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ECON 1311: Introduction to Macroeconomics
The MONETARY POLICY IN SAUDI ARABIA
Names:
Noura AlSubaie -200901747
Hanan AlSubaie -201000231
Section: 201
Dr. Mahmood O.E. Hamad
19/12/2012
INTRODUCTION :
One of the most effective tools for achieving progress and economic prosperity to any
nation is adopting a balanced and strong monetary policy. In other words, it is
considered as one of the most important methods used by the Government to affect
the economy. The Saudi Arabian Monetary Agency (SAMA) is responsible for
carrying out this task. Monetary policy should concentrate on the fiscal policy. One
of the most essential tasks of the monetary policy is fine-tune the influences of fiscal
policy.SAMA is responsible for achieving several targets. These tasks include shortterm interest rates, growth rates of narrow money and broad money, monetary
conditions, inflation, the exchange rate and other economic indicators. This project
describes SAMA's implementation and functions, discusses banking system, money
functionsand factors that influence the exchange rate and sheds light on the relation
between the dollar and the Saudi riyal and inflation in Saudi Arabia.
1. Implementation.
In order to implement the balanced monetary policy, SAMA uses some policy
instruments which affect money market conditions. The first tool is adopting the
minimum reserve policy. In order to keep a percentage of the customers' deposits,
banks should keep cash reserves according to SAMA policy. This can be done tomake
sure that the banks have enough liquidity to cover their customers’ deposits. Fewer
reserve requirements had the impact of pouring permanent reserves into the banking
system that at thattime was suffering from an imbalance between sources and uses of
fundsdue to robust economic activity and surging demand for credit. Moreover,
SAMA can impose reserve requirements on disputes in non – banks while interbank
transactions are not under the control of reserve requirements. Deposits by riyals in
the Saudi national banks are restricted to reserve requirements. The Saudi Monetary
policy adopts the system that reduces the effect of reserve requirements. These
requirements can reduce the amount of liquidity.
2. General description of the SAMA, managements, functions.
Saudi Arabian Monetary Agency (SAMA) is the central bank of the Kingdom of
Saudi Arabia. It was set up in 1952. It plays a very important role in forming the
policy of Saudi Arabia. It does not only affect the economy of Saudi Arabia, but it
also the other aspects of the Saudi life. It plays five main functions. The first function
is that it issues the Saudi riyal, the national currency of Saudi Arabia. Secondly, it
plays the role of a banker to the Saudi government. In addition, all commercial banks
are subject to SAMA. The most important function is managing the kingdom's foreign
exchange reserves. The other two functions include conducting monetary policy for
developing price and exchange rate stability and developing the growth and making
sure the soundness of the financial system. (Al-Jasser, M &Banafe, A)
3. Banking system in Saudi Arabia.
The banking system in Saudi Arabia is ruled by SAMA. It is governed by a group of
directors. It is headed by the Governor, Hamad Saud Al- Sayria, the vice governor is
Dr. Ahmed Al – Malek. There are three non – governmental employees. It follows the
directions of the council of ministers. Moreover, all the decisions of SAMA are made
under the control of the minister of finance and economic affairs. Saudi Arabia's
banking system is one of the safest in the world because it is the most low- risk
banking sector in the Middle East.(Sambidge A - 2011)
4. Money functions.
Saudi Arabia did not have any formal money and banking system till the mid of the
twentieth century. Because of the increase in the oil revenues, foreign and domestic
banks were formed. They focused only on making short-term loans to finance
imports, commercial trading, and businesses catering to pilgrims.AMA, and foreign
currency holdings. These included the Pension Fund, the General Organization of
Social Insurance, and the Saudi Fund for Development. According to SAMA, there
are three roles of money. They are pricing, payment and investment. (Staford, M
2010)
5. Exchange rates and factors dose influence the Exchange rate.
Thereare six main factors that determine exchange rates. These factors affect the
trading relationship between two countries. The first factor is Differentials in
Inflation. The value of the currency is determined by the inflation rate. The lower the
inflation rate is, the more value the currency has and therefore its purchasing power
rises. The second is the differentials in interest rates. There is a high correlation
betweeninterest rates, inflation and exchange rates.By manipulating interest
rates, SAMA tries to control both inflation and exchange rates. It is noteworthy to
mention that lenders earn a lot when there is a rise in exchange rates. The third is the
current – account deficits. The current account refers to the balance of trade between a
country and other countries that have trading relations with it, including all payments
between countries for goods, services, interest and dividends. A deficit means the
current account that reveals that a country spends more money on foreign trade than it
earns. The fourth factor is the public debt. The increase in the public debt leads to the
increase in the rate of inflation. The fifth factor is terms of trade which can be
measured by the price of a country's exports. In other words, when the price of a
country's exports increases and becomes higher than the price of its imports, this
means positive terms of trade. The sixth factor is the political stability and economic
performance. Saudi Arabia is a stable country since it is the largest oil producing
country and it does have good terms of trade. Moreover, it does not suffer from any
political and economic problems because of the good economic system adopted by
SAMA. (Bergen, V (2010)
6- Relationship between the dollar & Saudi Riyal.
The main target of the Saudi Arabian Monetary Agency is to issue and strengthen the
Saudi currency and stabilize its internal and external value according to Article 1 of
SAMA’s charter. There are several elements that are put into the consideration of
SAMA. The first one is the price stability. In Saudi Arabia, monetary policy is related
to exchange rate policy. In other words, SAMA aims to keep the dollar/riyal exchange
rate as stable as possible. The dollar/riyal exchange rate was often adjusted to keep
the Saudi Riyal’s strength against the dollar. The second element is the balance of
payments considerations. The third and most important element is creating stability
and confidence. It is noteworthy to mention that the Saudi riyal is closely affected by
the dollar since oil revenues are influenced by the value of the dollar and this means
float of the value of the Saudi Riyal against other currencies. By adopting sound
policies, SAMA could achieve the stability of the value of the Saudi Riyal.
7- Inflation in Saudi Arabia.
The inflation rate means the general increase in the price measured against purchasing
power. The inflation rate in Saudi Arabia has not increased a lot. According to
SAMA, the inflation rate is 3.90 percent according to SAMA. It is noteworthy to
mention that the inflation rates have increased a lot in all parts of the world. In Saudi
Arabia, it does not increase a lot. (Al-Jasser, M &Banafe, A)
CONCLUSION :
To sum up, SAMA plays a very important role in forming the monetary policy in
Saudi Arabia. There are many factors that influence the monetary policy of Saudi
Arabia. For example, it is an oil producing country and it is a rich country. However,
if The Saudi Arabian Monetary Agency does not adopt good monetary policies, there
will be no stability in the Saudi economy.
REFERNCES :
1- Al-Jasser, M &Banafe, A (2012) " Monetary policy instruments and procedures in
Saudi Arabia"
(http://www.bis.org/publ/plcy05j.pdf)
2- Bergen, V (2010) "Six Factors that Influence Exchange Rates"
(http://www.investopedia.com/articles/basics/04/050704.asp#axzz2F0E6OLOV)
3- Sambidge A (2011) "Saudi Arabia's banking sector among world's safest"
(http://www.arabianbusiness.com/saudi-arabia-s-banking-sector-among-world-ssafest-429229.html)
4- Staford, M (2010) "Saudi Arabia-MONEY AND BANKING"
(http://www.mongabay.com/history/saudi_arabia/saudi_arabiamoney_and_banking.html)