Abstract
SAMA maintains internal and external price stability by keeping the currency stable against the dollar because there is no price elasticity of demand for oil exports, and little elasticity for imports. The interest rate differential with the USA is small. SAMA has little discretion about interest rates but their role is small because of the under-developed financial system. In a fiscally dominant economy countercyclical policy dampens the volatility of economic growth and the peg does the same for monetary policy. Monetary tools include administrative measures, changing the repo rate and issuance of government or central bank debt. The peg has earned a high degree of credibility and this reduces speculative pressures. Policy alternatives are fiscal spending rules and a basket, band and crawl (BBC) currency policy.
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Notes
- 1.
Calculations based in July 2016 on 1.75 dollars per liter of diesel, 500 dollars per kilowatt-hour of lithium-ion battery, 36 mega joules per liter of petrol and 0.277778 kilowatt-hours per mega joule.
- 2.
This is allowing for the usual correlates of GDP growth, such as growth rates of population, education, the capital stock and overall productivity. OLS regression of Saudi real GDP on real oil price, population, human capital index (mainly comprised of educational attainment at age 25), the real capital stock and total factor productivity index, all in log-differences. R-squared is 0.640, N=41. Analysis by authors from data in the Penn World Tables version 8. University of Toronto, ‘Penn World Tables,’ University of Toronto. http://datacentre.chass.utoronto.ca/pwt/ (Accessed October 30, 2016)
- 3.
There were also brief panics when Iraq invaded Kuwait and during the depths of the global financial crisis.
- 4.
Unsterilized intervention in the foreign currency market is where the central bank does not attempt to offset the domestic money market impact of its actions. In a sterilized intervention a central bank which sells foreign exchange in the spot market (to increase the value of its own currency when it is under pressure to devalue) and then buys domestic assets (such as central bank bills) has sought to neutralize (or ‘sterilize’) the balance-sheet impact of the initial intervention. The initial intervention withdraws domestic liquidity as the central bank buys local currency from the banks, and the monetary action injects liquidity back as the central bank buys bills in return for crediting the banks with local currency. SAMA’s interventions were mostly in the forward market and so they remained unsterilized.
- 5.
Muhammad Al-Jasser and Ahmed Banafe, ‘Monetary Policy Transmission in Saudi Arabia,’ BIS Papers 35 (2008):1.
- 6.
Going back to Arthur Young’s plan of 1952.
- 7.
George Soros’ successful attack on the British pound sterling, driving it off its shadowing of the Deutsche Mark in 1992, was a legendary ‘short’ of a quasi-pegged currency. The opposite maneuver – going ‘long’ with the currency and ‘shorting’ the dollar – will yield a profit if the currency is revalued upwards. This was what speculators against SAMA were trying to do in 2007–08.
- 8.
Mario Marcel. ‘The structural balance rule in Chile: Ten years, ten lessons,’ IADB Discussion Paper 289 (2013): 44.
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Banafe, A., Macleod, R. (2017). Currency Regime and Monetary Policy. In: The Saudi Arabian Monetary Agency, 1952-2016. Financial Institutions, Reforms, and Policies in Muslim Countries. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-55218-7_11
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