The centrality of the Saudi fixed-peg regime
The centrality of the Saudi fixed-peg regime
From time to time, the Saudi fixed parity comes under speculative pressure to loosen the riyal from its peg in US dollars. This has happened during periods of low oil price volatility and sharp reductions in the Kingdom’s foreign exchange reserves, such as the 2008-2009 global financial crisis and the more recent oil price collapse in 2014. -2015. Even more recently, although more low-key, this has also happened due to the sharp drop in oil prices over concerns about the omicron variant of the coronavirus.
Are the arguments for de-pegging justified and why has Saudi Arabia continued to justify its fixed-peg monetary regime? These are not academic questions, but have a significant impact on both domestic companies and foreign investors operating in the Kingdom.
Since the start of the post-OPEC oil price hike in 1973, Saudi Arabia’s monetary and exchange rate policy has been dominated by a de facto peg to the Saudi Riyal, or the Special Drawing Right of the International Monetary Fund, or to the US dollar. Prior to mid-1981, the riyal was loosely tied to the SDR currency basket, but in a major political decision, from 1986 to the present day, the riyal has been closely tied at SR 3.75 to the dollar. So what are the pros and cons of a fixed exchange rate that makes Saudi Arabia so attached to it?
The benefits seem intuitively vast, as a fixed exchange rate maintains investor confidence in the currency, encourages domestic savings and investment, and discourages capital outflows, and reduces the inflationary pressures associated with devaluation, which some witness. Arab economies and Iran today. While Saudi Arabia’s current regime is a fixed conventional anchor, the Kingdom’s central bank is not legally bound to maintain the anchor at that rate forever, and the anchor can be adjusted up or down. the decline when misalignment or intensive speculative pressure becomes a problem.
SAMA can and has defended pegging either through direct intervention in the spot and futures markets, or indirectly through monetary policy and national interest rates, for example by setting a premium on interest rates. Saudi Riyal Interest Against Comparable US Dollar Rates. Above all, what Saudi policymakers want to achieve through a fixed rate regime is stability, as the anchor is a credible, clear and easy to understand nominal anchor for businessmen and women. foreign investors.
Various SAMA governors have publicly stated that pegging is more of a plus than a minus. As such, the credibility of SAMA’s policy and the preservation of substantial reserves of liquid assets in foreign currency become key parameters to maintain the anchor. This becomes a major drawback, which includes the requirement for a high level of international reserves and a low capacity to absorb shocks, which are instead passed on to the economy.
A drop in Saudi international reserves over the period 2015-2020, from SR 2.311 trillion in 2015 to SR 1.7 trillion in 2020, was triggered by a combination of sharply reduced oil prices and a Sluggish global energy demand since the COVID-19 pandemic hit, and the Kingdom’s budget deficit cuts. This led to a more pessimistic outlook that more reserves might be depleted, but such pessimism failed to take into account the government’s tax reforms, increased non-oil revenue and the huge borrowing capacity of the country. Saudi government, and its proven ability to borrow from both national and international sources.
The other main drawbacks of a fixed peg regime are that it does not allow the implementation of an independent monetary policy whereby the pegged country has to keep up with changes in the monetary policy of the foreign currency, which results in may not be appropriate for its own national economic situation. . Another argument is that fixed exchange rates cannot be adjusted for external shocks or trade imbalances, whereby a floating exchange rate allows a country to adjust with lower export prices and lower prices. imports helping to restore the balance of the external payments balance, and that a fixed peg is also a fixed target for speculation.
Overall, Saudi Arabia has a more than comfortable level of foreign exchange reserves to defend the Fixed Anchor, underpinned by the Vision 2030 goal of phasing out the Kingdom’s dependence on oil and building on it. more on other sources of income, such as recent positive quarterly budget figures. illustrate. All of this ensures that there is little likelihood in the short to medium term that SAMA will change the current dollar fixed anchor rate policy, as there are also political considerations given the close economic and geopolitical relationship between Saudi Arabia and the United States.
SAMA governors and other government officials like to remind us that there is no such thing as a “painless devaluation” of the Saudi Riyal as a way to balance Saudi budget deficits by increasing government oil revenues, because a devaluation through a floating exchange rate would increase import costs for the general public, businesses and government alike. SAMA officials also point out that the central bank has been able to maintain a stable exchange rate, even during different business cycles and market conditions, and that the short-lived volatility in spot and foreign exchange markets. term is overcome by the efficiency of the current fixed rates. ankle frame.
Given the FDI and joint venture plans hoped for to implement Saudi Vision 2030, it is imperative that Saudi regulators continue to signal to foreign investors their commitment to the fixed peg as a central element of monetary policy. .
â¢ Dr. Mohamed Ramady is a former senior banker and professor of finance and economics, King Fahd University of Petroleum and Minerals, Dhahran.
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