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Monetary policy in Saudi Arabia
Submitted by:
Abeer Al-Sayed
ID#201000962
Raghda Al-Awamry
ID# 201000219
Submitted to:
Dr: Mahmood Hamad
Macro Economics
Assignment2
December, 2012
Monetary policy in Saudi Arabia
1. Introduction
The Monetary Policy of Saudi Arabia is the central agency which device and control all
monetary policy guidelines which includes , the exchange rate mechanism , long-term view
planning for economics structuring , inflation control and interest rate .Saudi Arabian economy
is basically oil based economy where main sources of income for the government are coming
through these sources. The SAMA had instrumental in managing the huge revenue from
international markets through the sale of oil and its support products. To maintain the stability in
the economy SAMA had played the key role in devising the monetary and fiscal policy of the
country.
SAMA Management Functions:
SAMA is the Central agency for monetary functions policy makers in Saudi Arabia is headed by
Dr.Fahad Al Mubarak which controls and issue Saudi currency, monitoring commercial &
investment banks, managing foreign currency, control exchange rate system and Bank also
includes the designing and implementing the fiscal policies for better of Saudi economy. And
the SAME management functions include:
Functions:
 Control the printing and issuing the Saudi Riyals currency notes and manage its rate in
line with international exchange rate.
 Acts as a banker to banks and also helps government for funding proposes..
 Guide, monitor and supervises commercial banks.
 Devising monetary exchange policies and foreign reserve of Saudi Arabia.
 Plays an important role for promoting price mechanism of commodity and services which
is in line with exchange rate stability.
 Solely responsible for economic development polices, attracting foreign direct investment
in identified industries and better of Saudi economy.
Banking System of Saudi Arabia
Being the main exporter of oil with increase flow of foreign reserve in Saudi Arabia make this
as most economically sound nation in the middle east. With growing international and local
banking transactions, the Saudi banking system had been witness the step inclination of its
number of branches of various banks had been set up all across the Saudi Arabia. And the
Banking facilities are very advanced stages which in line of international standards. The Saudi
banks providing facilities for its local and corporate customers like Internet and mobile phone
banking, international Debit/Credit Cards are freely available. The local banks are providing
generous personal and business loans with very cheap interest rate. ,
Being the Islamic country, the central agencies are pursuing the Islamic sharia laws for banking
purposes. And mostly all bank are followed the Islamic banking system with non-existence of
Interest rate based banking system.
Money Functions:
Money function had been defined as it provides a store value, medium of exchange and used as
unit to purchase or sales goods and services.
 Medium of exchange. : It facilitates monetary transactions which involves direct
exchange of goods and services between the two parties. Money acts as the medium and
alternative to the barter system where one party offer goods/services and other part give
equal value in terms of money. As money is the primary value exists equally in all the
parties and can easily use to determine the value of goods and services.
 Store of value. Money is unique and it holds the value while reserve in home or put in
the investment activities. It acts as medium of exchange available in many convenient
denominations.
 Unit of account. : It acts as unit of exchange and can easily understand for determining
the value of goods and services. By knowing the value of products/services helps the
supplier to make quantity purchase decision easily.
Exchange Rate and factors does influence the Exchange rate mechanism;
The Saudi Arabian Monetary Agency (SAMA) is the sole agency control the exchange rate
mechanism in Saudi Arabia and it acts as medium for h foreign exchange receipts and payments
predominantly in US dollars.
Saudi Arabia had been pursuing the fixed rate exchange system with USD at (1 USD = 3.75
Riyals) in the year 1986. As this decision has been based on to control oil revenues and stabilize
the country economic and fiscal system. The main reason to peg with USD is to stabiles the oil
revenue in all economic conditions. And during recent and earlier economic recession the dollar
pegging helps the country benefited in short and long term economic objectives.
Inflation in Saudi Arabia
The inflation in Saudi Arabia is about the 4.4 % which is quite good with reference to
present economic conditions. The inflation rate is calculated with as percentage increase in the
price of goods and services compare to previous earlier. The key factors that contribute the
higher rate of inflation are higher consumer spending, generous credit facilities by banks and low
interest rates. And
SAMA is always acts as control authority by taking proactive action in
ensuring financial stability by introducing prudential guidelines and tightening credit criteria and
money supply.
The recent economic recession arise due to credit crisis effects on asset price inflation rate rise
because of money supply increase in the system. The SAMA had played the very important role
in tighten the credit policies and ensure the money supply in the market could not have the
negative markets. The Saudi Arabian monetary policy prime functions is to maintain the price
stability to
continuous monitoring and appropriate policy decision to maintain the growth
prospects about the Saudi economy. It acts as central agency to control the inflation rates,
interest rates, credit ratings to manage the economy effectively.
References:
1) http://www.sama.gov.sa
2)http://www.globalinv.net/research/SaudiBanking-092006.pdf