Download Monetary Policy

Monetary Policy
ECON1311: Introduction to Macroeconomics
Section: 203
Assignment 2: Monetary Policy
Instructor’s name: Dr. Mahmood O. E. Hamad
Due Date: 18th December, 2012
Done by:
Reem Al-Nobi
201000178
Malak Al-Turki
201000194
Page 1
Monetary Policy
Implementation
The central bank sets a range of targets at different times, those targets includes short term
interest rate, growth target for both narrow and broad money, inflation, exchange rate, the central
bank study the effectiveness of their policy over time by theoretical models of the economy,” the
riyal effectively pegged to the US dollar since the suspension of the SDR/riyal link in May 1981.
In practice, this has resulted in riyal interest rates closely tracking dollar rates, often with a small
premium, since the mid-1980s”( Al-Jasser, Banafe, 2012), this has led to limitation on the
monetary policy of Saudi Arabia
General description of the SAMA, managements, functions.
SAMA the Saudi Arabia monetary agency, was established in 1952 based in Riyadh, and it is the
central bank of the Kingdom Of Saudi Arabia which act as a banker to the government, issues
the national currency, supervising commercial banks, manages law, regulations, finance and
forging exchange reserves, “Conducts monetary policy for promoting price and exchange rate
stability and promotes the growth and ensures the soundness of the financial system”
(sama.gov.sa,2012), SAMA also operates a currency museum, that is located in Riyadh at the
head office building. Since December 13, 2011 the convener of SAMA is Dr. Fahad AlMubarak,
the vice convener is Dr. Abdulrahman A. AL-Hamidy since August 30, 2009.
Banking system in Saudi Arabia
The banking system of Saudi Arabia has developed to serve multifaceted economic, exchange,
and regulatory roles in a way that suits the monetary policy of the country by SAMA that
matches the Islamic view, which means the banking system can’t be a profitable institution, that
don’t pay or receive interest, when SAMA was founded the commercial banks was in the hand of
Saudi exchangers, nowadays “Twelve private commercial banks operated in the kingdom,
providing full-service banking to individuals, and to private and public enterprises. Eight of the
banks
were
totally
Saudi-owned.
Four
were
(countrystudies.us,2012).
Page 2
joint
ventures
with
foreign
banks”
Monetary Policy
Money functions:
Money is defined as any good that has a value and is commonly accepted and used by everyone
to perform transactions. The four essential functions of money are that it serves as a medium of
exchange, measurement of value, standard of deferred payments, and as a store of value. First of
all, money serves as a medium of exchange as we provide it as a replacement of something else
that we need and has the same value. Second, money is used as a measurement for the value of
goods and services that we buy or sell. In fact, it became easy nowadays to determine the
measurement of goods and services as money provides a language of economic communication
(Sinha, 2012). Third, money is used as a standard of deferred payments as our purchases in the
present are credited for the future, in other words “it’s used as a standard for specifying future
payments for current purchases” (Economic glossary, 2012). Fourth, money must store its value
in order to work as a medium of exchange. Since money is commonly accepted, it’s considered
more liquid than other stores of value. In short, each one of these basic functions is important in
a country’s economy and it makes everyday transactions much easier.
Exchange rates and factors that influence the exchange rate:
Exchange rate is defined as the current market price of one country’s currency when converted to
another country’s currency. A country’s market economy is affected by exchange rates. Some
factors that influence the exchange rate are:
1- Differentials to inflation: decreased inflation rate generates an increase in the currency value
and purchase power, “Countries with low inflation rate is more likely to see an appreciation in
their currency” (Economic.help, 2012).
2- Differentials to interest rates: High interest rates in a certain country are considered beneficial
for you when thinking to deposit and save money in that country’s banks; the reason is that the
higher interest rate provided by that country, the higher return you get from your savings.
3- Current account deficits: It shows that a county is importing more and exporting less goods
and services (Amadeo, 2012). So the country is spending money on goods and services imported
from other countries more than its receiving money from exporting.
4- Public debt: Exchange rates are sometimes affected by public debt. Public debt is determined
by the transactions made by a country including its exports and imports.
Page 3
Monetary Policy
5- Terms of trade: It’s a comparison between export prices to import prices measured in ratio.
When a country’s terms of trade is less than 100%, it indicates that they have more capital going
out than coming in.
6- Political stability and economic performance: Investors with big capitals always seek to find
stable countries in terms of inflation and flow of currency as they are interested in the goods and
services provided by that country.
Relationship between the Dollar and the Saudi Riyal:
The relationship between the dollar and the Saudi riyal in terms of exchange rate is that 1 Saudi
riyal is equivalent to 3.75 dollars. There are some factors that relate the dollar and the Saudi
riyal. The price of oil in Saudi Arabia is measured in dollars which indicates that exports of
Saudi Arabia are also measured in dollars. In addition, the relationship between the dollar and
Saudi riyal is positive in the long run which means both countries are benefited from this
relationship (Alfawaz, 2012).
Inflation in Saudi Arabia:
Inflation is defined as the rate at which the prices of goods and services go high while the
purchasing power falls down. Each country’s economy has a different rate of inflation depending
on their market economic situation. Inflation rate of Saudi Arabia was recorded by SAMA at
3.90% in November 2012. To analyze the inflation rate since 2003 to 2012, SAMA has recorded
the average rate within that period and found it to be 3.81%. The highest inflation rate recorded
during that period was 11.08% in July 2008 and the lowest was 0% in September 2004 (Trading
economics, 2012).
Page 4
Monetary Policy
Sources
Alfawaz, F. (2012). Saudi riyal and quantitative easing. Riyadh, Arab News. Retrieved from:
http://www.arabnews.com/saudi-riyal-and-quantitative-easing
Amadeo, K. (2012). The U.S. Trade Deficits. Retrieved from:
http://useconomy.about.com/od/tradepolicy/p/Trade_Deficit.htm
Economic glossary. (2012). Economic definition of standard of deferred payment. Retrieved
from: http://glossary.econguru.com/economic-term/standard+of+deferred+payment
Economic.help. (2012). Factors which influence the exchange rate. Retrieved from:
http://www.economicshelp.org/macroeconomics/exchangerate/factors-influencing.html
Sinha, A. (2012). what are the important functions of money? Retrieved November 22, 2012,
from preservearticles: http://www.preservearticles.com/201012271801/functions-of-money.html
Trading economics. (2012). Saudi Arabia inflation rate. Retrieved from:
http://www.tradingeconomics.com/saudi-arabia/inflation-cpi
Al-Jasser,M. Banafe, A. (2012). Monetary policy instruments and procedures
in Saudi Arabia. Retrieved from: http://www.bis.org/publ/plcy05j.pdf
SAMA. (2012). About SAMA. Retrieved from:
http://www.sama.gov.sa/sites/samaen/AboutSAMA/Pages/SAMAFunction.aspx
Countrystudies. (2012).Money And Banking. Retrieved from: http://countrystudies.us/saudiarabia/44.htm
Page 5