of total merchandise exports(made up of crude oil, refined oil, liquefied naturalgas, non-oil exports, and re-exports) increased by52.8 percent to RO 14,502.9 million in 2008 from RO9,493.9 million in 2007. Refined oil exports increasedby 116.1 percent to RO 1,007 million in 2008 andLNG exports increased by 35.7 percent to RO 1,601.3million during the same year. The increase in value ofrefined oil was mainly attributed to surge in average oilprices in 2008 (given the positive correlation between2007 to more than US $ 130 per barrel in September2008, reflecting the impact of rising global demand foroil and supply side constraints, such as weather relatedproduction shutdowns and rising geopolitical tensions inthe Middle East. Thereafter, global oil prices eased duringthe fourth quarter of 2008 following concerns of slowingdemand for oil caused by the global recession in 2008.Against this backdrop, the price of Omani oil for 2008 roseto an average of US $ 101.1 per barrel compared to US $65.15 per barrel for the previous year.refined oil and oil prices), while surge in crude oilexports resulted from increased level of production asNatural Gas Exportswell as higher realization of oil prices in 2008. Thelevel of re-exports also increased considerably fromRO 1,003.3 million in 2007 to RO 1,515.8 million in2008, registering an annual growth of 51.1 percent.In spite of larger volume of non-oil exports during2008, the share of oil and LNG exports in total exportsNatural gas in Oman is mainly exported in the form ofliquefied natural gas to South Korea, Japan, Spain, Turkey,Taiwan and India. Export realization from LNG production in2008 increased by 35.7 percent to RO 1,601.3 million from RO1,180.4 million in 2007 and accounted for about 11 percent ofCentral Bank of OmanAnnual Report 2008 95

CHAPTER VItotal export earnings. Both, Oman LNG (OLNG) and QalhatLNG (QLNG) combined, utilized roughly 44 percent of thenatural gas produced during 2008 for export purposes. Theremaining share of natural gas was used domestically in thepublic gas system, for industry and power plants, and for fueland re-injection in local oil fields.Non-Oil Exports of Omani OriginIn 2008, total non-oil exports of Omani origin registereda robust growth of 52.1 percent, over and above the 58.9percent recorded in 2007 (Table 6.2). Higher receipts of nonoilexports during 2008 were attributed to the performance ofseveral commodity baskets. Leading the non-oil export growthperformance were “animal or vegetable fats & oil” registeringa growth of 114.1 percent, followed by “live animals & animalproducts” (101 percent) and “products of chemicals andallied industries” (73.9 percent). “Plastic, rubber & articlesthereof,” and “base metals & articles thereof” also recordedimpressive annual growth rates of 65.9 percent and 36.5percent, respectively, whereas “textiles and articles thereof”continued to display the ongoing negative trend that started in2004. Low performance of the textiles sector can be attributedto termination of the Multi-Fiber Agreement related quotasunder the WTO.Re-ExportsTotal re-exports increased by 51.1 percent to RO 1,515.8million in 2008 over the previous year mainly on account ofsignificant increase in the value of re-exports of “machineryand transport equipment,” which represented 87.5 percentof total re-exports (Table 6.3). Even though not significantin terms of their magnitude, items such as “minerals, fuels,lubricants and related materials”, “manufactured goods”and “crude materials inedible except fuel” also witnessedrobust growth in 2008. In contrast, re-exports of “beveragesand tobacco” and “animal and vegetable oil & fats”displayed negative growth of 2.5 percent and 63.6 percent,respectively in 2008.Destination of Non-Oil ExportsThe destination of non-oil exports of Omani origin in 2008remained by and large unchanged, as evidenced by thefact that UAE, India and Saudi Arabia together accountedTable 6.2Value of Non-oil Exports of Omani Origin*(Rial Omani Million)2004 2005 2006 2007 2008% Change2008/070 Live animals and animal products 91.9 90.6 74.5 86.9 174.7 101.01 Vegetable products 15.2 16.1 12.9 15.4 24.5 59.12 Animal or vegetable fats & oil 17.9 28.5 28.8 36.2 77.5 114.13 Foodstuffs, beverages, tobacco & related products 26.0 35.5 32.1 38.1 48.5 27.34 Mineral products 42.7 50.5 216.1 450.1 623.8 38.65 Products of chemicals & allied industries 28.0 89.2 138.7 176.7 307.2 73.96 Plastic, rubber, & articles thereof 31.0 33.0 31.9 112.9 187.3 65.97 Textiles & articles thereof 23.9 14.2 10.9 7.2 4.6 -36.18 Base metals & articles thereof 72.6 95.8 123.7 120.7 164.8 36.59 Others 71.1 101.9 142.7 246.5 350.0 42.0Total 420.3 555.3 812.3 1290.7 1962.9 52.1*Excludes re-exports.Source: Directorate General of Customs and Ministry of National Economy.96 Annual Report 2008 Central Bank of Oman

Foreign Trade and Balance of PaymentsTable 6.3Composition of Re-exports(Rial Omani Million)2004 2005 2006 2007 2008% Change2008/070 Food & Live Animals 19.0 8.8 17.9 17.0 33.9 99.41 Beverages and Tobacco 24.5 13.8 9.6 12.1 11.8 -2.52 Crude Materials Inedible Except Fuel 2.2 5.2 6.5 6.4 14.3 123.43 Mineral, Fuels, Lubricants and Related Materials 0.1 0.9 0.1 1.7 15.8 829.44 Animal and Vegetable Oil & Fats - 0.1 - 1.1 0.4 -63.65 Chemicals 7.8 7.8 6.8 8.4 8.6 2.46 Manufactured Goods 17.6 15.4 13.5 20.4 38.0 86.37 Machinery & Transport Equipment, of whichroad vehicles & other transport equipment398.8 502.4 663.0 884.4 1326.9 50.08 Miscellaneous Manufactured Articles 30.5 19.9 36.2 45.4 47.3 4.29 Commodities & Transactions n.i.e.* 37.7 9.3 13.1 6.4 18.8 193.8Total 538.2 583.6 766.7 1003.3 1515.8 51.1* n.i.e. stands for not included elsewhere.Source: Directorate General of Customs and Ministry of National Economy.for close to 53.4 percent of total non-oil exports of Omaniorigin compared to 58.7 percent in 2007 (Table 6.4). Non-oilexports to UAE nudged upwards registering a robust growthof 21.7 percent in 2008, accounting for 32.4 percent of totalnon-oil exports of Omani origin, whereas India remained asthe second most important destination for Omani exportswith a share of 12.6 percent of total non-oil exports duringthe same year.Destination of Re-ExportsThe destination for re-exports from Oman also remainedhighly concentrated in a few countries in line with thepattern witnessed in earlier years. Most Omani non-oil reexportswere exported to two major countries, the UAE(62.4 percent) and Iran (10.4 percent), with their combinedshare at 72.8 percent of total re-exports in 2008 (Table 6.5).Machinery and transport equipment dominated re-exportsto the UAE. Iran remained the second most importantdestination for Omani re-exports, holding a share of 10.4percent of total re-exports in 2008 compared to 12.1 percentshare in the previous year. Hong Kong emerged as the thirdlargest destination for Omani re-exports with its share at 2.1percent in 2008.ImportsThe import bill for the year (on c.i.f. basis) amounted to RO8,896.3 million, 44.4 percent above the level recorded inthe previous year. The robust expansion in imports during2008 can largely be explained by increase in investmentrelated imports linked to large ongoing projects and passthroughof the US Dollar depreciation against other majorcurrencies during the first three quarters of the year underreference (Table 6.10). The composition of recorded importsfor Oman (Table 6.6) indicated that noticeable increases inimports during 2008 were reflected under “machinery andtransport equipment,” “manufactured goods,” “food andlive animals,” chemicals and “minerals, fuels, lubricantsand related items.” Machinery and transport equipmentexhibited a strong annual growth of 39.1 percent, andaccounted for 50 percent of aggregate recorded imports inCentral Bank of OmanAnnual Report 2008 97

