SCENARIO

Omans fixed exchange rate regime linked to the US dollar serves the countrys economy well and remains an appropriate policy anchor for the sultanate, the International Monetary Fund (IMF) said. The currency peg to the US dollar continues to serve Oman well, given the oil dependent structure of the economy. The IMFs executive directors agreed that the exchange rate peg remains an appropriate policy anchor for Oman, helping to deliver low and stable inflation, the IMF said in its Article IV Consultation Staff Report. The International Monetary Fund noted that a more flexible exchange rate could support the development of Omans non-hydrocarbon tradable sectors over time.

However, a move away from the dollar peg would have limited benefits for competitiveness in the near term and remove an effective nominal anchor, the fund added. The Omani authorities expressed an open attitude towards moving to a more flexible exchange rate regime in the long-run as the importance of the non-hydrocarbon tradable sector increases. The Medium-Term Fiscal Plan and structural reforms are critical to support the peg, the IMF said. The IMF assessed that the sultanates external position in 2020 was substantially weaker than the level implied by fundamentals and desirable policies.

The Medium-Term Fiscal Plan and structural reforms therefore are critical to support the currency peg. The launch of the Monetary Policy Enhancement Project would enhance the effectiveness of monetary policy, the fund said. Since the last change in parity in 1986, Omans fixed currency peg has remained unchanged at US$2.6008 per riyal, according to the information on the Central Bank of Omans website.

The fixed peg and the associated stability of the exchange rate has contributed significantly to the congenial atmosphere for promoting trade, investment and growth in Oman. The monetary discipline embodies in the peg has also caused orderly monetary conditions in the system, according to the central bank. As per the IMFs estimates, Omans real GDP which contracted by 2.8 per cent in 2020 is expected to grow by 2.5 per cent this year and by 2.9 per cent in 2022.

The sultanates budget deficit and government debt rose sharply in 2020 but are projected to improve considerably over the medium-term with the implementation of the sultanates Medium-Term Fiscal Balance Plan, the IMF said. As per the funds estimates, the sultanates fiscal deficit widened to 19.3 per cent of GDP in 2020 but it is projected to decline to -2.4 per cent in 2021 and a surplus in 2022.

(Source: Muscat Daily 18 September 2021)

(Learning outcomes 2 assessed: Be able to discuss the importance of foreign investment decisions and Be able to evaluate different theories, tools and techniques of decision-making related to forex management in different organizational settings)

Task 1

More flexible exchange rate could support the development of Omans non-hydrocarbon tradable sectors over time. (The International Monetary Fund)

You should evaluate the above statement using different theoriesrelated to forex management in different organizational settings.

(15 marks)

Task 2

Development of Omans non-hydrocarbon tradable sectors requires foreign direct investment

Critically discuss the risks and advantages of foreign direct investment?

(10 marks)