Download Monetary Policy ECON 1311: Introduction to Macroeconomics Fall

ECON 1311: Introduction to Macroeconomics
Fall 2012\2013
Instructor: Mahmood O. E. Hamad
Section: 203
Monetary Policy
Project by:
Asma Almulla - 201000877
Samah Althikrallah -201000696
Monetary Policy
Implementation of Monetary Policy:
Monetary policy is one of the ways that the government uses in influencing the economy. That
mission is connected to the central banks to affect monetary and financial conditions in order to
achieve the extended macroeconomic policy purposes of low inflation , maintain the stability of
domestic prices and currency exchange rate and sustainable the growth of economic. In Saudi
Arabia, this is accomplished by (SAMA) the Saudi Arabian Monetary Agency. This paper
discusses the actions that SAMA taken to reach the desired deportment of monetary policy.
SAMA:
Central bank is defined as the entity responsible for overlooking the monetary system for a
country or group of countries. In 1952, Saudi Arabian Monetary agency (SAMA) was
established to governed the banking system and assist like the central bank. SAMA's purposes
contain several functions to set the country's general monetary policy. It improved several
categories intended to provide a quantity of multifaceted economic, exchange and regulatory
roles. For example, maintains the steadiness of the Saudi riyal exchange rate and prices, oversees
and regulates the commercial banks, manages general debt and the Saudi’s foreign exchange
reserves, ensures the soundness and supports the development of the financial system. SAMA
had a little adaptability in adjusting reserve and liquidity requirements for commercial banks. It
enlarge the credit base by placing deposits in commercial banks. Earlier in 1990-1991, this
period saw the gulf war and banking system
has shocked because exchange has hearten
investors looking for shorter-term investments and share prices and trading volumes have
expanded piercingly, but SAMA has strength intervene support that followed by economic
prosperity. Today SAMA management is representing in a governor who is Dr.Fahad
AlMubarak and his vice Dr. Abdulrahman AL-Hamidy. The Deputy Governor for Technical
Affairs is Dr. Abdulrahman Alkalaf and the Deputy Governor for Administration and Finance is
Ibrahim Abdullah Al-Nassar. The period of appointment for the Governor and Vice-Governor is
4 years and for the further members is 5 years. The appointment could extendable by royal order.
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Monetary Policy
Banking system in Saudi Arabia:
“Saudi Arabian banks remain in a healthy financial condition, with strong economic
fundamentals, robust growth in most areas and a high likelihood that their recent impressive
performance will continue into 2012” (Timewell, 2012). Saudi banking system composed of the
Saudi Arabian Monetary agency, the banks and other institutions, which offer services and
acquire deposit that help people and companies in making and receiving payments. Nowadays,
Saudi banking system position remains stable because of a benignant working environment, a
low cost deposit base and plenty liquidity and low problem loans. Moreover, SAMA and banks
contributed in investing significant resources to improve the Saudi’s banking technology to cover
a extensive range of services such as (ATM) automated teller machine, current account, saving
account, Letter of Credit Documents and credit card. Furthermore, they newly institute the
Electronic Funds Transfer System that offers several advantages for the banks and their clients. It
permits straight transfers of payments and provides safe and precise payments machine. In
addition, the central trait of an islamic financial system is the complete forbiddance of the
payment and receiving of interest. Accordingly, there are some Saudi banks have chosen to bring
their economic systems with the policies determined by Islamic law such as Al Enma Bank and
Al Jazirah Bank.
Function of Money:
There are three services that frequently provided and determined by money. Money functions
as a medium of exchange, as a store of value, and as a unit of account (Chandra, 2001). The
major function of money is to be a medium of exchange. Without money, all transactions would
have to be run by barter, this system requires direct exchange of one good or service for another.
What makes barter system complicated is that a one has to own a good or service of a value that
is equally matched with the particular good or service value’s that he\she wants in order to
procure it, which the supplier is also wants. The second function of money is to be a unit of value
or a unit of account. It offers an expression and gauge of the value of goods and services. Having
a knowledge of a good's value, that is expressed in terms of price which is number of monetary
units that can be exchanged for a good or service, facilitates both the seller of the good and the
buyer to appoint resolutions about the number of goods to sell and the number of goods to buy.
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Monetary Policy
The function of a store of value is executed when money turns into a monetary unit and a
medium of payment. The owners of money are the owners of purchasing power that could be
spent with the passage of time. The money owners know that money can be used to buy and
purchase any good or service at any time as long as it have a steady purchasing power.