CHAPTER VITable 6.4Destination of Non-oil Exports of Omani Origin*(Rial Omani Million)Country2006 2007 2008Non-oil Exports % of Total Non-oil Exports % of Total Non-oil Exports % of TotalUAE 320.9 39.5 522.7 40.5 635.9 32.4Saudi Arabia 49.0 6.0 59.2 4.6 163.9 8.4U.S.A 15.6 1.9 19.5 1.5 54.2 2.8Jordan 4.4 0.5 4.3 0.3 8.9 0.5Yemen 20.9 2.6 27.5 2.1 25.9 1.3Kuwait 15.7 1.9 17.1 1.3 30.0 1.5Qatar 31.9 3.9 51.2 4.0 98.0 5.0Iraq 11.2 1.4 16.2 1.3 70.1 3.6Pakistan 16.0 2.0 35.2 2.7 36.0 1.8Syria 3.0 0.4 10.1 0.8 8.1 0.4India 124.5 15.3 175.9 13.6 247.4 12.6Somalia 16.3 2.0 14.4 1.1 18.2 0.9Bahrain 6.6 0.8 9.3 0.7 17.6 0.9Taiwan 8.0 1.0 26.3 2.0 41.4 2.1Iran 12.2 1.5 7.3 0.6 20.9 1.1Others 156.2 19.2 294.5 22.8 485.7 24.8Total 812.3 100.0 1290.7 100.0 1962.2 100* Excludes re-exports.Source: Directorate General of Customs and Ministry of National Economy.Table 6.5Destination of Re-Exports(Rial Omani Million)Country2006 2007 2008Re-Exports % of Total Re-Exports % of Total Re-Exports % of TotalUAE 431.7 56.3 558.3 55.6 945.4 62.4Iran 70.8 9.2 121.9 12.1 156.9 10.4Saudi Arabia 36.7 4.8 37.6 3.7 24.4 1.6U.K. 21.9 2.9 16.8 1.7 21.6 1.4Hong Kong 20.1 2.6 32.8 3.3 32.4 2.1Singapore 10.5 1.4 16.8 1.7 14.3 0.9Belgium 13.6 1.8 11.0 1.1 14.5 1.0Yemen 8.3 1.1 12.2 1.2 17.4 1.1China 1.8 0.2 12.8 1.3 10.7 0.7Iraq 4.3 0.6 6.0 0.6 18.1 1.2Libeya 15.0 2.0 5.1 0.5 19.2 1.3Germany 7.4 1.0 6.0 0.6 6.9 0.5India 10.0 1.3 9.8 1.0 10.1 0.7Sudan 8.8 1.1 4.8 0.5 3.7 0.2Kagakhstan 7.7 1.0 13.2 1.3 6.6 0.4Others 98.1 12.8 138.2 13.8 212.8 14.0Total 766.8 100.0 1003.3 100.0 1515.0 100Notes: Please see Table 3.2 in Chapter 3 for data on destination of oil exports.Source: Directorate General of Customs and Ministry of National Economy.98 Annual Report 2008 Central Bank of Oman

Foreign Trade and Balance of PaymentsTable 6.6Composition of Recorded Imports(Rial Omani Million)Classification 2004 2005 2006 2007 2008% Change2008/070 Food & Live Animals 369.1 340.3 382.1 509.1 824.2 61.91 Beverages and Tobacco 43.5 31.2 32.9 42.5 48.6 14.42 Crude Materials Inedible Except Fuel 105.0 88.5 123.0 114.5 153.1 33.73 Mineral, Fuels, Lubricants and Related Materials 83.8 141.0 139.2 214.4 235.5 9.84 Animal and Vegetable Oil & Fats 26.0 25.0 28.2 45.9 82.1 78.95 Chemicals 246.1 284.6 280.6 395.6 547.9 38.56 Manufactured Goods 587.3 569.1 799.4 1283.5 1874.0 46.07 Machinery & Transport Equipment 1565.0 1637.4 2085.0 3165.3 4403.3 39.18 Miscellaneous Manufactured Articles 183.2 198.3 239.4 340.8 599.5 75.99 Commodities & Transactions n.i.e.* 105.0 78.8 80.2 32.6 46.2 41.7Total 3314.0 3394.2 4190.1 6144.2 8814.4 43.5* n.i.e stands for not included elsewhere.Notes: Import figures presented here include recorded imports only & hence, they may not tally with import figures in Tables 6.1 & 6.10.Source: Directorate General of Customs and Ministry of National Economy.2008, whereas “manufactured goods,” “chemicals” and“food and live animals” also recorded high growth of 46percent, 38.5 percent, and 61.9 percent, respectively. Thehigh import growth phenomenon witnessed was consistentwith higher nominal GDP growth during 2008, reflectinggrowth in consumption demand for goods as well asinvestment demand for capital goods.The UAE, Japan and the United States continued tobe the three major sources of imports for Oman in 2008with their shares in total imports remaining more or lessunchanged at the previous year levels (Table 6.7). Importsfrom the UAE amounted to RO 2,397.4 million or 27.2percent of total imports in 2008 compared to RO 1,625.2million or 26.5 percent of imports in 2007. Imports fromJapan also increased by 41.6 percent to RO 1,372 million in2008 from RO 969.1 million in 2007. It may also be notedthat the Euro area is gradually emerging as a major sourceof Omani imports.Trade with GCCOmani non-oil exports (inclusive of re-exports) to GCCmember countries as a group increased by almost 51.9 percentto RO 1,925.7 million in 2008 from 1,267.4 million in 2007(Table 6.8). Similarly, Oman’s combined recorded importsfrom GCC countries increased by 48.8 percent to RO 2,758.7million in 2008 from RO 1,853.9 million in 2007. The UnitedArab Emirates remained the main trading partner for Omaniexports and imports during 2008. The share of UAE marketin total non-oil exports of Oman to GCC member countriesstood at 82.1 percent, while the share of UAE market in totalimports of Oman from GCC States was 86.9 percent in 2008.Unit Value Trade IndicesAs depicted in Chart 6.5, the unit value index for Omanicrude oil in 2008 increased to about 363 (expressed as anindex with the base period 2003=100), implying a welfaregain of 55.1 percent in oil income over the 2007 level, onCentral Bank of OmanAnnual Report 2008 99

CHAPTER VICountryTable 6.7Sources of Recorded Imports(Rial Omani Million)2006 2007 2008Imports % of Total Imports % of Total Imports % of TotalUAE 1083.7 25.9 1625.2 26.5 2397.4 27.2Japan 724.0 17.3 969.1 15.8 1372.0 15.6Italy 86.8 2.1 144.9 2.4 176.0 2.00UK 142.1 3.4 181.7 3.0 197.2 2.2Germany 212.0 5.1 325.8 5.3 371.7 4.2USA 219.3 5.2 354.8 5.8 504.2 5.7France 73.6 1.8 149.2 2.4 117.9 1.3India 222.2 5.3 400.1 6.5 400.6 4.5Netherlands 83.7 2.0 131.2 2.1 132.4 1.5South Korea 147.7 3.5 212.6 3.5 372.6 4.2Australia 83.2 2.0 121.8 2.0 153.0 1.7China 141.7 3.4 183.4 3.0 403.0 4.6Saudi Arabia 144.8 3.5 149.7 2.4 225.3 2.6Singapore 49.2 1.2 42.2 0.7 154.1 1.7Belgium 54.1 1.3 57.2 0.9 155.5 1.8Others 722.0 17.2 1095.3 17.8 1681.6 19.1Total 4190.1 100.0 6144.2 100.0 8814.5 100.0Source: Directorate General of Customs and Ministry of National Economy.GCC CountryTable 6.8Trade with GCC Countries(Rial Omani Million)Non-Oil Exports in 2007* Recorded Imports in 2007 Non-Oil Exports in 2008* Recorded Imports in 2008Value% ofTotalValue% ofTotalUAE 1081.0 85.3 1625.2 87.7 1581.3 82.1 2397.4 86.9Saudi Arabia 96.8 7.6 149.7 8.1 188.4 9.8 225.3 8.2Bahrain 10.1 0.8 56.3 3.0 18.8 1.0 82.6 3.0Kuwait 18.1 1.4 11.8 0.6 35.7 1.9 38.4 1.4Qatar 61.3 4.8 10.9 0.6 101.5 5.3 15.0 0.5Total 1267.4 100.0 1853.9 100.0 1925.7 100.0 2758.7 100.0Value% ofTotalValue% ofTotal* Includes re-exports.100 Annual Report 2008 Central Bank of Oman

Foreign Trade and Balance of PaymentsTable 6.9Value and Quantity of Exports / ImportsNon-Oil Exports(including re-exports)ValueWeight(RO Million) (000) TonnesRecorded ImportsValue(RO Million)Weight(000) TonnesValue(RO Million)Oil ExportsAvg. Price(US $ b)1992 350.2 446.1 1449.2 2440.9 252.60 18.001993 442.8 594.3 1581.8 3178.8 267.40 15.611994 503.9 708.0 1505.3 2746.8 270.50 15.171995 503.9 846.9 1633.6 2772.6 284.60 16.391996 560.3 949.6 1760.2 3416.5 296.20 19.421997 710.2 923.9 1932.5 3760.8 303.20 18.621998 692.6 1267.9 2184.5 3556.9 300.20 11.921999 656.8 1243.5 1797.1 3362.3 308.50 17.352000 746.4 1704.7 1937.6 3841.9 326.90 26.712001 843.4 1976.4 2229.3 4429.8 331.52 23.122002 988.3 2203.0 2309.1 4901.0 306.15 24.292003 904.9 2463.0 2527.0 5643.1 287.71 27.842004 958.5 2468.0 3312.7 5712.0 263.64 34.422005 1139.1 3351.8 3394.0 5566.0 262.13 50.262006 1579.2 5806.3 4190.1 5822.4 233.17 61.692007 2294.1 6673.6 6144.2 7395.4 221.99 65.152008 3478.7 10765.2 8814.5 10476.3 216.70 101.06Source: Directorate General of Customs, Ministry of National Economy and Ministry of Oil and Gas.account of favourable oil prices. This favourable gain,however, was partially offset by the negative terms of tradeshocks corresponding to unit value index of non-oil exportsChart 6.5: Unit Value Indicesof Exports and Imports400350for Oman. In fact, the non-oil export price index declined by6 percent in 2008 over the previous year suggesting higherquantities of non-oil exports at lower prices (Table 6.9).Moreover, the unit value index for imports in 2008 increasedby 1.3 percent to around 187.9 reflecting lower quantities ofimports valued at higher prices in 2008.(Base: 2003=100)300250200150100502001 2002 2003 2004 2005 2006 2007 2008Oil Price IndexImport Price IndexExport Price IndexNominal Effective Exchange RateThe nominal effective exchange rate (NEER) is measuredas a weighted average index of overall movement in thenominal exchange rate of the Rial Omani vis-à-vis currenciesof 18 major trading partners of Oman. The NEER for Omanrepresents an import weighted average index of the RialCentral Bank of OmanAnnual Report 2008 101

