Saudi Arabia

Saudi Arabia initially fixed its exchange rate with limited monetary policy operations, but financial liberalisation meant that this became loose exchange rate targeting from 1986, and full exchange rate targeting from 2000.

Years Targets and attainment Classification
1974-85 new parity vs SDR August 1973, intervention currency is USD; March 1975 decided to keep peg to SDR rather than depreciating USD, then from September 1975 new parity vs SDR, formally now with wider margins of 7.25%, but de facto fix to USD with very narrow margins; series of very small appreciations vs USD 1977-80 then 1981-5 small depreciations, rate vs SDR from mid-1981 outside formal margins (which were suspended); Saudi Arabian Monetary Authority (originally Agency) retains reserve coverage (currency board) rule, cannot by charter lend to government or to banks (but can place deposits in them), cannot discount or use discount rate (Islamic law), main instruments reserve requirements and moral suasion, but SAMA mostly operates ‘neutral’ monetary policy, focuses on banking supervision; monetary growth driven by government’s net domestic spending (of oil revenues) in context of open economy, but fiscal policy mostly well controlled; new monetary instrument in form of 91-day (later both shorter and longer term) deposit account facility for banks at central bank 1984 augmented exchange rate fix AERF
1986-99 from mid-1986 riyal effectively pegged to USD at constant rate but formal peg is still to SDR with wide margins and authorities argue (e.g. SR 1991) this gives them flexibility; SAMA quotes no longer serve as basis for banks’ dealings in forex market; SAMA foreign reserves well above currency issue, so backing rule does not bind; repoable Bankers Security Deposit Accounts (BSDAs) at central bank from 1984; SAMA government development bonds issued from 1988; Treasury bills (in place of BSDAs) of varying terms issued from 1991; reverse repos from 1992; murabaha debt securities and floating rate notes (for shariah-compliant banks) from 1997; secondary bill and bond markets remain underdeveloped, but interest rates becoming more important; bouts of speculative pressure 1993 and 1998-9 which SAMA is able to resist; slow but continuing improvements to statistical database loose exchange rate targeting LERT
2000-17 riyal is still formally pegged to SDR but de facto peg to USD is by now well-established, and “Saudi Arabia’s monetary policy goals aim mainly at containing inflation and preserving the pegged exchange rate regime” (RED 2000); 2002 formal peg switched to USD, in context of moves towards GCC monetary union (planned for 2010, later postponed); further capital market development (but mostly primary, not secondary), e.g. SAMA bills in place of Treasury bills from 2005 which provide basis for interest rate corridor formed by repo and reverse repo rates, sukuk bonds from 2016; some development and use of macroprudential tools; fiscal policy adjusted as main macroeconomic instrument; authorities respond to GFC with liquidity support for banks; continuing improvements to statistical database full exchange rate targeting FERT

Selected IMF references: Currency Arrangements and Banking Legislation in the  Arabian Peninsula, 1974; EFS (Saudi Arabia – An Economic and Financial Survey) 1975 pp27-8, 30, 40; EFS 1976 p56; EFS 1978 p65; RED 1979 pp40, 48; RED 1980 pp36, 50; RED 1981 p52; RED 1982 p46; RED 1984 pp37, 47; RED 1985 pp34, 52-4; SR 1985 p8; RED 1986 pp47-9, 60-1; RED 1987 pp32-4; SR 1988 pp8-9; RED 1989 pp37-40; RED 1990 pp38-42; SR 1990 pp9-10; SR 1991 p15; RED 1993 p24-6; REDSI 1998 pp42-3, 53-5, 60, 68-70; SR 1999 pp17-18; RED 2000 pp58-60, 68; SR 2001 p25; SISA 2002 p57; SR 2004 p8; SR 2005 pp19-20; SI 2008 p41; SR 2009 pp4-5, 10, 16; SR 2010 pp6-7; SR 2012 p5; SI 2014 pp16-34; SI 2015 pp35-7, 39-44; SI 2016 pp25-30; SR 2018 pp7-8.

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