Exchange rate and factors that influence it:
Exchange rate or as it also known foreign exchange are the trading of two countries’
currencies between each other. It is a central element of most international transactions. It is also
consider the value of a currency compared to another currency. For example, an interbank
exchange rate of 1 European Union Euro (EUR, €) to the Japanese yen (JPY, ¥) means that €1
will be exchanged for each ¥107.30 and vice versa. Because of the circumstances surrounding
the supply and demand on the pertinent currencies exchange rate is determined. When the
demand of a currency is less than the supply, it becomes less valuable. That means people want
to hold their wealth in another form or other currency, it is not that they do not want the money
itself. In addition, there are some factors influence the foreign exchange rate. Interest Rates, the
higher it is in a country the higher the demand of that countries’ currency. Unemployment, when
it increase, the customer spending fall (demand), hence, the supply will also decrease, and
exchange rate depreciation is to be expected. Moreover, inflation, the currency of a country is
much valuable whenever the inflation of that country is low. For example, when inflation in US
is lower than the other countries, the competitiveness of exporting in US will grow and there will
be a rise in demand for United state dollar to buy US goods. Additionally, there are other factors
that impact the exchange rate such as, Government Intervention, Balance of Payments, Central
Bank Actions, and so on.
Relationship between the dollar & Saudi riyal:
The relation between these two currencies is an interbank exchange rate of 1 United State
Dollar (US, $) to the Saudi Riyal (SAR,SR) means that $1 will be exchange for each 3.75 SR or
that 3.75 will be exchanged for each $1. This rate is fixed since January 2003.
Inflation in Saudi Arabia:
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Monetary Policy
One of the most important issues of economy that has a great deal of attention is inflation in
the public and likewise the policy circles because of its remarkable impact on an economy. In
Saudi, inflation turned into a serious problem during the 1970 threatening the standard of living.
Despite that, between 1982-2003 the rate of inflation was low, the period which followed the oil
boom. During that period, the inflation in saudi fluctuated between very low inflation and
deflation, with an average rate below one percent. However, the rate has grown rapidly since
2003, and it reached its maximum in 2008 with a percentage of 11.1. Yet, as a result of the world
financial crisis, the rate of inflation had decreased during the last quarter of 2008 and during
2009. Nevertheless, it has started rising again since 2010. In 2011, the inflation average was
about 5 precent and in 2012 the rate was expected to drip under 4 percent. In spite of the fact that
the rate should remain under 4 percent till the end of the year, food and tobacco experienced an
increase by 21 percent. This was because of the recent attempts by Saudi authorities to diminish
smoking, by increasing the the tobacco price and prohibiting smoking indoor. On the other hand,
food prices have decreased to 4 percent inflation, yet, it is expected to rise again. One possible
way of curbing the level of inflation, the Saudi economy needs to be reconstructed in a way to
diversify the economy and increase the national output leading to reduction its dependency on
import.
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Monetary Policy
References:
Al-bassam, K. A. (1999). Domestic and External Sources of Inflation in Saudi Arabia: An
Empirical Study. Economics and Management, 13(1), p1-30.
Altowaijri, H. A. (2011). Determinants of Inflation in Saudi Arabia. World Review of Business
Research, 1(4), p109-114.
Aziz, M. (2012, November 28). Inflation in Saudi Arabia to Remain Moderate. Middle East
Financial, Business and Investment News. Retrieved December 12, 2012, from
english.nuqudy.com/Gulf/Inflation_in_Saudi_-3986
Chandra, d. (2001, June 12). Functions of Money. Hub pages. Retrieved August 24, 2012, from
http://dilipchandra12.hubpages.com/hub/Functions-of-Money
Corporate and Investment Banking Division. (2010). The Foreign Exchange Market.
Johannesburg: Standard Bank.
Pryor, F. (1985). Journal of comparative economics. The islamic economic system , 9(2), 197223.
Sama functions. (n.d.). Retrieved from
http://www.sama.gov.sa/sites/samaen/AboutSAMA/Pages/SAMAFunction.aspx
Sama management. (n.d.). Retrieved from
http://www.sama.gov.sa/sites/samaen/AboutSAMA/Pages/SAMAManagement.aspx
Savard, K., Reeve, J., Gilmour, A. B., Agha, R. A., & Ahmed, T. (2010). Inflation in Saudi
Arabia: Drivers, Trends, and Outlook. Riyadh: Samba Financial Group.
Sultan, Z. A. (2011). Inflation in Kingdom of Saudi Arabia: A Bound Test Analysis. European
Journal of Social Sciences, 24(2), p237-245.
Timewell, S. (2012 , April 2). Saudi arabia's banking sector hits new heights. Retrieved from
http://www.thebanker.com/Banking/Saudi-Arabia-s-banking-sector-hits-newheights?ct=true
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