CHAPTER VIOmani exchange rate since Omani imports far exceed nonoilexports of Omani origin. Moreover, the pass-throughan appreciation of the US Dollar entails an analogousappreciation in the Omani Rial.effects of exchange rates on inflation via imports – associatedwith US Dollar depreciation – assumes greater significancefor the assessment of inflationary conditions in Oman, thusjustifying the emphasis of import weights in the constructionof the NEER index. Given that the exchange rate of theOmani Rial remains fixed to the US Dollar, a depreciation ofthe US Dollar vis-à-vis key international currencies impliesa corresponding depreciation in the Omani Rial, whereasPeriodEnd of yearTable 6.10Nominal Effective Exchange Rate (NEER)(Base: 1999=100)WeightedAverageSimpleAverage2001 111.0 112.62002 104.0 101.42003 97.1 91.32004 93.5 86.62005 99.4 93.72006 96.3 87.72007 92.4 82.32008 94.1 90.6Month-end (2008)January 91.4 81.6February 91.0 80.7March 89.4 79.3April 90.5 80.3May 91.5 81.6June 90.9 80.9July 91.4 81.6August 93.5 85.7September 93.9 87.7October 95.7 92.3November 97.1 95.7December 94.1 90.6Notes: A rise in the index indicates an appreciation of the Rial Omani (R.O.)Sources: Central Bank of Oman.During the latter half of 2008, exchange rates in all regions ofthe globe came under pressure due to the negative spilloverand repercussions of the financial crisis in both advancedand emerging economies, which caused a flight of capitalfrom peripheral markets towards more advanced financialmarkets, particularly to the United States. This phenomenonof capital relocation in search of alternative safe havens(for instance the U.S.) and the uncertainty surrounding theworld economic outlook for 2009 provided support to theappreciation of the US Dollar against most major currenciesin the world. The US Dollar appreciated by 35.7 percentagainst the Pound Sterling and by 4.9 percent in terms ofthe Euro. However, it depreciated by 18.7 percent relativeto Japanese Yen as at end December 2008, on a year-on-year(Base: 1999=100)RO Million115Chart 6.6: NEER & WPI Indices11010510095902000 2001 2002 2003 2004 2005 2006 2007 2008NEER (1999=100)Muscat WPI (2000=100)Chart 6.7: NEER and Non-Oil Exports250020001201008015006010004050020002001 2002 2003 2004 2005 2006 2007 2008Non-oil Exports (RO million)NEER (1999=100)16015014013012011010090(Base: 1999=100)(Base: 2000=100)102 Annual Report 2008 Central Bank of Oman

Foreign Trade and Balance of Paymentsbasis. The strengthening of the U.S. Dollar against othermajor currencies led to the appreciation of Oman’s nominaleffective exchange rate during 2008 to the order of 1.8 percentin terms of the import weighted index and 10.1 percent interms of the non-weighted index over the previous year.However, the external competitive disadvantage resultingfrom an appreciation of the NEER remained moderate forOman in 2008 in view of the low share (14 percent) of nonoilexports of Omani origin in total exports (Chart 6.7), whichrecorded a robust annual growth of 52.1 percent in 2008.Unlike unfavourable implications of the appreciation in theNEER on non-oil exports, domestic inflationary conditionsseem to have slightly eased owing to a reduction in importedinflation induced by the appreciation of the NEER in the secondhalf of 2008. However, in spite of higher WPI figures for 2008relative to 2007, fourth quarter results for WPI in 2008 stoodat 163.2 as against 186.3 for third quarter of the same year,exhibiting a 12.4 percent quarterly decline in the index. Chart6.6 sheds some light on the pass-through effects of exchangerates on inflation, whereas Chart 6.7 graphically illustrates therelationship between the exchange rate and non-oil exports ofOmani origin.Balance of PaymentsStatistical Presentation and CoverageCompilation of the balance of payments statistics in any openeconomy with free convertibility in both current and capitalaccounts is a major challenge, since the required informationhas to be collected from multiple sources through varioussurveys, and the reported information has to be compiledand presented as per the guidelines and concepts set out inthe 5th edition of the Balance of Payments (BoP) Manualof the International Monetary Fund (IMF). The sources ofinformation for economic transactions between residentsand non-residents of Oman are numerous and informationis collected from various government ministries, financialinstitutions, surveys, etc.Current AccountThe strength of the balance of payments position in 2008 wasprimarily driven by a large surplus of RO 2,103 million inthe current account, which was equivalent to 9.1 percent ofnominal GDP (Chart 6.8). The increase in Oman’s currentaccount balance in 2008 was primarily caused by the sharprise in oil prices which led to a surge of 53 percent in oil andgas related exports that overshadowed the 44.4 percent growthin merchandise imports. In terms of the major components ofthe current account, merchandise trade alone contributed tothis surge with a surplus of RO 6,541 million, whereas theother three major accounts (i.e. services, income & transfers)continued to remain in deficit during the year under review.Services, income and transfers together contributed to a netoutflow of RO 4,438 million in the current account of 2008.The current account surplus stood higher at RO 2,103 millionin 2008 compared to RO 994 million in the previous year.Another notable feature in the current account relates towidening magnitude of the deficit each year for services,income and transfer accounts. Higher services payments,including transportation and other business charges onaccount of higher imports as well as higher current transfers(worker remittances) reveal the structural characteristicsof the Omani economy (i.e. demand for services in Omanare growing at a faster pace than what can be supplied viadomestic resources). In particular, net outflows recordedunder the services account amounted to RO 1,595 million,a 27.8 percent growth over and above the outflows of RO1,248 million recorded in 2007. Net outflows associated withworker remittances increased by RO 581 million in 2008,representing an annual growth of 41.2 percent over 2007.The share of services sector GDP in terms of nominal GDPCentral Bank of OmanAnnual Report 2008 103

CHAPTER VIChart 6.8: Cuurent Account SurplusesChart 6.9: Remittance OutflowsRO Million250020001500100050018161412108642Percent (%)RO Million220020001800160014001200100080060015.51514.51413.51312.5Percent (%)02001 2002 2003 2004 2005 2006 2007 200804002001 2002 2003 2004 2005 2006 2007 200812Current Account Surplus (RO million)Current Account Surplus as % of GDPRemittances (RO million)Remittances (as % of export earnings)stood at 32.7 percent in 2008, with the sector recordinga growth of 22.5 percent in 2008. Of the five major broadcomponents of services, travel receipts increased by 24.1percent, reflecting the growing importance of Oman asa tourist destination for foreign travelers, whereas travelpayments for the purpose of education, health, business,pleasure trips, Hajj and Omrah, etc., rose by 13.8 percent.While transportation receipts rose to RO 180 million in 2008from RO 150 million in 2007, transportation payments roseat a sharper rate from RO 663 million in 2007 to RO 978million in 2008 reflecting surge in imports of goods (44.4percent annual growth rate). Insurance payments consistingof outward premiums and outward claims rose from RO 147million in 2007 to RO 170 million in 2008.Growing deficit in the income account generally suggestsexcessive recourse to external liabilities by any country. Inthe case of Oman, it is the high return on modest level ofexternal liabilities that contributes to the growing deficitin the income account. Direct investment income relatedpayments continued to remain high in 2008, increasing toRO 1,001 million from RO 934 in 2007 on account of higherrepatriation of profits in 2008 (resulting from higher returnsin the oil & gas sector), whereas payments under otherinvestment income (i.e. interest payments on foreign debtcapital) remained roughly in line with 2007 estimates at RO256 million in 2008. Receipts relating to other investmentincome comprising primarily of income earned on foreign/non-resident assets or investments of CBO, Government,commercial banks, pension funds, finance companies,corporate entities, etc., declined to RO 391 million in 2008from RO 827 million in 2007 due to retreating earningprospects (lower rates of return) globally and depressedinternational financial markets.The magnitude of the persistent deficit position in Oman’scurrent transfer account continued to widen in 2008, solelydriven by a 41.2 percent increase in remittances from RO1,411 million in 2007 to RO 1,992 million in 2008. However,the share of remittances as percentage of total exportearnings, which has been rising since 2005, moderated to13.7 percent in 2008 from 14.9 percent in 2007 mainly dueto large merchandise export growth arising out of favorableoil prices (Chart 6.9). The tradeoff from the use of foreignlabor and foreign capital involves an unavoidable cost in theform of foreign exchange outflows, which can be offset bythe requirements for a country to achieve higher growth anddevelopment. Overall, the combined deficits in the services,income and current transfer accounts amounted to RO 4,438million, and were as high as 19.3 percent of nominal GDPin 2008.Capital and Financial AccountA significant deficit in the capital and financial account in2008, as opposed to a large surplus in 2007, was another104 Annual Report 2008 Central Bank of Oman

