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Monetary Policy in Saudi Arabia
ECON1311: Introduction to Macroeconomics
Section: 202
Assignment 2:
Monetary Policy in Saudi Arabia
Instructor’s name: Dr. Mahmood O. E. Hamad
Due Date: 18th December, 2012
Done by:
Ghadah Kamal
201000412
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Monetary Policy in Saudi Arabia
1. Implementation:
The implementation model is described as a short term to medium term demand
oriented annual econometric model built over an input and output scope. the
behavioral relationships for it are concentrated on the private non oil sector, inverting
economic consequences of monetary or fiscal policy actions taken by the Government
in continuation of plan targets, as well as encouragements from the oil sector or from
outside. These properties bring the model in line with the mainstream of policy
oriented macroeconomic prediction models in industrialized market economies. The
main purpose of implementation model is to monitor the plan implementation, but
also it's useful at the plan preparatory stage too. The model can provide an updated
picture by using the prior indicators of the economic development in Saudi Arabia
(Per Richard Johansen, 1996).
2. General Description of the SAMA, Managements and Functions:
SAMA is Saudi Arabian Monetary Agency. It was established in 1952 in King
Abdulaziz time. Now, the governor for it is Dr, Fahad AlMubark and the vice
governor is Dr. Abdulrahman AlHamidy. Also, there are deputy governor for
technical affairs, and for administration and finance. The governor and vice governor
stays 4 years, and the other members stays 5 years. There are many functions for
SAMA such as: issues national currency and Saudi Riyal, manage Kingdom's foreign
exchange reserves, promotes the growth and assure the soundness of the financial
system (Saudi Arabia Monetary Agency, 2012).
3. Banking System in Saudi Arabia:
The banking system in Saudi Arabia is governed by SAMA (Saudi Arabia Monetary
Agency). The view for Saudi Arabia banking system stays stable. There are four key
drivers to this view: First one is good operating environment. Second one is low
problems on loan levels. Third one is strong loss reduction capacity. Fourth one is the
sector's stable, which means low cost deposit base and amble liquidity. The strengths
of the system will stay counterbalanced by structural weaknesses. Those structural
weaknesses are: high loan, deposit concentrations and the financial opacity of a
certain family (Investors, 2012).
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Monetary Policy in Saudi Arabia
4. Money Functions:
There are three money functions depends on the services it provides. First function is
medium of exchange. It is the most important function to facilitate transactions. In
this function we don't use money, but we exchange the goods and services together.
The second function is the store of value. Here, the money most held its value over
time. The money is not unique in this function because there many other stores of
value such as land and works of art. The third function is unit of account. In this
function, if we know the price or value of good, it will enable the supplier and
purchaser to make decisions about the good (Functions of Money, 2009).
5. Exchange Rates and Factors that Influence them:
Exchange rates mean the value of the currency when we changed to other contry's
currency. There are three ways of exchange rates which are: currency rate, currency
converter and Gregorian monthly exchange rates. First way is the currency rate. There
are a schedule of the currency against Saudi Riyal and the closing price, for example:
UAE Dirham its closing price is 1.0211 and Australian Dollar is 3.9622. Second way
is the currency converter. This way is like an equation we put the Saudi Riyal and we
choose a country and it does it for me and gives me the price. Third way is the
Gregorian monthly exchange rates. It's a schedule for each month exchanging rates
(Saudi Arabia Monetary Agency, 2012). There are six factors influence exchange
rates which are: public debit, political stability, current account deficits, terms of
trade, economic performance and differentials to inflation.
6. Relationship between the Dollar & Saudi Riyal:
One Saudi Riyal is equal to 3.75 Dollar. Nowadays, there are many opinions emerged
about rising the value of Saudi Riyal among the Dollar, that's because the fall of the
dollar, oil prices are in the highest levels and a bright economy are factors that making
pressure to raise the value of Saudi Riyal. The big disadvantages of higher the value
of Saudi Riyal is the cost of exchange rates is really high and it will harm Saudi at the
first. SAMA said that there is no intention to change the current foreign exchange
system (Al-Bagmi, 2007).
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Monetary Policy in Saudi Arabia
7. Inflation in Saudi Arabia:
Inflation is arising in Saudi Arabia. It's recorded in November of 2012 at 3.90. This
higher inflation charge is a sign of deeper structural issues in the economic climate,
especially with respect to food and housing (AlHamaidi, 2011). This inflation causes
a weak riyal that's why there were arguments to exchange the rate. The arguments are
said because raising the value of Riyal will cut the price of imports, and that will
decrease the imported inflation. JIC (The Saudi Jadwa Investment Company) believes
that no relationship between raise the value of riyal and lower the inflation. Inflation
is focused on specific areas not the imported goods (Al-Bagmi, 2007).
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Monetary Policy in Saudi Arabia
References:
Al-Bagmi, M. (2007). Saudi Riyal to Continue Pegging to the Dollar. Retrieved December 15,
2012, from The MEMRI Economic Blog:
http://memrieconomicblog.org/bin/content.cgi?article=14
AlHamaidi. (2011). Inflation in Saudi Arabia . Retrieved December 16, 2012, from AlHamaidi:
http://www.alhamaidi.com/inflation-in-saudi-arabia
Functions of Money. (2009). Retrieved December 15, 2012, from CliffsNotes:
http://www.cliffsnotes.com/study_guide/Functions-of-Money.topicArticleId-9789,articleId9745.html
Investors, M. (2012, October 8). Saudi Arabia's Banking System outlook remains stable.
Retrieved December 16, 2012, from Moodys: http://www.moodys.com/research/MoodysSaudi-Arabias-banking-system-outlook-remains-stable--PR_256764
Per Richard Johansen, K. A. (1996). The Iimplementation Model for Saudi Arabia. Oslo:
Statistics Norway.
Saudi Arabia Monetary Agency. (2012). Retrieved December 16, 2012, from SAMA:
http://www.sama.gov.sa/sites/samaen/AboutSAMA/Pages/SAMAFunction.aspx
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