(YET) Another Inflation Record Smashed...(but is that all that is to the story?)

Just when some are beginning to think it cant get much worse, in an article published by ITP's ArabianBusiness (click HERE to go to the article in full), inflation in Oman is racking up record upon record ever since the US Dollar started it's fateful slide for the worse...since then, the Omani Rial has lost close to 20% of it's value against some currencies (as I compared here), prices for food and other essential commodites have shot up through the roof (possibly more than just a roof this year)...

According to the article, "Inflation in Oman rose for a ninth month to 11.11% in February, the highest in at least 18 years"...

further adding that "Food, beverage and tobacco costs, which account for almost a third of the consumer price index, surged 19.6% in February, the Ministry of National Economy said on its website on Sunday. Food costs had jumped 17% in January"

And the response was just the usual rhetoric the Omani public has been hearing all along..."There is no quick fix," Omani Economy Minister Ahmad bin Abdul-Nabi Mekki told newswire Reuters on Sunday."We took measures of reducing imports and we also requested wholesalers to reduce prices. Inflation will take its natural course in 2008."

Oman's CPI is now at 120 points, up from 108 from the same point in time a year back. This is reportedly the highest level since 1990.

The final piece of data given is: "Inflation in Oman, which hit 10.12% in January, had risen by an average of 1% in the last 10 years.

Rents rose 14.1% in February, down slightly from 14.3% in January,"

The article then goes into the defensive statements we've been hearing all along...there is an implicit message again that Oman does not intend to depeg or revalue the ailing Rial anytime soon...

What is surprising is the fact that the article mentions a Central Bank official as saying that Oman needs to slow down economic expansion...I dont see how that can be done without raising interest rates and reducing the money supply and liquidity in the market...

That said, I have a few thoughts of my own to add...I dont think Oman is alone in facing rapidly inflating food prices...Prices for food items have been rapidly increasing all around...I've noticed food items in Australia going up as well (Australia faces inflationary pressures as well and annual inflation is at around 3-4% despite measures by RBS including relentless interest rate rises, but some food items like Indian rice have shot up by as much as 20% over a period of months).

prices for food items (such as rice, wheat and perhaps all essential grains) have been rising sharply all over the world since the last year or so...prices are expected to stabilise a bit this year (since Australia is coming out from drought and expects to produce a healthy wheat crop this year) but to what extent they stabilise remains to be seen.

Another rant about inflation (or controlling the juggernaut)...and my own observations

Another one added to the tally of a bajillion articles on inflation and what the government is doing to combat it was published in the Times of Oman recently...Click here to read it (it's a bit long).

Apparently the import of fish has been allowed, which will somehow drive down inflation. (It should drive down prices of fish and seafood, provided the imports are comparable in price to local produce. That aside, it should also calm the markets by balancing out supply/demand to an extent).

In my observation over the last year or so, I have noticed that inflation in Oman is not necessarily due to supply/demand...it is due to excessive liquidity in the market. This is due to the GCC states (except Kuwait) having to shadow US Monetary policy...while the US Federal reserve has cut interest rates form 5.25% to 3% from september onwards trying to ward of recession, the GCC countries are riding on a growth spurt fuelled by oil prices smashing new records everyday. This is practically a case of two economies moving in opposite directions but following the same policies.

This disparity in economic policies has driven up inflation in several ways...on one hand it creates a situation where a rapidly expanding economy meets excessive liquidity, excess money supply and low interest rates...when these combine together, it can drive up inflation very quickly...

Secondly, due to the OMR being pegged with the USD (at 1 USD = 0.385 OMR) and Oman shadowing the US economic policies, the value of the OMR has been dragged down to record lows against the major currencies...I'll cite a few examples:

Currency, Value in OMR 15-Dec 2006 , Value in OMR at 6-Mar-2008, % change from 2006 value

AUD OMR 0.300 OMR 0.360 (up 20%)
CAD OMR 0.332 OMR 0.390 (up 17.4%) [1]
EUR OMR 0.504 OMR 0.584 (up 15.8%)
GBP OMR 0.752 OMR 0.770 (up 2.4%)
JPY* 306.04 268.53 (up 14%) [2]
SGD OMR 0.250 OMR 0.277 (up 10.8%)
NZD OMR 0.266 OMR 0.307 (up 15.4%) [3]
CHF OMR 0.315 OMR 0.373 (up 18.41%)

[1] Canadian dollar attained parity with the USD in early November 2007, peaking at OMR 0.410
[2] The rate against JPY is expressed as OMR 1 to JPY/. Other currencies are 1 unit of foreign currency to OMR
[3] NZD value was reduced by some amount after intervention by RBNZ


(All rates sourced from HERE)

As it is clearly visible, the OMR has lost significantly to all major currencies except the UK Sterling. This means that all imports (be it shoes from European brands, your favourite meats from AUS/NZ, and the Cars from Toyota APAC which is based in Australia and manufactures most of the Camry units for the GCC region) have become significantly more expensive.