CHAPTER VIChart 6.11: Stock of Foreign InvestmentChart 6.12: Annual Income10000in FDI Enterprises1000on FDI Stock8000800RO Million600040002000RO Million60040020002003 2004 2005 2006 2007Total Foreign InvestmentFDI02003 2004 2005 2006 2007Dividend PaymentsRetained Earningsforeign exchange reserve position in 2008 (net of valuationadjustments), however, stood at RO 4,216.1 million at theend of 2008 in comparison to RO 3,450.4 million at the endof 2007. In terms of standard reserve adequacy indicators,CBO’s foreign exchange reserves at the end of 2008 providedcover for 6 months of merchandise imports and 4 months forall gross current account payments. It may be noteworthyto mention here that even though balances under SGRF donot strictly conform with the definition of foreign exchangereserves presented in the fifth edition of the Balance ofPayments Manual of the IMF, as a matter of conventionSGRF assets are being presented as a below the line entry inOman’s balance of payments, which may have to be viewedas analytically relevant in the context of Oman.Foreign Direct InvestmentGovernment of Oman provides a congenial and liberalenvironment for attracting foreign investment in Oman.Foreign ownership up to 70 percent is permitted under WTOand Oman-US FTA commitments, which can go up to 100percent in specific cases. Moreover, there are no restrictionson repatriation of capital or income earned on investedforeign capital, and FDI enterprises are eligible for 5 yearstax breaks that can be extended up to 10 years. The newlypromulgated tax law (Royal Decree no. 28/2009) provides alevel playing field for all enterprises, both local and foreign,which would help stimulate economic development andattract more foreign investment into the country. Oman alsooffers quality physical infrastructure in terms of roads, seaports, airports, electricity and water supply, besides naturalgas.As per the preliminary results published by the Ministry ofNational Economy in February 2009, the outstanding stockof total foreign investment increased in 2007 by 51.6 percentto RO 9,433.7 million from RO 6,223.4 million in 2006.Foreign direct investment (FDI), which is a major componentof total foreign investment, witnessed a sharper annualincrease of 54.6 percent to RO 3,485.5 million in 2007 overthe previous year (Chart 6.11). Total return on FDI (dividendsplus reinvested earnings) continued to be impressive at 25.1percent in 2007 compared to 33.1 percent in 2006 (Chart6.12). The main sectors receiving large amounts of FDI in2007 were oil and gas sector (41.5 percent), manufacturing(17.3 percent) and financial sector (17.1 percent).106 Annual Report 2008 Central Bank of Oman

Foreign Trade and Balance of PaymentsTable 6.11Balance of Payments(Rial Omani Million)Items 2004 2005 2006 2007 2008 Prel.A. Current account 338 1991 2179 994 21031. Goods 2118 4100 4501 3979 6541Exports (F.O.B) 5145 7187 8300 9494 14503Oil 3553 5160 5576 6020 9423Natural Gas 634 888 1145 1180 1601Other exports 420 555 812 1291 1963Re-export 538 584 767 1003 1516Imports (F.O.B) -3027 -3087 -3799 -5515 -79622. Services -928 -848 -997 -1248 -1595Services (Credit) 284 361 502 627 759Travel 159 165 209 249 309Transportation 111 115 122 150 180Insurance 1 2 2 3 6Communication 8 14 17 29 38Other Services 5 65 152 196 226Services (Debit) -1212 -1209 -1499 -1875 -2354Travel -247 -257 -274 -289 -329Transportation -412 -404 -476 -663 -978Insurance -92 -109 -128 -147 -170Communication -14 -16 -17 -18 -21Other Services -447 -423 -604 -758 -856Balance on goods & services (1+2) 1190 3252 3504 2731 49463. Income -150 -393 -256 -326 -851Income (Credit) 293 294 670 842 406Compensation of employees 15 15 15 15 15Other Investment Income 278 279 655 827 391Income (Debit) -443 -687 -926 -1168 -1257Direct Investment Income -356 -588 -776 -934 -1001Other Investment Income -87 -99 -150 -234 -256Balance on goods, services & income (1+2+3) 1040 2859 3248 2405 40954. Current Transfers -702 -868 -1072 -1411 -1992Current Transfers (Credit) - - - - -Current Transfers (Debit) -702 -868 -1072 -1411 -1992Worker Remittances -702 -868 -1072 -1411 -1992Central Bank of OmanAnnual Report 2008 107

CHAPTER VITable 6.11 (Contd.)Balance of Payments(Rial Omani Million)Items 2004 2005 2006 2007 2008 Prel.B. Capital and Financial Account (5+6) 146 -597 -1320 1444 -11455. Capital Account 8 -6 -37 318 -20Grants (Credit) 8 0 0 331 0Grants (Debit) 0 -6 -37 -13 -206. Financial Account (i + ii + iii) 138 -591 -1283 1126 -1125(i) Foreign Direct Investment 27 502 543 1107 1000Assets (FDI abroad) -16 -90 -106 -94 -126Liabilities (FDI in Oman) 43 592 649 1201 1126(ii) Portfolio Investment -5 36 -84 823 -633Assets -67 -168 -392 30 -298Liabilities 62 204 308 793 -335(iii) Other Investment 116 -1129 -1742 -804 -1492(a) Assets -376 -1241 -2551 -1901 -2695Trade Credit& Other receivables 0 -19 -28 -16 3Currency& Deposits -243 -200 -842 -142 -108Other Assets -133 -1022 -1681 -1743 -2590(b) Liabilities 492 112 809 1097 1203Trade Credit & Other payables 26 29 68 107 108Currecy & Deposits 11 -105 395 637 802Loans 224 -23 310 322 259General Government (net) 75 -169 196 3 44Other Sectors 149 146 114 319 215Other Liabilities 231 211 36 31 34C. Net Errors & Omissions -151 -317 -7 -34 -256D. Overall balance 333 1077 849 2404 702E. Reserves assets -333 -1077 -849 -2404 -702Central Bank 23 -330 -224 -1710 -765Government Reserves -356 -747 -625 -694 63Note: Based on improved reporting of information through the annual survey, data on foreign direct investment, other investment, and investment incomeflows have been revised considerably for past years. Since the coverage of the survey increases every year, with new respondents reporting data for pastfew years as well, this annual revision process may continue till the survey becomes comprehensive with full coverage.Source: Central Bank of Oman.108 Annual Report 2008 Central Bank of Oman

Central Bank Accounts and RegulationsCentral Bank of OmanAnnual Report 2008 111

ASSETSCentral Bank of OmanBalance Sheet at 31 December 20082008RO’0002007RO’000Bullion 304 321Reserve holdings abroadForeign currency placements 1,191,392 1,391,565Available-for-sale investments 3,246,170 2,255,463Other assets 58,305 54,712International Monetary FundReserve tranche 8,075 7,555Currency quota 106,819 110,320114,894 117,875Special drawing rights holdings 7,596 7,194122,490 125,069Premises and equipment 10,291 5,644Total assets 4,628,952 3,832,774LIABILITIESCurrency in circulation 780,620 663,063Deposits and current accounts 2,547,005 2,053,752Other liabilities 34,408 26,318International Monetary FundNon-interest bearing demand notes 50,000 50,000Other accounts 56,842 60,345106,842 110,345Special drawing rights allocation 3,709 3,805110,551 114,150Total liabilities 3,472,584 2,857,283CAPITAL AND RESERVESCapital 400,000 400,000General reserve 320,516 229,088Bond price fluctuation reserve 50,500 43,500Currency fluctuation reserve 54,000 51,000Currency valuation adjustment account 184,954 211,682Financial assets valuation adjstment account on available-for-saleinvestments146,398 40,221Total capital and reserve 1,156,368 ,975,491Total liabilities and capital and reserves 4,628,952 3,832,774112 Annual Report 2008 Central Bank of Oman

Central Bank Accounts and RegulationsCentral Bank of OmanIncome StatementFor the year ended 31 December 20082008RO’0002007RO’000Interest income 122,827 116,934Interest expense (19,198) (29,585)Net interest income 103,629 87,349Net other income 23,842 10,631Net operating income 127,471 97,980Staff costs and administrative expensesStaff costs (18,932) (11,328)Currency expenses (3,622) (1,075)Administrative expenses (2,944) (3,923)Depreciation (545) (636)Net operating expenses (26,043) (16,962)Profit for the year 101,428 81,018Central Bank of OmanAnnual Report 2008 113

21st January 2008CIRCULAR BM 1033To:All Licensed Banks Operating in the Sultanate of OmanAfter Compliments,Sub: Vehicle Loans in the Personal Segment1. Personal loans for purchase of vehicles have beenmounting significantly.2. With a view to bring about improved prudenceand moderation, Central Bank of Oman advises thefollowing:reviewed and banks are satisfied). There shall be no newchecking account opened by any bank for such personsduring this cautionary period of two years.v) Banks should issue cheque books only after minimumof three months of opening accounts.i) There shall be a minimum of 20% down-payment ofthe cost by the borrower.ii) Banks shall arrange for insurance on the borrowerscovering life and total disability so as to avoid hardshipfor the successors.vi) Banks should continue to educate their customers onconsequences of post-dated cheques inviting particularattention to penalties for issue of dud cheques.3. All licensed banks shall comply accordingly.iii) Comprehensive insurance should not be insistedupon, as a credit term.Best regards,iv) Banks should not issue cheque books for those findingplace in the Caution List for a period of two years from thedate of inclusion in the List (unless financial capability isHamood Sangour Al ZadjaliThe Executive President114 Annual Report 2008 Central Bank of Oman

