## Monetary Policy Transmission in Oman

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**Canonical URL:** [Monetary Policy Transmission in Oman](https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024018.pdf)

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### Key findings
- Since the beginning of the current Fed tightening cycle in March 2022, the CBO has followed Fed policy rate hikes closely to maintain the OMR-USD peg; policy rates increased by 550 basis points.
- Interest rate passthrough in Oman has been weak compared to GCC peers; deposit and lending rates in Oman were almost flat year-on-year at the end of 2022, while deposit rates rose by about 55 basis points and lending rates rose by 65 and 90 basis points in Saudi Arabia and the United Arab Emirates, respectively.
- Financial conditions in Oman have not tightened since January 2022 and have somewhat eased because of accelerating credit growth and lower external spreads.
- The divergence in passthrough relative to peers cannot readily be explained by the share of unremunerated deposits or excess liquidity alone; Oman ranks similarly to other GCC economies on these characteristics.

### Econometric evidence on passthrough
- Regression results for other GCC countries (excluding Oman): a 100 bps Fed tightening correlates with a 34 bps increase in deposit rates and a 43 bps increase in lending rates after one year.
- In Oman:
  - There is no statistically significant increase in deposit rates in response to higher US rates.
  - The impact on lending rates is half as large as in other GCC countries.
  - Passthrough from higher policy rates into credit quantities is statistically indistinguishable from zero; higher policy rates on average are not affecting credit growth.

### Credit dynamics
- Private sector credit growth in Oman stands at about 7 percent (y-o-y) by end of 2023H1, driven by strong growth in both personal loans and corporate loans.
- Private sector credit growth in Oman has accelerated over the past 18 months, making it the second highest in the GCC.
- While nominal credit growth in other GCC countries is not significantly affected by higher US rates (sign negative), real credit contracts by 3.7 percentage points in response to 100 bps higher US rates (other GCC evidence).

### Drivers of weak passthrough
- Excess liquidity and limited interbank market activity persist in Oman; effective lending rates on OMR loans have slightly fallen since the beginning of the Fed tightening cycle.
- Personal loans account for 40 percent of the market and are subject to a 6 percent interest rate cap, constraining passthrough.
- FX lending accounts for one-eighth of the market; effectively, the entire passthrough of higher policy rates into lending rates in Oman has been driven by FX lending, as domestic currency lending rates have marginally declined.
- Excess liquidity has been a pervasive feature of the Omani banking sector including during times of low oil prices.
- Other institutional features noted: reserve requirement can be partially met with sovereign bond (up to 2 percent); certificates of deposit have not been used since 2015.

### Policy recommendations
- Continue the Monetary Policy Enhancement Project (MPEP) to enhance liquidity management and improve monetary policy implementation.
- Expand the CBO toolkit to absorb excess liquidity, including:
  - Prepare the resumption of issuance of certificates of deposit (not used since 2015).
  - Introduce further liquidity instruments for Islamic banks.
- Modify the reserve maintenance period for required reserves to begin on a weekday to facilitate better liquidity management and pave the way towards conducting open market operations.
- Remove the regulation allowing up to 2 percent of the reserve requirement to be met with sovereign bonds; reducing the number of reserve eligible assets would contribute towards tightening liquidity.
- Continue testing of a Call Money Market and Deposit Facility and put in place a full liquidity management framework to support effective liquidity allocation and encourage interbank market activity.
- Relax the interest rate cap on personal loans to ensure banks can adequately reflect related credit risk and maintain margins.
- Maintain healthy banking competition amid ongoing banking sector consolidation to support increased interest rate passthrough and access to credit for riskier borrowers, including SMEs.

*Source: IMF Selected Issues Paper SIP/2024/018, “Monetary Policy Transmission in Oman” (paper completed December 14, 2023; June 2024).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024018.pdf_