A an example,If you were paying OMR 3 per kilo for a A$10/kilo meat from Australia, you'll simply have to pay OMR 3.6 per kilo for the same product...

Not only has this depreciation of the OMR hurt the consumer in Oman, it has also reduced the attractiveness of the GCC region to expatriates, particularly from South Asia. On top of the spiralling cost of living, leaving less money with people to remit back home ( a large chunk of south asians do that), the depreciating currency creates further hindrance. As another example, 1 OMR was equal to almost 120 INR (Indian rupees) in dec 2006...and the current value stands at 1 OMR equaling almost 102 INR. This change of 17% in currency rates, coupled with the rapidly growing economies in South Asia (particularly India) where salaries are on an upward trend, will make it all the more difficult to attract talented people from the region. (The sporadic protests by construction workers over wages is another indication).

Looking at the data, isn't it getting obvious that if not detachment from the USD, a revaluation of the OMR makes sense? It will make imports cheaper and reduce the "imported inflation" in food items...As such, there is nothing stopping the Central bank from revaluing later should the USD appreciate again...but for the short-term, another US interest rate cut of 75 basis points (0.75%) from 3% to 2.25% is expected soon... will definitely pinch the USD even more...

The need for a law capping rent increases?

Rising rents cause concern

By Ali Al Badi

MUSCAT Rents in the Sultanate are on an upswing. The rise has exceeded 200 per cent in Muscat, 300 per cent in Sohar and 100 per cent in Salalah.

Experts say this is due to absence of activation of laws governing rent practices. They say there is a need for laws to govern the process of raising prices and resolve disputes between owners and tenants.

The phenomenon of high prices of real estate rents, especially by greedy landlords at the expense of tenants, is turning from bad to worse.

This has made some landlords to exploit the situation leading to situations where tenants are either forced to accept the new rent or search for a new house. And most of the time the tenants end up in accepting the new rent grudgingly.

According to the public, there is no way to stop the landlords from hiking rents.

HE Younis Bin Sabeel Al Balushi, Chairman of the Economic Committee in the Shura Council, said the committee has prepared a study on the subject of high rents and concluded that the main causes for the hike in rents is due to hike in the value of land, some of which rose to over 500 per cent in some locations especially in Al Khuwair.

The rise in prices of building materials such as cement, iron, cables, sanitary materials and also labour wages has led to a surge in prices.

He said laws that specify a certain annual percentage of rent hike would limit the rise in an arbitrary manner.

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Amid rising inflation due to various factors, this is the last thing tenants could hope for...lets hope the municipality does something...

(Click on header to go to main article in Tribune)

The hard facts on inflation in Oman

Annual inflation in Oman accelerated to 5.9% in June, the highest in at least two and a half years, as food costs and rents jumped, official data showed.

The consumer price index rose to 110.3 points compared with 104.2 points in the year-earlier, according to data published on the Ministry of National Economy website. Inflation was 4.3% in May.

The cost of food, beverages and tobacco, which account for around 30% of the index, rose 11.1% in June, compared with 9.1% in the previous month. (Link)

Cost of food went up 11.1% in one month. Add the 9.1% the previous month and that's a 20% increase in just May and June!

Seminar on rising prices of consumer items on Monday

Times of Oman:

SOHAR — A seminar on ‘The rising prices of consumer commodities, services and the scope of cooperation between consumers, traders and distributors’, will be organised on Monday at the Sohar branch of the Oman Chamber of Commerce and Industry by the Omani Association for Consumer Protection. The opening ceremony will be presided over by Ahmed bin Sulaiman Al Maimani, undersecretary for administrative, financial and regional affairs at the Ministry of Commerce and Industry.

The aim of this seminar is to highlight the major role played by the association in protecting consumers, raising the consumers’ awareness of their rights, protecting such rights and protecting consumers against price hike, profiteering, imitation and fraud. “It also aims at raising the consumer awareness of the scopes of cooperation between consumers, traders and distributors,” said Said bin Nasser Al Khusaibi, chairman of the Omani Association for Consumer Protection and spokesman for the seminar.

In a statement to ONA, Al Khusaibi said the keynote speaker at the seminar, Dr Mohammed bin Ibrahim Ebeidat, chairman of the Jordan-based Arab Union for Consumer Protection, will highlight the price hike in consumer commodities and services in addition to scopes of cooperation among consumers, traders and distributors.
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It's high time the inflation issue was paid more attention...the Middle East is suffering from "imported inflation" as the weakening US Dollar drags down the value of the OMR, AED etc...so far Oman has resisted the calls to revalue the OMR...

Click on the header to go to the original post in Times of Oman.