Central Bank Accounts and Regulations11th June 2008CIRCULAR BM 1037To:All Licensed BanksOperating in the Sultanate of OmanAfter Compliments,Re:Interest Rate Ceiling on Personal Loans1. Reference is drawn to Circular BM 1035 dated 31st March 2008.2. Taking into consideration the overall domestic and global interest rate scenario and the need to respond to the genuinerequest of all concerned to reduce the burden of the personal loan borrowers correspondingly, the Central Bank of Omanhas decided to reduce the ceiling on interest rate from 8.5% p.a. to 8% p.a. on all new personal loans (including housingloans) extended by banks from 14th June 2008.3. All banks shall comply accordingly.Best regards,Hamood Sangour Al ZadjaliThe Executive PresidentCentral Bank of OmanAnnual Report 2008 115

11th June 2008CIRCULAR BM 1040To:All Licensed BanksOperating in the Sultanate of OmanAfter Compliments,Re:Quantitative Ceiling on Housing Loans1. Reference is invited to Circular BM 1001 dated 16thApril 2006.2. Based upon requests from many banks and to addressissues arising from demand-supply asymmetry presentlyand prospectively, Central Bank of Oman has decidedto raise quantitative ceiling, on commercial banks, ofhousing loans from 5% to 10% of total credit.clear communication and understanding of all terms andconditions by all concerned, including the guarantors, ifany.5. It had been the requirement that extra bank charges, ifany, on Personal loans should be accommodated withinthe ceiling interest rate and the same should apply toHousing Loans also.3. Central Bank has, separately, advised the banks of thereduction of ceiling interest rate on personal loans(including housing loans) to 8% p.a. (for all loansextended from 14th June 2008).All other instructions (including the advice to banks tobuild prudent and risk-managed portfolio and addresssuch issues of risk management like building up matchinglong term – stable deposits) remain in force.4. Central Bank appreciates in this connection that interestrate trend can not be one-sided and that it will be inorder for banks to provide, in long term loan documents,enabling covenant to raise rate in response to CentralBank’s ceiling rate and other stipulations as applicablefrom time to time. Needless to add that there shall be6. Central Bank reiterates in the light of variousrepresentations received that, out-of-pocket expenses(like valuation fees and insurance charges), if any,recovered should be reasonable and justifiable andshould not be disproportionate or burdensome. Besides,banks should arrange to make reasonable quantificationand refund charges like insurance when the coverage isless than what the original charges envisaged (as in thecase of pre-closures).Best regards,Hamood Sangour Al ZadjaliThe Executive President116 Annual Report 2008 Central Bank of Oman

Central Bank Accounts and Regulations23rd July 2008CIRCULAR BM 1043To:All Licensed BanksOperating in the Sultanate of OmanAfter Compliments,Re:Customer Complaints Redressal System1. Central Bank of Oman observes that there is an increasein the number and range of complaints received by itfrom customers of banks highlighting specific grievancesagainst their banks.2. It is also observed that (i) some of the customers are notaware of the redressal mechanisms available in theirbanks (ii) some banks do not have a systematic process ofdealing with complaints (iii) many times, Central Bankis being referred to when banks could have solved theissues themselves – if there had been a formal systemand approach with mutual understanding and that (iv)if the inadequacies are dealt with, it will benefit allconcerned.3. Since banking is an important service industry and bankshave substantial responsibility to depositors, borrowersand other customers and stake-holders, and an efficientbanking sector will have larger benefits, beyond protectingthe image, reputation and efficiency of the sector, there isa need to fine-tune the redressal mechanism as a whole.4. With a view to streamline the requirements to addressinadequacies of response to customer grievances andcomplaints and to have an organized and accountablesystem, Central Bank of Oman, hereby, stipulates thefollowing, as minimum requirements.i) Banks should make all their staff aware of the importanceof dealing with customer grievances/complaintsdiligently. This should be done systematically withfocus starting from new recruits and through periodicalcommunications and interface with staff, includingtraining programs.ii) Branch Managers in smaller branches and DepartmentalHeads in bigger branches, in particular, should receivespecial attention to the sensitivity and be equal to dealwith issues and nuances involved.The culture of dealing with customer complaints withunderstanding, fairness and courtesy should be developedarduously.iii) There should be a person, designated, in Head Office oflocal bank/Main branch of the foreign bank for the purposeof acting as a focal point of reference for all complaintsnot being solved by recipient – offices and coordinator forthe redressal system as a whole. The focal functionary,not below the level of Assistant General Manager in alocal bank/No. 2 in main branch of the foreign bank,should be fully aware of the redressal system in the bankand be communicative with concerned bank offices/Departments, Regulators and others too – soliciting theassistance of legal and other professionals as may beCentral Bank of OmanAnnual Report 2008 117

necessary. There should be back-up for the functionary toensure continuity.Needless to add that the top management and governingbodies shall have overall responsibility as in all otherissues.iv) Banks shall draw up policies and procedures to dealwith grievances and complaints and they shall have to beexhaustive and cover, as a minimum, the following:a) Acknowledgement of the complaint (this should be doneimmediately).b) Defining the process of dealing with speed anddelegation.c) Report to the focal functionary, mentioned in para (iii)above (even if complaint is resolved).d) Special reference to the focal functionary, in case ofassistance/escalation required.e) Time-frame for resolution/final response (this may begraded in complex cases, but reasonably).f) Final action taken by the bank with reasons in case ofinadequate redressal (if there were to be genuine time-lagin resolution, customer should be so advised and thereshould be adequate explanation in case complaint is notsolved to his satisfaction).g) The roles of audit, compliance, legal and other supportfunctionaries in contributing to the efficacy of thesystem.h) Overall Review Process and scope for larger remedial/service-enhancement actions.5. It will be necessary for the top management and Board tohave periodical review of the redressal infrastructure andthe efficiency of its functioning so as to make on-goingimprovements.It shall be noted that the appointment of focal functionarydoes not absolve the senior management and variousoperational units of their responsibility in maintainingefficiency and order and rendering assistance to the focalfunctionary in discharging his role.6. Banks should give importance to appropriate managementinformation system, recording, evidencing and reviewing(quarterly, at least) the number of complaints received,resolved and outstanding during a period and this shouldfacilitate follow up and critical analysis so as to bringabout organizational improvements. It will be useful tohave break up of disputes according to (i) nature (viz.,interest on deposits, interest on loans, delay in collectionof payment instruments, delay in/non-availability ofstatement of accounts/information, excess charges,unauthorized debits, short credits, bancassurance,staff behaviour and inadequacies etc) and (ii) period ofpendancy of unresolved complaints. The break up maybe according to market segments too and, eventually, thesystem should enable analysis, identification of causes,specific as well as generic, and taking needed actions.7. As stated earlier, the infrastructure and exercise willbe useful and successful if only its availability is madeknown to customers, and for the purpose the focal personsof reference in operating outlets and Head Office/Mainbranch should be made prominently known by displayin the Notice Board or other means.Banks shall inform Central Bank of the names of thedesignated persons in Head Office and Main branches(with changes, if any, subsequently).8. It will be very much in the fitness of things to make useof electronic modes for the work processes – as much aspossible and with safeguards.A distinction may be made between fate and follow-upenquiries on transactions made verbally or through CallCentres (of routine nature) and resolved immediately(with no evidence of serious issues) and others. Thelatter, received through whatever means, require moresystematic recording and appropriate attention, as statedhereunder.118 Annual Report 2008 Central Bank of Oman

Central Bank Accounts and RegulationsThe Management Committee or appropriate Committeeof Senior Management shall review the redressalfunctioning quarterly, at least, in detail and the Board ofDirectors shall have half yearly review of complaints ofserious nature, if any, and the system, in general, for thepurpose of organizational excellence and policy re-visit.9. Some banks tend to be more helpful in responding tocomplaints and solving issues amicably.Central Bank appreciates the principle that good faith builtby banks is a very important ingredient in the progress ofa bank and that it will take a long time to remedy damagescaused by inappropriate dealings, particularly if they arenot handled promptly, sympathetically and with displayof understanding.10. Audit, Compliance and Central bank examination shallhave scrutiny within their mandate.Banks may study the improvement, periodically, in theirservice standards, absolutely and in comparison to fellowcompetitors and own past status.11. Central Bank envisages that with the implementation ofproposed set up, banks themselves deal with and answerto grievances and complaints reasonably and that therewill be avoidance of scope for reference to Central Bank.Central Bank shall take appropriate action in terms ofRegulation BM/REG/012/5/78 if there is inadequacy inthe set up and required actions.12. Central Bank advises licensed banks to review theirredressal set up and ensure compliance with the aboveand confirm so (with names of designated officials asmentioned in para 4 (iii) above with contact details) notlater than 31st October 2008.Best regards,Hamood Sangour Al ZadjaliThe Executive PresidentCentral Bank of OmanAnnual Report 2008 119

