Download Monetary Policy in Saudi Arabia Alya Alnaimi 200901390

Monetary Policy in Saudi Arabia
Alya Alnaimi
200901390
Assignment 2
Section 201
Implementation:
SAMA (Saudi Arabian Monetary Agency), like other Central financial institutions, usually
formulates and implements monetary policy to control the circulation of money in the economy.
These tools include: Changing of the monetary base- SAMA achieves this by selling or buying
asset reserves, for example, exchanging bonds with money, therefore, reduce or increase supply
of money respectively. Dictating bank’s reserve requirements- this has the effect of altering of
the amount of money loanable to individuals, in case there is more money in circulation, banks
will be ordered to increase their reserves to limit loaning activities (Al-Hamidy, 2006). Changes
in the interest rates- the supply of money in an economy is influenced by the escalating interest
rates. This has the effect of reducing the liquidity of money hence lowers consumers’
expenditure. SAMA, in Saudi Arabia’s case, determines the rate of interest charged to
households. Lastly, SAMA uses currency boards to control foreign influence. That is anchoring
of a country’s financial base to that of a stable country. This move imports the value of money of
the anchoring nation and maintains a credible exchange rate that is fixed. Hence, foreign
influence on local currency is low or insignificant (Al-Hamidy, 2006).
SAMA general description, management, and functions
Saudi Arabian Monetary Agency is the central financial controller in Saudi Arabia. It was
established in 1952 and immediately developed financial policies, which were implemented the
same year. This was followed by expansion of the financial body through creating branches of
SAMA in Makah and Al-Madinah, in 1952 and 1953 respectively. SAMA authorized the
development of the Saudi Arabian currency, in stages, from the use of silver riyal to paper notes,
and by issuing royal decrees to adopt other forms of currencies. For example, the use of pilgrim
receipts for convenience purposes, whose denomination were in ten-riyals. The kingdom of
Saudi Arabia encountered an economic crisis in 1957. This happened a year after the resignation
of the founding governor, George A. Blowers and appointment of Mr. Raplh Standish as
governor. Consequently, this transition in SAMA governorship led to recognition of its
autonomy, and a board of directors were chosen to ensure effective administration and
management of funds. The management structure of SAMA is a typical formal system with a
specified hierarchy of authority. The strategic management comprises the Governor, who is the
head, and the Vice governor. The tactical level has the Deputy Governor for Technical Affairs,
Deputy Governor for Administration and Finance, and the Board of Directors. The operational
level comprises a team of appointed officers who implements the financial mechanisms proposed
(Saudi Arabia Monetary Agency, 2012). The functions of the Saudi Arabian Monetary Agency
are mandates similar to those performed by central financial institutions of other countries. These
functions include; being a custodian and issuance of Saudi riyal, in case of a severe shortage of
currency nationally. It also controls the activities of commercial banks by dictating their interest
rates. SAMA is also the government’s banker; it controls the foreign exchange reserve on behalf
of the kingdom. SAMA ensures growth and stability in the nation’s financial system. This is
achieved through promoting financial policies that favor import prices and exchange rate
stability.
Banking system in Saudi Arabia
Capitalization of the banking sector in Saudi Arabia has supported economic growth amidst
risks. Its ambitions to implement the Basel 3 Accords (recommended banking laws as directed
by Basel committee on Banking Supervision) attracted investors globally. Notably, developing
of Islamic bank products has enticed a wider net of clients. These events together with SAMA’s
move to liberalize the banking sector warrant a bright future for the banking industry (MeyerReumann, 2005).
Functions of money
Money acts as a unit of value or account. It measures the utility of all goods and services sold at
a price, in monetary terms. Money acts as a medium of exchange. This is because of its general
acceptance by the majority of Saudi Arabians as a means of clearing a financial obligation and
for its consistency in value. Money functions as a store of value: Money holders have the
potential of certain purchasing power, which is acceptable at the time of expenditure (AlHamidy, 2006). Lastly, money is preferred as a standard of deferred payments. This is because it
has unanimously been recognized as s store of value then future transactions are stated basing on
the same.
Exchange rates and factors that influence the exchange rates
Exchange rate is valuation of the currency of one country in terms of another country’s currency.
Several factors influence the same; for example, the flow of imports and export between
countries alters the rates depending on demand and supply of goods traded. Oil products tend to
have a high demand; therefore, it attracts high rates when its supply is low. Relative rates of
inflation between countries affect the flow of capital either way. This is because one side could
have reduced purchasing power due to devalued currency. The expenses incurred when
borrowing, which is brought by the differences in interest rates, alters the exchange rates
between countries. Relative growth and payment of bank securities, for example, stocks and
bonds can force adjustment in the interest rates of a country with less financial base.
Relationship between the dollar and Saudi Riyal
Saudi Riyal is a stable currency in relation to other currency in the Middle East and Africa. This
stability has linkage to the prices of oil products exported. On 7th December 2012, the exchange
rate of Saudi riyal against the dollar was 3.7500 buying and 0.2667 selling. Its stability is bound
to escalate with the increasing shortages in oil supply worldwide (Saudi Arabia Monetary
Agency, 2012).
Inflation in Saudi Arabia
Despite the high purchasing power of the Saudi Riyal, Saudi Arabia is no exception from
experiencing inflation. The cause of these general rises in prices emanates from prices of food
and housing rents. Severe droughts, excess domestic demands and consumption of imports
brings with it the high prices, which lowers the purchasing power of a country's currency. The
fixed exchange rate regime in Saudi Arabia helps it to control inflation and maintain it at
reasonable levels. This is done through ensuring that monetary policy formulated to control
financial flows compliment the fiscal policies established in the economy (El-quqa, 2006). This
move helps in stabilizing the currency and the economy of a country.
References

Al-Hamidy, A. (2006). Monetary Policy in Saudi Arabia. BIS Papers, 2(57), 302-304.

El-quqa, O. (2006). Saudi Arabian Banking Sector: biggest beneficiary of the economic
boom.
o Global Investment House, 2(41), 22-8.

Meyer-Reumann, R. (2005). The banking system in Saudi Arabia. Arab Law
o Quarterly; Jstor Journals, 10, 3, 207-237.

Saudi Arabia Monetary Agency. (2012). Organization Structure. Retrieved
o December 11, 2012, from
http://www.sama.gov.sa/sites/samaen/AboutSAMA/Pages/OrganizationStructure.
aspx