All-time high Saudi liquidity fuels inflation



Saudi Arabia has remained awash with liquidity while bank credits to the private sector have continued to grow despite central bank measures to discourage lending and reverse a rapid increase in inflation.

A surge in the Kingdom’s petrodollar income, seen as one of the main causes of inflation, also boosted its overseas assets by nearly SAR100 billion (Dh97.94bn) in the first two months of this year, according to official figures.

Liquidity, which is normally associated with inflation, soared to an all-time high at the end of February despite two decisions by the Saudi Arabian Monetary Agency to raise the reserve requirement of the country’s banks from seven per cent to nine per cent in November and to 10 per cent in January.

As liquidity continued to rise afterwards, the Saudi Arabian Monetary Agency decided for the third time last week to increase the banks’ reserve requirement to 12 per cent.

The Saudi Arabian Monetary Agency’s figures showed broad money supply, known as M3, surged from about SAR771bn at the end of November to SAR827bn at the end of February.

The level had steadily and rapidly grown over the previous two years, when it stood at SAR660bn at the end of 2006 and about SAR789bn at the end of 2007.

Credits to the private sector also continued to increase to match an upsurge in the country’s economy because of higher oil prices and public spending.

From about SAR569bn at the end of November, the total credits extended by banks swelled to a record SAR607.9bn at the end of February, according to the monetary agency.

The figures also showed a large increase in deposits with the banks, which peaked at SAR756bn at the end of February compared to nearly SAR700bn at the end of November.

“So far, the growth in liquidity and private sector credit has not been affected by the increases in the reserve requirement,” said the National Commercial Bank.

Like other Gulf oil producers, Saudi Arabia has reeled under high inflation rates over the past two years because of a surge in domestic demand, high rents, an increase in food prices, and the decline in the United States dollar, to which its currency, the riyal, and four other Gulf currencies are pegged.

Inflation was officially put at about 4.1 per cent in 2007 and is expected to increase   sharply this year as domestic demand remains high and the government is tempted by soaring oil revenues to spend more.

Forecasts by Jadwa Investment in Riyadh showed inflation could soar to 6.5 per cent this year before easing to five per cent in 2009 and four per cent in 2010.

Jadwa Investment’s figures also showed Saudi Arabia’s revenues could peak at SAR678bn this year while spending is expected to rise above budget projections to about SAR509bn. This will create a large budget surplus of nearly SAR168bn.

High income has already started to affect the Kingdom’s fiscal situation this year, with Saudi Arabian Monetary Agency’s total assets gaining nearly SAR100bn in two months to peak at SAR1.29 trillion at the end of February from about SAR1.19trn at the end of December.

The country’s official foreign currency reserves also climbed to one of their highest levels of $33.57bn (Dh123.32bn) at the end of February, according to the monetary agency.

Quoted by the local media this week, the Saudi Arabian Monetary Agency’s Deputy Governor, Mohammed Al Jassir, said the decisions to increase the banks’ reserve requirement were intended to stem domestic liquidity and curb inflation.

“The Saudi Arabian Monetary Agency is continuously watching the level of liquidity, capital inflow and the consumer price index as well as the lending activity and all global monetary developments.

The movement of funds around the world has become unlimited and monetary agency is taking this into account in its monetary policy,” he added.