Muscat: The Policy Actions Taken During the Pandemic and Post-pandemic Recovery so far have Diminished the Short-Term Risks to Financial Stability A battery of financial, monetary, and fiscal measures taken by the government and central bank to support the businesses and households through the COVID-19 pandemic ensured that the economy remained well-poised for a swift recovery once the pandemic subsided. Large-scale vaccination and less-lethal mutations of coronavirus supported the withdrawal of all COVID-related restrictions in Oman late in 2021.

The post-pandemic recovery in Oman has been rapid, which was duly supported by favorable oil prices. The financial sector, which had been instrumental in the provision of credit and financial services throughout the pandemic, continued to sport a fair amount of resilience with the capacity to dampen any vulnerabilities should they materialize. Overall short-term risks to financial stability have significantly declined compared to the previous year.

Higher-for-longer Commodity Prices, Supply Chain Constraints, and Emerging Uncertainties might Further Fuel Inflationary Pressures and Decelerate Recovery in Some Countries The demand for commodities has been strong as economies emerged from the pandemic and recovery started to pick up. The surge in demand has pushed up the prices of commodities. The ongoing conflict in Europe and uncertainty further raised energy prices. Future price data suggests that the oil prices will remain higher for the next 12 months or beyond.

Moreover, soaring food prices and supply chain pressures have further exacerbated the inflation outlook. The ensuing monetary policy tightening to keep inflation in check may decelerate the growth and setback the global recovery process. Markets are eagerly awaiting positive news inflow regarding the conflict.

An amicable resolution of the conflict will help restore confidence and relieve some pressures, while any further escalation or a delay in the peace process will elevate downside risks for recovery and financial stability. Gains from Higher Oil Prices Dwarf the Inflationary Pressures. Moderate Inflation Does not Pose any Imminent Concern for Financial Stability in Oman Despite the global inflationary concerns, inflation expectations in Oman remain moderate. Unlike in many other economies where property prices and rents grew at record rates during the pandemic, the property prices in Oman fell in 2020 due to a decline in population and stabilised in 2021.

Due to ample supply, housing costs are not expected to rise sharply in the near term. Moreover, the prices of utilities (water, gas, electricity) are administered, the price of fuel for the year 2022 has been capped at the October 2021 level, and the communication sub-index has been almost flat though slightly declining for almost a decade.

Considering this, although landed cost of some food items in particular grains and edible oil will contribute to higher prices, the inflation will remain benign for over 50 percent of the consumer basket. As an oil exporter, rising commodity prices are a net positive for Oman as the higher proceeds from hydrocarbons have provided ample fiscal space to the government to counterbalance any inflationary pressures with targeted interventions to complement the impact of monetary policy actions.