3rd September 2008CIRCULAR BM 1044To:All Commercial & Specialised Banks in the Sultanate of OmanAfter Compliments,Sub: Basel II Guidelines – Treatment of Minority Investments in Banks / Financial Entities1. This has reference to CBO Circular BM 1009 datedSeptember 13, 2006 forwarding therewith the Basel IIGuidelines.2. In terms of para 31 of the Basel II Guidelines, banksare required to deduct, equally from Tier I and Tier IIcapital, any investments in the capital of banks and otherfinancial entities, other than reciprocal cross-holdings ofbank capital. Reciprocal cross-holdings of bank capitalare to be deducted entirely from Tier I capital. Further,in terms of para 11 of the Basel II Guidelines, where nodeduction is applied, for any permissible reasons and /or specific approvals there for, banks’ holdings of otherbanks / financial entities’ capital instruments will bear aminimum risk weight of 100%.• Non-strategic investments made in Banks / financialentities upto either 5% of the capital of investee Bank /financial entity or 5% of the net worth of the investingbank, whichever is lower, shall be risk weighted at aminimum of 100%, without the requirement of deductionof capital. Where such an investment is risk-weighted at100% or above, the unrealized gains on the investmentare to be treated as per the extant norms indicated in theBasel II guidelines.• Non-strategic investments made in Banks / financialentities beyond 5% of the capital of investee Bank /financial entity or 5% of the net worth of the investingbank shall be deducted from the capital, as hitherto,equally from both Tier I and Tier II capital.3. Central Bank of Oman reviewed the instructions recentlyon the basis of certain submissions from banks and it hasbeen decided to treat minority investments in Banks /financial entities as under:• Any strategic investments made in Banks / financialentities either with or without Board level participation,both within and outside the Sultanate, are to be deductedfrom capital, equally from both Tier I and Tier II capital.4. All the banks are advised to note the above instructionscarefully for computing and reporting the capitaladequacy.Best regards,Hamood Sangour Al ZadjaliThe Executive President120 Annual Report 2008 Central Bank of Oman

Central Bank Accounts and Regulations8th October 2008CIRCULAR BM 1047To:All Licensed BanksOperating in the Sultanate of OmanAfter Compliments,Re:Lending Radio1. Attention of Licensed Banks is invited to Circular BM 1039 dated 11 June 2008 on the above subject.2. As you are aware, in terms of the above-referred Circular, the lending ratio would stand reduced to 82.5% with effectfrom 1st November 2008. In view of the current market conditions, it has since been decided to temporarily suspend theabove requirement, till further notice. In other words, banks are required to operate within the lending ratio of 85% as ispresently applicable.3. Banks are advised to note the above for prompt compliance noting that all other instructions on the subject remainunchanged (Article 1 of Regulation BM/44/7/98 is being suitably amended).Best regards,Hamood Sangour Al ZadjaliThe Executive PresidentCentral Bank of OmanAnnual Report 2008 121

29th October 2008CIRCULAR BM 1048To:All Local Commercial BanksOperating in the Sultanate of OmanAfter Compliments,Subject Direct:Reverse Swap Facility / Scheme of Lending in US DollarsWith a view to assisting the local banks to overcomethe liquidity constraints brought on by the prevailingconditions in the international markets, it has beendecided to make available USD funds to the localbanks by way of Reverse Swap Facility and by way ofDirect Lending of US dollars in line with Article 28 ofthe Banking Law subject to fulfillment of the followingconditions:Mechanism of the SchemesA. Reverse Swap Facility Scheme1. Nature of transaction :The Reverse Swap transaction envisages banks to enterinto a forex swap transaction with the CBO in which, thebanks will buy spot USD in the first leg in exchange forOmani Rials and sell back the USD forward in exchangefor Omani Rials at specified exchange rates.2. Tenor :The tenor of the swap will be for a period of one/ threemonths. The CBO will consider any request for roll overon the basis of prevailing market conditions and otherfactors.3. Value dates :The first leg of the transaction will be undertaken for spotvalue and the second leg will be for a tenor of one/threemonths.4. Swap Pricing :The USD/ Omani Rial Exchange rate for the spot leg willbe the mid rate between bid and offer rates of the CBOquotation, ie 384.5 Baizas for one US dollar.The swap points for the forward leg will be calculatedbased on the interest rate differential between thebenchmark rates for USD and OMR. The benchmark ratefor the USD will be the prevailing LIBOR rate for thecorresponding tenor plus a mark up of 100 bps.The benchmark rate for OMR will be the USD LIBID rateof the corresponding tenor minus 100 bps.A calculation sheet is attached for banks’ guidance.B. Direct Lending in US dollars1. Nature of transaction :The direct lending facility will be provided to the banksby the CBO in US dollars. The bank has to show sufficientevidence to the CBO about its inability to secure credit122 Annual Report 2008 Central Bank of Oman

Central Bank Accounts and Regulationslines abroad and the CBO, after considering all therelevant factors and at its discretion, will accede to therequest for funds.2. Value date :The funds under this facility will be made available tothe banks on a Spot basis.3. Tenor of the loan :The loan will be made available for a fixed period of one/three months. The loan will have to be paid back withinterest by the banks on the due date by credit of USDollars in CBO’s account with the Federal Reserve Bankof New York. The CBO will consider any request for rollover on the basis of the prevailing market conditions andother relevant factors.4. Pricing :The loan will be priced at LIBOR for the tenor of one orthree months, as the case may be, plus a mark up of 150basis points.C. General Instructions/ guidelines1. Purpose :The funds availed from the CBO through the DirectLending /Reverse Swap mechanism should be used bythe banks strictly for the purpose of providing fundingfor local project loans and for meeting all other loancommitments already entered into or to repay theoutstanding foreign currency deposits or foreign currencyborrowings from banks abroad, if they cannot be rolledover. The banks will have to maintain clear evidence ofthe end-use of the USD funds on their records.2. Bank-wise limits :CBO has drawn up the bank-wise overall limits foravailment of USD financing under the above schemes onthe basis of the bank’s applicable net worth as at the end ofJune 2008. For the time being, each bank will be allocateda limit of 50 per cent of the applicable net worth as at theend of June 2008. CBO reserves the right to review andalter the limits at any time during the operation of thescheme.The banks may avail the USD funds under any one or acombination of the two facilities outlined in the aboveparagraphs subject to compliance with the overall limitearmarked for each bank. However, banks are encouragedto exhaust the ‘Reverse Swap Facility’ first beforeproceeding to the ‘Direct Lending Facility’.3. Lending RatioFor the purpose of computation of the lending ratio, banksmay include the amount of foreign currency borrowingsfrom the CBO under the ‘Direct Lending Facility’ as apart of the deposit base in the denominator.4. Availability of USD funds :The facility will be made available by the CBO till theinternational markets return to normal conditions or asdeemed appropriate by the CBO. The CBO may reviewthe facility every six months based on the prevailingconditions. The CBO reserves every right to withdrawthis facility at any point of time without giving any reasontherefor.5. Promissory Notes :The Direct Lending Facility will be made availableagainst a ‘Promissory Note’ ( promising the repayment ofthe loan ) to be issued by the bank in favour of the CBOvalid for a period of 5 years and for an amount equivalentto 100 per cent of the bank’s net worth.6. Declaration :Besides the above-mentioned Promissory Note, the bankswill have to furnish a declaration signed by the ChiefExecutive Officer of the bank that they agree to abide byall the terms and conditions stipulated/ to be stipulatedby the CBO for the operation of the scheme.Central Bank of OmanAnnual Report 2008 123

7. Information system :CBO reserves the right to call for any information fromthe banks regarding the operation of the scheme .8. Miscellaneous :Banks are advised to approach the Treasury Domainof The Central Bank of Oman Tel No. ( 24704374 or24704169 ) for any further clarification and operation ofthe scheme.Hamood Sangour Al ZadjaliThe Executive President124 Annual Report 2008 Central Bank of Oman

Central Bank Accounts and Regulations23rd December 2008CIRCULAR BM 1050To:All Licensed BanksOperating in the Sultanate of OmanAfter Compliments,Sub: Reserve Against Deposits1. Attention of licensed banks is invited to Circular BM 1046 dated of 9th October, 2008.2. In modification thereof and with a view to provide greater flexibility for banks in liquidity management and creditdeployment, Central Bank of Oman has decided to reduce reserve ratio requirement from 8% to 5%.3. Accordingly, reserve will be maintained at 5% (of designated deposit- liabilities) in the form of clearing balances from thecomputation period commencing with December 26, 2008.4. Licensed banks shall comply accordingly.Best regards,Hamood Sangour Al ZadjaliThe Executive PresidentCentral Bank of OmanAnnual Report 2008 125

23rd December 2008CIRCULAR BM 1051To:All Licensed BanksOperating in the Sultanate of OmanAfter Compliments,Sub: Leading Radio1. Attention of Licensed Banks is invited to Circular BM 1047 dated 9th October, 2008 on the above subject.2. Central Bank of Oman, on continued review of relevant factors, has decided to raise the lending ratio limitation from 85%to 87.5% with effect from 1st January, 2009. All other instructions on the subject remain unchanged.3. Central Bank has noted in this connection banks’ representation for the relaxation in view of certain difficulties inliability management and also their assurance that they will use the enhancement prudently and to finance, significantly,the productive sector and keep the lending rates moderated. It is reiterated that raising the entitlement should not leadto dilution of credit norms and aggressive asset expansion unrelated to market conditions and that banks should operatewith reasonable cushion to be risk-conscious and in compliance.Best regards,Hamood Sangour Al ZadjaliThe Executive President126 Annual Report 2008 Central Bank of Oman

