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25 April 2024

Riyadh quashes speculation on dropping peg

By Nadim Kawach


Saudi Arabia has again quashed speculation it intends to scrap the peg between its currency and the dollar – but left the door open for a riyal revaluation.

Prolonged discussions by the kingdom’s Shura consultative council at the weekend made it clear Riyadh has no plans to abandon the dollar link. Instead it is opting to use a massive petrodollar surplus to increase salaries and subsidies as a temporary measure to tackle inflation.

Saudi Finance Minister Ibrahim Al Assaf said the kingdom was monitoring the situation and would take the necessary measures to ease the problem – but admitted inflation could not be tackled overnight.

His statement at the Shura session, which covered mainly financial policies, coincided with a study by a leading Saudi bank, projecting a further increase in inflation in 2008, after it hit a record annual average last year.

“During the Shura council discussions Al Assaf denied any plan to unlink the Saudi riyal from the US dollar on the grounds that 65 per cent of the world’s nations are tied to the dollar,” the report said. “Detachment has nothing to do with the rise in cost of living.”

The meeting was attended by Hamad Al Sayyari, Governor of the Saudi Arabian Monetary Agency.

The report added: “Sayyari said linking the Saudi riyal to the US dollar does not have a major impact on inflation, adding that all exports by Saudi Arabia and other Gulf states are priced in US dollars. He added most developing nations use the dollar as a peg to their currencies.” But according to London-based newspaper Al Sharqalawsat, Al Assaf assured Shura members the “monetary authorities will not remain idle in respect of revaluing the riyal against the dollar when the need arises”.

He added: “Inflation has hit many countries. There are no magic solutions to this problem. Saudi Arabia is making efforts to ease the problem, particularly by increasing salaries by five per cent and subsidising consumer goods. These subsidies on essential goods, as well as indirect subsidies on many other commodities, will help us deal with the rising costs of living.”

Saudi Arabia, the largest GCC member, has reeled under rising inflation rates over the past few years because of a surge in food prices and rents, as well as the dollar’s decline and a sharp rise in domestic demand due to a sustained economic upsurge caused mainly by soaring oil prices.

After more than 20 years of relatively stability its price index exceeded four per cent last year – but rent and food price hikes were much higher. The National Commercial Bank (NCB), Saudi Arabia’s largest, said inflation in December hit 6.5 per cent – the highest monthly average in 12 years.

A NCB study said: “Rents and food remain the largest sources of inflation. While the repairs, rent, fuel, and water component of the cost of living index has significantly increased to 12.5 per cent, food and beverages surged to 9.5 per cent.

“The rise in inflation is largely due to domestic factors, which include rising aggregate demand, given the acceleration in private investments related to the mega-projects, and high government expenditure, the expansion in credit to the private sector and a tight housing market associated with an increasing population and inflow of expatriates.

“Inflation is also due to external factors including the surge in world prices of food, capital equipment, and raw materials,” the report said

“We believe inflation will accelerate in 2008 on the back of oil prices,” the study added.

The number
was Saudi Arabia’s inflation in December 2007, its highest monthly in 12 years