Saudi Arabia seeks steps to curb inflation

Saudi Arabia on Saturday said it was considering taking further action to curb inflation after previous steps failed.

The Saudi Arabian Monetary Agency (Sama), the Kingdom’s central bank, has twice forced banks to raise their reserve requirements to stem a sharp rise in domestic liquidity but the moves have had no effect.

Now it may increase the requirement further.

Governor Hamad Al Sayari admitted that the country had been a victim of what he called the free movement of capital and globalisation, which he blamed for soaring domestic liquidity.

The Oxford Business Group (OBG) quoted him as saying Sama might pursue its policy of forcing banks to boost their financial reserves to slacken their generosity in extending credit, which is stoking inflation.

“Sama has increased the commercial bank reserve requirement on two occasions by a total of 300 basis points, to 10 per cent,” said OBG.

“Increasing the reserve requirement restricts the banking sector’s ability to extend credit, which, given current levels of liquidity, is a concern. When asked if Sama would continue this policy throughout the year, Al Sayari said they would look at the best options and use all their tools to manage monetary policies given global influences such as the dollar and global liquidity.”

Sama increased banks’ reserve requirement from seven to nine per cent in November and 10 per cent in January. But National Commercial Bank – the Kingdom’s largest – has said this failed to stem liquidity and credits to the private sector.

Sayari told OBG: “Globalisation and the free movement of capital means money supply exceeds acceptable levels in many developed countries. Saudi Arabia is particularly affected as it had to follow the Federal Reserve’s direction.”

Besides bank measures, Saudi Arabia, which controls a quarter of the world’s recoverable oil reserves, approved a 17-point strategy in late January to ease the impact of soaring prices that pushed inflation to a record annual average of 4.1 per cent in 2007.

Experts believe the rate will climb above six per cent this year mainly because of a sharp rise in rents and food prices. The strategy includes higher wages for public sector workers over the next three years and reductions in fees for driving licences and residency permits for domestic workers.

Additionally, some basic commodities, such as rice and milk, will continue to be subsidised by the government, with a review date set for 2011. In addition, the government hopes that steps to diversify sources of goods and encourage greater competition will alleviate some price rises. The creation of a National Housing Agency, which aims to reduce real estate supply bottlenecks and accelerate the construction of public housing, and the approval of the mortgage law are expected to reduce inflationary pressures coming from there.

The plan calls for a review of the health sector, including an examination of the pricing of drugs and looking at a compulsory health insurance system for nationals.

Experts said such measures had been offset by Sama’s decisions to follow the Fed’s recurrent interest rate cuts because of the riyal’s peg to the dollar.

“Raising interest rates is the standard approach to tackling inflation, but the exchange rate peg to the dollar has forced Sama to follow the United States in cutting rates,” said Brad Bourland, chief economist at the Riyadh-based Jadwa Investment company.

“This policy has worked against attempts to restrain inflation in the Kingdom.”