Statistical AppendixLIST OF APPENDIX TABLES.No. Title Page1. Domestic and National Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1312. Expenditure on Gross Domestic Product at Market Values – Current Prices . . . . . 1323. Money Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1334. Structure of Interest Rates on Commercial Banks Deposits . . . . . . . . . . . . . . . . . . 1345. Structure of Private Sector Time Deposits by Rate of Interest and Maturity . . . . . 1356. Structure of Interest Rates on Commercial Banks Credit . . . . . . . . . . . . . . . . . . . . 1367. Structure of Private Sector Cridit by Rate of Interest and Maturity . . . . . . . . . . . . 1378. Licensed Banks in the Sultanate of Oman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1389. Balance Sheet of Oman Development Bank SAOC . . . . . . . . . . . . . . . . . . . . . . . . . 13910. Balance Sheet of Oman Housing Bank SAOC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14011. Combined Balance Sheet of Exchange Houses Licensed to Issue Drafts . . . . . . . . 141Central Bank of OmanAnnual Report 2008 129

Statistical AppendixTable 1Domestic and National Savings(Rial Omani Million)ITEMS 2003 2004 2005 2006 2007 (Prov)1. GDP at Market Prices 8283.2 9487.0 11882.9 14151.2 16010.32. Final Consumption Expendition 4957.3 5644.1 6115.3 7015.8 8544.63. Cross Domestic Savings (1-2) 3325.9 3842.9 5767.6 7135.4 7465.74. Net Factor Income (transfer) -883.4 -889.7 -1281.3 -1471.0 -1810.05. Cross National Saving (3-4) 2442.6 2953.3 4486.3 5664.3 5655.76. Percent Of Domestic Savings to GDP (3/1) 40.15 40.51 48.54 50.42 46.637. Percent of National Savings to GDP (5/1) 29.49 31.13 37.75 40.03 35.33Source : Ministry of National Economy.Central Bank of OmanAnnual Report 2008 131

Table 2Expenditure on Gross Domestic Product at Market Values – Current Prices(Rial Omani Million)Items 2003 2004 2005 2006 2007(Prov.)1. Final Consumption Expenditure4957.35644.16115.37015.78544.6Households3096.33498.43734.84383.05619.6Government1850.52134.82368.62621.12913.4Non Profit Instutions10.510.911.911.611.62. Gross Capital Formation*1850.22426.32750.63426.74884.5Building and Construction643.3907.81222.21470.91979.8Machinery and Equipment959.41244.61231.81600.62485.9Intangible Fixed Assets247.5273.9296.6355.2418.8Change in Inventories65.1215.7-122.8327.264.13.Net Exports of goods & services1410.71200.93139.83381.62517.1GDP at Market Prices8283.39487.011882.914151.216010.3* It does not include change in inventories.Source: Ministry of National Economy.132 Annual Report 2008 Central Bank of Oman

Statistical AppendixTable 3Money SupplyEnd of Period Million ROM1 M2% Change over prev.period% Change over12 MonthsMillion RO% Change over prev.period% Change over 12Months2004 907.4 12.8 12.8 2944.3 4.0 4.02005 1128.1 24.3 24.3 3573.1 21.4 21.42006 1229.6 9.0 9.0 4461.3 24.9 24.92007IQ 1420.4 15.5 12.1 4871.4 9.2 28.2IIQ 1568.0 10.4 18.6 5240.9 7.6 31.7IIIQ 1649.5 5.2 37.9 5465.0 4.3 29.6IVQ 1921.3 16.5 56.3 6119.8 12.0 37.22008Jan 2088.1 8.7 53.7 6363.4 4.0 40.0Feb 2133.7 2.2 65.8 6435.4 1.1 40.5Mar 2322.6 8.9 63.5 6713.9 4.3 37.8Apr 2184.7 -5.9 53.7 6834.2 1.8 38.8May 2211.7 1.2 48.8 6982.9 2.2 36.7June 2241.5 1.3 43.0 7024.1 0.6 34.0July 2111.4 -5.8 38.5 6766.4 -3.7 31.2Aug 2147.8 1.7 37.8 7070.5 4.5 33.9Sept. 2170.2 1.0 31.6 7119.3 0.7 30.3Oct. 2133.0 -1.7 23.7 7365.4 3.5 31.3Nov. 2063.4 -3.3 15.5 7576.9 2.9 30.9Dec. 1994.9 -3.3 3.8 7533.3 -0.6 23.1Source: Central Bank of Oman.Central Bank of OmanAnnual Report 2008 133

Table 4Structure of Interest Rates on Commercial Banks DepositsDecember 2008(Rial Omani Thousand)Rates ofInterest(Per Annum)Total Rial Omani Deposits Total Foreign Currency Deposits Total DepositsNo of A/Cs ٪ Amount ٪ No of A/Cs ٪ Amount ٪ No of A/Cs ٪ Amount ٪Nil Interest 1,590,250 90.1 2,504,932 34.3 14,896 66.3 204,812 16.0 1,605,146 89.8 2,709,744 31.6Over 0% To 2% 159,508 9.0 1,049,227 14.4 5,772 25.7 298,967 23.3 165,280 9.2 1,348,194 15.7Over 2% To 3% 4,558 0.3 482,989 6.6 648 2.9 267,044 20.8 5,206 0.3 750,033 8.7Over 3% To 4% 3,331 0.2 685,598 9.4 596 2.7 255,011 19.9 3,927 0.2 940,609 11.0Over 4% To 5% 5,692 0.3 840,924 11.5 424 1.9 196,139 15.3 6,116 0.3 1,037,063 12.1Over 5% To 6% 1,335 0.1 1,382,911 19.0 128 0.6 50,617 3.9 1,463 0.1 1,433,528 16.7Over 6% To 7% 476 0.0 345,782 4.7 15 0.1 10,465 0.8 491 0.0 356,247 4.2Over 7% To 8% 14 0.0 723 0.0 3 0.0 26 0.0 17 0.0 749 0.0Over 8% To 9% 1 0.0 3,066 0.0 0 0.0 0 0.0 1 0.0 3,066 0.0Over 9% To 10% 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0Over 10% To 11% 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0Over 11% To 12% 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0Over 12% 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0Total 1,765,165 100.0 7,296,152 100.0 22,482 100.0 1,283,081 100.0 1,787,647 100.0 8,579,233 100.0Weighted Average Rate of Interest 2.512% 2.407% 2.496%Source: Central Bank of Oman.134 Annual Report 2008 Central Bank of Oman

Statistical AppendixTable 5Structure of Private Sector Time Deposits by Rate of Interest and MaturityDecember 2008(Rial Omani Thousand)Rates ofInterest(Per Annum)7 Days to Less than 6 Months 6 Months to Less than 1 Year 1 Year and Above TotalRialOmaniForeignCurrencyTotalRialOmaniForeignCurrencyTotalRialOmaniForeignCurrencyTotalRialOmaniForeignCurrencyUp to 2% 132,526 76,232 208,758 25,211 3,741 28,952 17,665 2,256 19,921 175,402 82,229Over 2% To 3% 88,514 30,765 119,279 23,203 38,887 62,090 48,048 31,490 79,538 159,765 101,142Over 3% To 4% 113,343 35,234 148,577 68,791 49,759 118,550 195,757 72,157 267,914 377,891 157,150Over 4% To 5% 165,382 32,467 197,849 88,702 15,818 104,520 285,948 42,549 328,497 540,032 90,834Over 5% To 6% 111,823 23,421 135,244 329,465 1,478 330,943 691,790 6,700 698,490 1,133,078 31,599Over 6% To 7% 31,244 261 31,505 23,150 157 23,307 212,054 19 212,073 266,448 437Over 7% To 8% 4 1 5 0 8 8 719 17 736 723 26Over 8% To 9% 0 0 0 0 0 0 3,066 0 3,066 3,066 0Over 9% To 10% 0 0 0 0 0 0 0 0 0 0 0Over 10% To 11% 0 0 0 0 0 0 0 0 0 0 0Over 11% To 12% 0 0 0 0 0 0 0 0 0 0 0Over 12% 0 0 0 0 0 0 0 0 0 0 0Total 642,836 198,381 841,217 558,522 109,848 668,370 1,455,047 155,188 1,610,235 2,656,405 463,417Weighted AverageRate of Interest (%)3.598 2.788 3.407 4.809 3.236 4.550 5.034 3.622 4.898 4.639 3.174Source: Central Bank of Oman.Central Bank of OmanAnnual Report 2008 135

