* 5 pct growth expected in 2014 as oil recovers, spending rises
* Foreign reserves around $16 bln, up 10 percent year-on-year
* Stable oil prices likely to wipe out 2014 budget deficit
By Suleiman Al-Khalidi
AMMAN, April 22 (Reuters) - Oman's economy should grow 4 to 5 percent this year, underpinned by stable oil prices and the billions of dollars spent on major projects in the past two years, the head of the Gulf country's central bank said on Tuesday.
Oman is spending billions on infrastructure to diversify its economy, said Hamood Sangour Al-Zadjali, and it hopes to attract more private investment. Projects include a $1.8 billion terminal at Muscat International Airport due to be completed this year.
"We are building airports. We are building seaports, a lot of roads are being built," Zadjali told Reuters in an interview in Amman. "Oman is like a huge workshop now ... this is generating increased economic activity."
Analysts say government spending on welfare and salary increases has also grown since 2011, to placate protesters demanding jobs and an end to corruption. Without the fiscal reserves of its Gulf neigbours, Oman has seen pressure growing on state finances.
The International Monetary Fund warned Oman would need to reform spending and find new revenue sources in coming few years to avoid a series of ballooning budget deficits.
The current trend of oil prices above $100 a barrel should help to cover a shortfall in this year's $35 billion budget, which assumed prices would average $85, Zadjali said.
"With the existing oil prices, I think the deficit will be wiped out," he said.
A projected rise in oil output to around 1 million bpd from the current 950,000 by year-end should also improve state finances, Zadjali.
Oman will continue to peg its currency, the rial, to the dollar, Zadjali said. The policy has anchored monetary policy and is helping to underpin the economy's favourable outlook.
"The rial is strong because it's pegged to the dollar and we don't expect the dollar to dip down," he said.
Foreign reserves managed by the central bank stand at $16 billion, up almost 10 percent year-on-year, Zadjali said.
Oman's central bank will continue withdrawing liquidity from commercial banks, which are flush with cash. Deposits rose 11 percent increase to 15.3 billion rials to curb inflationary pressure and ensure monetary stability, Zadjali said.
Inflation was expected to average 2 percent in 2014, cushioned by expectations that global food prices would remain at their current levels, Zadjali said. It fell to 0.6 percent year-on-year in February from 1.2 percent in January.
"Our inflation is imported, and we see our import bill this year staying as it unless there will be a catastrophic rise in food prices," Zadjali said.
($1 = 0.3850 Omani rials) (Reporting by Suleiman Al-Khalidi; Editing by Larry King)