Saudi riyal weakens on dollar peg and high liquidity



Saudi Arabia’s riyal continued to decline against other major currencies this year under the pressure of the weak US dollar, complicating the Gulf country’s desperate efforts to reverse a rapid climb in inflation.

The Saudi riyal (SAR) has declined by between five and 11 per cent against the euro and the Japanese yen since the start of this year as it remained pegged to the dollar that has lost more than 30 per cent of its value over two years.

As a new government decision on higher bank reserves failed to stem excess liquidity and the weak riyal makes imports more costly, the world’s oil superpower could lose the fight against inflation unless it takes more radical measures, said Saudi bankers and economists.

In its latest bulletin sent to Emirates Business yesterday, the Saudi National Commercial Bank (NCB) said the decision last week by the Saudi Arabia Monetary Agency (Sama, central bank) to cut the reverse repo rate by 0.75 basis point to match a similar US cut eased pressure on the SAR value against the dollar.

“Lowering the rate eases pressure on the value of the riyal against the dollar and hence allows Sama to maintain a stable exchange rate. But with the weakening of the dollar, the riyal has significantly depreciated against other major currencies, making imports more expensive,” NCB said.

“Since the start of this year, the riyal has nominally depreciated by around 5.8 per cent and 10.6 per cent against the euro and the yen, respectively. This has contributed to inflation, which increased to seven per cent in January.
Lower rates have also stimulated the growth in broad money supply (M3). In fact, the previous hikes in the reserve ratio have not been effective in reducing the growth in private-sector credit,” added NCB, Saudi Arabia’s largest bank.
“Going forward, Sama will continue to follow the Fed on any interest rate cuts. Accordingly, the fight against inflation will require future co-ordination between monetary and fiscal tools.”

Sama’s figures showed broad money supply – a key factor in reining in inflation – swelled to an all-time high of around SAR815 billion (Dh799bn) at the end of January, nearly 3.2 per cent above its level at the end of 2007 and more than 23 per cent higher than a year ago.

Credit to the private sector grew by around three per cent to SAR594bn at the end of January compared to the previous month and by nearly 24 per cent a year ago. The increase reflected the failure of a government decision to force banks to raise reserve requirements to curb lending.

The figures showed a sharp rise in deposits allowed Saudi banks to expand their lending activity as they swelled to a record SAR743bn at the end of January compared to SAR717bn at the end of December and around SAR591bn at the end of 2006.

Citing a new Sama report this week, Reuters news agency said inflation in Saudi Arabia continued to rise despite government counter-measures, climbing in February to its highest level in 27 years to 8.67 per cent. It blamed soaring prices of food imports and a surge in rents as is the case in other Gulf oil-producing states.
In January, Saudi Arabia announced a 17-point plan to combat inflation but none of the points involved a revaluation of riyal or cap on rents. Instead the plan focused on higher wages for civil servants, subsidies and a 50 per cent reduction in the cost of port fees, issuing passports and other government services.
 It was estimated to cost the government SAR67bn in three years.
Experts said they doubted such measures would push down inflation and expected the country to take additional steps in the near future.

“We think the new government measures will have a broadly neutral impact on inflation. The public sector pay rise is below the current rate of inflation and is, therefore, unlikely to have much impact on inflation.

Lower charges for government services, port fees and various measures to tackle anti-competitive behaviour and increase consumer awareness may reduce the price of some goods, but will not have a pronounced immediate impact on overall inflation.
Accelerating housing construction should ease the rise in rents over the long term,” said Brad Bourland, chief economist at Jadwa, a well-know Saudi investment and financial services company.
“The strength of the 17-point plan is that it is generally restrained and employs a market-oriented approach to tackle some of the main causes of inflation. For example, rather than putting a cap on rents, it calls for more rapid construction of accommodation, which will help ease the underlying shortage of property.

“One drawback to this approach is that it takes time to have an impact on inflation. We, therefore, think the government will examine more options to moderate inflation,” he said.


The anti-inflation plan


Five per cent will be added to the salaries of public sector workers in each of the next three years. Social insurance benefits will be raised by 10 per cent.

The government will absorb 50 per cent of the cost of port fees, issuing passports, traffic licences and transferring ownership and renewing the residency permits of domestic workers.

The government will continue to control the prices of basic commodities; these controls will be reviewed after three years

A National Housing Agency will be established and the construction of public housing that has already received budgetary approval will be expedited.

The supply policy, which aims to diversify sources of supply of goods to ensure that local demand can be satisfied at reasonable prices, will be approved.

Steps will be taken to encourage greater competition, eliminate efforts by the private sector to control prices and monopolistic practices [the agencies system is to be reviewed] and raise consumer awareness.

The pricing of medicines will be reviewed and the health insurance system examined. The approval of the mortgage law will be expedited