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Saudi Arabia’s Monetary Policy
Name: Ghaida Almutairi
ID#: 201102118
Saudi Arabia’s Monetary Policy
Monetary policy are the guidelines put in place to determine the ease of
accessing and the cost of money supply in an economy; the aim is ensuring economic
growth, maintaining price stability, maintaining exchange rate stability, sustaining
balance of payment (BOP) equilibrium, ensuring full employment of locals, preserving
the neutrality of money, and equalizing income distribution. The monetary policy in
Saudi Arabia encompasses a wide range of fiscal functions that promote the nation to be
among the leading FDI destinations in the world. The governing body charged with
formulation, regulation, and execution of the Kingdom’s monetary policies is the Saudi
Arabian Monetary Agency (SAMA). This agency oversees the issuance of the national
currency (Saudi Riyal), supervises commercial banks’ transactions, ensures stability of
commodity prices and exchange rates stability, and maintains the Kingdom’s annual
economic growth. The Kingdom of Saudi Arabia is the world’s leading producer and
exporter of crude oil; it supplies 20% of the world’s demand for crude oil. The country
derives a significant of amount its revenue from crude oil, an extractive industry. The
Kingdom is in the process of diversifying the economy by strengthening the
service/hospitality industry.
Saudi Arabia’s central bank is the Saudi Arabian Monetary Agency (SAMA); it is
charged with maintaining progressive economic practices that are beneficial to the
citizens and foreign investors. SAMA was established on 4th October, 1952; it is currently
headquartered in Riyadh, the capital city of Saudi Arabia. Fahad Al Mubark is the acting
governor and head of SAMA. SAMA has the mandate of issuing and strengthening the
Saudi Riyal and stabilizing its internal and external value, handling banking affairs of the
government, and regulating commercial banks and foreign exchange dealers. For
example, supervisory bodies that include Saudi Arabian Monetary Agency and the
Capital Market Authority are empowered to conduct on-site inspections of financial
institutions (Middle East & North Africa Financial Action Task Force, 2010, p. 10).
SAMA implements the Shari’ah law in the financial sector. This is done to satisfy
consumers’ and international community’s interests such as non-terrorist associated
financial support, channeling, and reporting.
The banking sector in the Kingdom strictly adheres to Islamic Banking rules whose tenets
of operations adhere to Shari’ah based systems (Middle East & North Africa Financial
Action Task Force, 2010, p. 19). The Report affirms that Saudi Arabia has adopted antimoney laundering and counter-terrorist financing statutes since the year 2003 (p. 6).
Banks in Saudi Arabia carry out cash deposits, lending, financial guarantees and
commitments, trading in money markets, and issuing and managing means of payments
for instance cheques, debit and credit cards, and electronic money. The Saudi Arabian
Monetary Agency supervises such types of transactions (Middle East & North Africa
Financial Action Task Force, 2010, p. 20-21). Other transactions carried out by Saudi
banks include safekeeping and administration of cash and liquid securities on behalf of
their customers, money transfer, and foreign currency exchange. There were 23 banks
that were operating in the Kingdom by 2008: 12 were local banks, 5 branches of banks
from other Gulf Cooperation Council member states, and 6 branches of foreign banks
such as Deutsche Bank, JP Morgan Chase, BNP Paribas, and HSBC (Middle East &
North Africa Financial Action Task Force, 2010, p. 22; Saudi Arabia Banking Sector,
2006, p. 8).
The charter that established SAMA endorsed the body to stabilize the exchange rate; the
exchange rate of the Riyal against the US Dollar is pegged at Saudi Riyal 3.75 per dollar.
Two main reasons that dictate the pegging of the Riyal to the Dollar is that oil income is
denominated and received in US Dollar (Al-Jasser & Banafe, n.d.), and due to a
consensus reached by the Gulf Cooperation Council member states summit in December
2001 in Oman, which envisioned a unified currency by 2010 since a majority of Saudi
Arabia’s receipts and payments are in US Dollar (SAMA, 2012, p. 1). A number of
disadvantages arise from this arrangement; they include speculative positioning of the
Riyal when market participants short their dollars, no lasting economic benefits to the
government that devalues the Riyal in an effort to reduce its budget deficit, and the
creation of a virtually “floating” riyal against non-dollar currencies (Al-Jasser & Banafe,
n.d., p. 204-205), and generation of imported inflation (El-Quqa, 2006, p. 4).
SAMA is also mandated to minimize inflation. The two methods that measure inflation in
the Kingdom are the Cost of Living Index (CLI) and the Wholesale Price Index (WPI)
(Samba Report Series, 2010, p. 3). Khathlan (2011) emphasizes that the major
contributors of inflation are externally sourced rather than domestic. For instance, the
fixed exchanges rate of the Riyal against the US Dollar; the depreciating dollar against
the Euro and other currencies implies depreciation of the local currency. The local factors
attributed to inflation are mainly to food, housing, transport, and communication price
indexes. According to El-Quqa et al. (2006), the regulatory body attempts to suppress
inflation by either increasing reserve rates for commercial banks or issuing more treasury
bills; this process has ensured a history of low and stable inflation in the Kingdom.
In conclusion, Saudi Arabia operates on a pegged exchange rate of the Riyal to the US
Dollar. SAMA is charged with the responsibility of implementing the monetary policy;
the body plays a crucial role in stabilizing the entire Saudi Arabia’s economy through the
implementation of tight monetary policies. This has a knock on effect of ensuring a stable
investment destination and maintaining social cohesion amongst the citizens of the
Kingdom.
References
Al-Jasser, M., & Banafe, A. (n.d.). Monetary policy instruments and procedures in Saudi
Arabia. Retrieved from http://www.bis.org/publ/plcy05j.pdf
El-Quqa, O. M., Dash, S., Hasan F., Bhatt C., Tripathy A., & Marfatia, M. (2006). Saudi
ArabiaBanking Sector: Biggest beneficiary of the economic boom. Saudi Banking
SectorReport. Retrieved from http://www.globalinv.net/research/SaudiBanking092006.pdf
Khathlan, K. (2011). Inflation in the kingdom of Saudi Arabia: The Bound Test Analysis.
Retrieved from http://www.academicjournals.org/ajbm/pdf/pdf2011/14Oct/Khathlan.pdf
Middle East & North Africa Financial Action Task Force. (2010). Anti-money laundering
and combating the financing of terrorism: Kingdom of Saudi Arabia. Mutual Report.
Retrieved from http://www.fatfgafi.org/media/fatf/documents/reports/mer/MER%20KSA%20full.pdf
SAMA. (2012). Saudi Arabia’s Exchange Rate Arrangement. Retrieved from
www.sama.gov.sa/sites/samaen/OtherReportsLib/3.pdfSamba Report Series. (2010).
Inflation in Saudi Arabia: Drivers, Trends, and Outlook. Office of the Chief Economist,
Economics Department, Samba Financial Group, Saudi Arabia.