Govt spending, salary hike to stoke inflation


The inflation rate in Oman is mainly driven by price fluctuations in importing countries, which mostly involves food grains and other products

Muscat: High government spending and the recent decision to increase the minimum salary of Omani workers are expected to trigger inflationary pressures this year, according to market analysts.

Further, the inflation rate might exceed the government target of four per cent this year, mostly driven by a 'cost push' factor, rather than 'demand pull' factor. The standard of living of a sizable portion of workers, mainly unskilled and semi-skilled workers, will rise along with the minimum monthly salary, increasing from OMR220 to OMR325 beginning in July.

As much as 35 per cent of the Omani private sector workforce currently earns less than OMR325 per month. The Public Authority for Social Insurance (PASI) estimated that over 122,000 registered employees will receive higher pay due to the wage increase.

Additionally, the impact of the wage revision will be reflected more in the case of labour-intensive sectors such as retail and contracting, as opposed to financial or industrial sectors, as a large group of employees in these sectors remain in lower salary brackets.

"The cost to retailers will increase and they will try to pass the extra cost to consumers," said Anil Kumar, senior vice-president (Asset Management) of the Financial Corporation. He noted that all major retailers in the country will have similar cost increases and, as a result, they will try to maintain their margins by increasing the prices of goods.

Meanwhile, the National Centre for Statistics and Data said last week that the inflation rate in Oman in 2012 declined to 2.9 per cent from 4.1 per cent in 2011.  However, the consumer price index rose slightly, by 0.2 per cent in December 2012 compared to November 2012, due to a 0.7 per cent rise in prices of foodstuffs, beverages and tobacco, which constitutes approximately 30 per cent of the items counted in the index. In fact, the inflation rate in Oman is mainly driven by price fluctuations in importing countries, which mostly involves food grains and other products, as well as house rental costs.

After a rise in food prices and rent in 2010 and 2011, commodity prices and house rental costs were largely stabilised in 2012, which helped in bringing inflation under control. Anil Kumar said that the growth in demand due to salary revisions is unlikely to affect the prices of imported goods, mainly due to the fact that the suppliers' market is wide and, as such, demand from Oman is not a factor that could influence prices.

Crude price
However, the international price of crude oil is a major factor that could influence imported inflation in Oman. "If oil prices go up substantially, prices of imported goods will also increase due to high transportation costs," Anil Kumar noted.

EFG Hermes, in a research note, said that contracting companies which employ a large work force will be affected due to the minimum salary increases. "We expect these firms should be able to pass on the additional costs, fully or partly, provided their major clients are government entities. We expect the impact on other industrials firms to be relatively lower, as the number of employees is comparatively low. However, the firms with export operations and cement companies could find it difficult to fully pass on additional costs, as it would impact their competitive edge in their respective markets," noted EFG Hermes.

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