Table 6Structure of Interest Rates on Commercial Banks CreditDecember 2008(Rial Omani Thousand)Rates ofInterest(Per Annum)Total Rial Omani Lending Total Foreign Currency Lending Total Lending (RO. + Fcy.)No of A/Cs ٪ Amount ٪ No of A/Cs ٪ Amount ٪ No of A/Cs ٪ Amount ٪Nil Interest 78,042 15.2 105,768 1.4 469 22.4 15,208 0.8 78,511 15.2 120,976 1.3Over 0% To 5% 9,974 1.9 418,521 5.7 834 39.9 1,577,777 80.7 10,808 2.1 1,996,298 21.6Over 5% To 7% 14,570 2.8 2,164,225 29.6 367 17.6 316,778 16.2 14,937 2.9 2,481,003 26.8Over 7% To 8% 114,600 22.3 2,585,514 35.4 111 5.3 23,621 1.2 114,711 22.2 2,609,135 28.2Over 8% To 9% 133,420 25.9 1,568,948 21.5 74 3.5 8,142 0.4 133,494 25.8 1,577,090 17.0Over 9% To 10% 10,387 2.0 223,570 3.1 12 0.6 674 0.0 10,399 2.0 224,244 2.4Over 10% To 10.5% 453 0.1 26,463 0.4 1 0.0 600 0.0 454 0.1 27,063 0.3Over 10.5% To 11% 19,314 3.8 67,760 0.9 58 2.8 465 0.0 19,372 3.8 68,225 0.7Over 11% To 11.5% 288 0.1 8,718 0.1 3 0.1 136 0.0 291 0.1 8,854 0.1Over 11.5% To 12% 5,482 1.1 37,391 0.5 30 1.4 3,349 0.2 5,512 1.1 40,740 0.4Over 12% To 13% 12,014 2.3 36,910 0.5 53 2.5 1,215 0.1 12,067 2.3 38,125 0.4Over 13% To 14% 836 0.2 5,440 0.1 8 0.4 1,165 0.1 844 0.2 6,605 0.1Over 14% To 15% 7,212 1.4 5,084 0.1 67 3.2 5,074 0.3 7,279 1.4 10,158 0.1Over 15% To 16% 7 0.0 813 0.0 0 0.0 0 0.0 7 0.0 813 0.0Over 16% To 17% 67,613 13.1 19,358 0.3 0 0.0 0 0.0 67,613 13.1 19,358 0.2Over 17% To 18% 40,271 7.8 27,232 0.4 3 0.1 783 0.0 40,274 7.8 28,015 0.3Over 18% 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0Total 514,483 100.0 7,301,715 100.0 2,090 100.0 1,954,987 100.0 516,573 100.0 9,256,702 100.0Weighted Average Rate of Interest 7.099% 3.206% 6.277%Source: Central Bank of Oman.136 Annual Report 2008 Central Bank of Oman

Statistical AppendixTable 7Structure of Private Sector Credit by Rate of Interest and MaturityDecember 2008(Rial Omani Thousand)Rates ofInterest(Per Annum)RialOmaniOverdraft Other Loans and Advances TotalForeignCurrencyTotalRialOmaniLess than 1 Year 1 Year and aboveForeignCurrencyTotalRialOmaniForeignCurrencyTotalRialOmaniForeignCurrencyNil Interest 58,012 805 58,817 33,819 7,953 41,772 12,793 4,111 16,904 104,624 12,869Over 0% To 5% 62,543 10,734 73,277 166,875 279,107 445,982 141,172 869,515 1,010,687 370,590 1,159,356Over 5% To 7% 177,736 6,306 184,042 606,507 127,094 733,601 1,356,767 179,116 1,535,883 2,141,010 312,516Over 7% To 8% 116,465 718 117,183 343,536 2,231 345,767 2,125,513 20,672 2,146,185 2,585,514 23,621Over 8% To 9% 64,616 134 64,750 95,643 7,352 102,995 1,408,689 656 1,409,345 1,568,948 8,142Over 9% To 10% 90,265 196 90,461 30,930 288 31,218 102,375 190 102,565 223,570 674Over 10% To 10.5% 13,833 0 13,833 8,420 0 8,420 4,210 600 4,810 26,463 600Over 10.5% To 11% 37,414 351 37,765 13,485 10 13,495 16,861 104 16,965 67,760 465Over 11% To 11.5% 3,809 23 3,832 4,337 113 4,450 572 0 572 8,718 136Over 11.5% To 12% 14,405 2,475 16,880 7,931 799 8,730 15,055 75 15,130 37,391 3,349Over 12% To 13% 14,700 106 14,806 9,586 704 10,290 12,624 405 13,029 36,910 1,215Over 13% To 14% 2,573 21 2,594 1,529 259 1,788 1,338 885 2,223 5,440 1,165Over 14% To 15% 2,400 5,074 7,474 2,683 0 2,683 1 0 1 5,084 5,074Over 15% To 16% 41 0 41 772 0 772 0 0 0 813 0Over 16% To 17% 415 0 415 0 0 0 18,943 0 18,943 19,358 0Over 17% To 18% 8,098 0 8,098 9,215 0 9,215 9,915 783 10,698 27,228 783Over 18% 0 0 0 0 0 0 0 0 0 0 0Total 667,325 26,943 694,268 1,335,268 425,910 1,761,178 5,226,828 1,077,112 6,303,940 7,229,421 1,529,965Weighted AverageRate of Interest (%)6.985 6.731 6.976 6.340 3.675 5.695 7.356 3.203 6.647 7.134 3.396Source: Central Bank of Oman.Central Bank of OmanAnnual Report 2008 137

Table 8Licensed Banks In the Sultanate of Oman(As at 31 December, 2008)Name of the Banks Date Of Establishment Authorised Offices Operating OfficesLocal Banks1. National Bank of Oman 1973 62 542. Oman Arab Bank 1973 43 403. Oman International Bank 1975 87 824. Bank Muscat 1981 122 1205. Bank Dhofar 1990 53 516. Bank Sohar 2007 12 117. Al Ahli Bank 1997 11 7Foreign Banks1. HSBC Bank Middle East 1948 6 62. Standard Chartered Bank 1968 1 13. Habib Bank Ltd. 1972 8 84. Bank Melli Iran 1974 1 15. National Bank of Abu Dhabi 1976 7 66. Bank Saderat Iran 1976 1 17. Bank of Baroda 1976 3 38. State Bank of India 2004 1 19. Bank of Beirut 2006 2 210.Qatar National Bank 2007 1 1Specialised Banks1. Oman Housing Bank 1977 9 92. Oman Development Bank 1977 14 13Total 444 417Source: Central Bank of Oman.138 Annual Report 2008 Central Bank of Oman

Statistical AppendixTable 9Balance Sheet of Oman Housing Bank SAOC(Rial Omani Thousand)December 2008 December 2007AssetsCash and balances with banks 771 124Term deposit 21,250 28,300Mortgage loan accounts 156,340 146,179Property and equipment 944 1,031Other assets 976 908Total assets 180,281 176,542Liabilities and EquityLiabilitiesCustomers' deposits 5,648 7,618Loans from the Government 72,830 72,830Other liabilities 4,919 5,244Total Liabilities 83,397 85,692Shareholders' EquityShare capital 30,000 30,000Legal reserve 11,045 10,202Special reserve 36,658 34,062Revaluation reserve 189 189Retained earnings 18,992 16,397Total shareholders' equity 96,884 90,850Total liabilities and shareholders' equity 180,281 176,542Commitments 18,078 25,096Source: Oman Housing Bank SAOC .Central Bank of OmanAnnual Report 2008 139

Table 10Balance Sheet of Oman Development Bank SAOC(Rial Omani Thousand)December 2008 December 2007AssetsCash and balances with Central Bank of Oman 25 21Balances due from other banks 2,390 21,572Loans and advances to customers 57,460 32,275Investments 2,225 3,798Staff housing loans 863 961Receivable from government 1,154 0Property and equipment 1,322 1,215Prepayments and other receivables 137 319Total assets 65,576 60,161Liabilities and Shareholders' EquityLiabilitiesDue to other bank 3,000 0Payable to Government 123 442Payable and accruals 1,951 1,218Total liabilities 5,074 1,660Shareholders' EquityShare capital 40,000 40,000Legal reserve 2,517 2,055Special reserve 1,877 1,047Cumulative change in fair values 206 1,751Retained earnings 15,902 13,648Total shareholdres' Equity 60,502 58,501Total liabilities and shareholders' Equity 65,576 60,161Net assets value per share (RO) 1.513 1.463Source: Oman Housing Bank SAOC.140 Annual Report 2008 Central Bank of Oman

Statistical AppendixTable 11Combined Balance Sheet of Exchange Houses Licensed to Issue DraftsAs at December 31, 2008(Rial Omani Thousand)Rial Omani Foreign Currency TotalAssets1- Cash &Precious Metals on Hand 3,958 3,953 7,9112- Capital Deposits with CBO 1,110 0 1,1103- Balance due from Banks, Branches &Money Changers7,280 9,794 17,0744- Investments 255 0 2555- Fixed Assets 1,789 0 1,7896- Other Assets 872 0 872Total Assets 15,264 13,747 29,011Liabilities1- Capital, Reserves & Retained Earnings 19,261 0 19,2612- Borrowing from Banks 0 0 03- Balances due to Banks, Branches & Money Changers 2,357 5,665 8,0224- Drafts & Cheques Issued & Outstanding 0 0 05- Other Liabilities 1,728 0 1,728Total Liabilities 23,346 5,665 29,011Source: Central Bank of Oman.Central Bank of OmanAnnual Report 2008 141