MUSCAT, 6 September 2007 — Monetary and financial conditions in Oman remained in order and is resilient despite disruptive developments taking place in the global financial system in response to emerging weaknesses in the US subprime housing sector, the Central Bank of Oman (CBO) said.

The activities of the commercial banks in Oman continued to expand at a brisk pace, as evidenced by the growth in credit, foreign assets, deposits, capital and reserves as well as operating profits until July 2007, the central bank said in a statement in its monthly review of banking and monetary developments.

The economy, however, was affected by 3.7 percent fall in oil prices, 5.4 percent fall in oil production and 6.4 percent fall in oil exports in the first half of 2007. Inflation, as measured by change in average CPI for the Sultanate, was at 4.7 percent during the first half of 2007. The combined balance sheet of the commercial banks showed strong year-on-year expansion in assets by 34.5 percent to reach RO8,259.8 million at the end of July 2007, with credit accounting for 64.6 percent of total assets, registering a growth of 25.2 percent to reach RO5,336.7 million.

Even though the asset portfolio of commercial banks continued to be dominated by credit, investments in securities accounted for about 9.4 percent of total assets, which also registered a high year-on-year growth of 76.5 percent in July 2007. Most notably, foreign (non-resident) assets created by the commercial banks rose 69.9 percent from RO1,091.5 million in July 2006 to RO1,854.0 million in July 2007, partly in response to both the prevailing interest rate differential in favor of the US dollar and the surplus domestic liquidity conditions.

In fact domestic (resident) assets exhibited absolute decline in July 2007 over June 2007, whereas foreign assets exhibited significant absolute increase during this period. On the liability side, deposits held with commercial banks registered 32.1 percent year-on-year growth in July 2007, with private sector deposits with a share of 81.6 percent in total deposits growing by 30.9 percent. Time deposits, which accounted for 45.8 percent of total private sector deposits in July 2007, witnessed a high year-on-year growth of 33.6 percent.

Private sector demand deposits and saving deposits also increased by 28.4 percent and 30.0 percent respectively. The core capital and reserves of commercial banks at the end of July 2007 amounted to RO889.8 million, which represented about 10.8 percent of their total assets. Provisional figures for net profits of commercial banks (net of provisions and taxes) at RO104.5 million for the first seven months of 2007 suggest a 21.8 percent growth over the profits recorded during the corresponding period of 2006.

For M2, the broad measure of money supply (i.e., Ml plus quasi-money), the money stock at the end of July 2007 stood at RO5,159.1 million, which represents a growth of 31.2 percent over the end July 2006 level at RO3932.9 million. In 2005 and 2006, annual money supply growth had remained high at 21.4 percent and 24.4 percent, respectively. The narrow measure of money supply (i.e., M1) includes currency held by the public and RO demand deposits, quasi-money includes RO saving, RO time and forex deposits as well as margins. While narrow money M1 showed a lower annual growth of 23.7 percent as at the end of July 2007. In relation to M2, quasi money witnessed a sharper growth of 34.6 percent.

Within quasi money, foreign currency deposits exhibited a strong growth of 49.6 percent, which essentially reflects the result of persistently higher interest rates being offered on foreign currency deposits on par with international interest rates in relation to RO deposits. In terms of components of money supply, growth in both currency and deposits contributed to the high growth in money supply, with foreign currency deposits growing the fastest.

In terms of sources of money supply, expansion in both domestic and foreign assets contributed to the growth in money supply. Net foreign assets of the banking system as a whole increased by 42.7 percent (RO1,042 million), with CBO’s foreign assets expanding by 35.1 percent (RO655.1 million) and commercial banks’ foreign assets rising by 67.5 percent (RO387.0 million).