JEDDAH, 7 August — Growth of monetary aggregates during the first half of 2001 reflected the continued buoyant economic activity in the Kingdom on the back of firm oil prices and a resulting expansionary fiscal stance. The narrowest money supply aggregate (M1), which consists of currency in circulation and demand deposits or non-interest bearing accounts (NIBs), grew by 7.4 percent to SR177.8 billion during the first half of 2001 compared to 3.8 percent during the same period last year and 5.6 percent for all of 2000. Currency outside banks, however, continues to decline, falling by 3.4 percent during the first six months of the year, as automatic teller machines grow in number and functionality in addition to the wider acceptance of point of sale terminals at retail stores.
Reflecting higher liquidity, NIBs exhibited strong growth during the first six months of this year, rising by 12.2 percent to SR128.5 billion compared to 12.6 percent during the first half of 2000. In addition, NIBs share of total bank deposits rose during the first half of this year to 46.8 percent from 43.4 percent in 2000 and 41.2 percent in 1999. This increase in NIBs, which represent a major source of income for commercial banks, reflected positively on banks’ profits during the first half of this year, with eight of the Kingdom’s ten banks reporting net profits between 12.8 percent and 27 percent. The 7.4 percent increase in M1 together with a 3.8 percent decline in time and saving deposits have resulted in the broader money supply aggregate M2 to expand by 3.4 percent to SR265 billion during the first half of the year, similar to the growth rate over the same period last year. The decline in time and saving deposits during the first six months of the year is largely attributed to the sharp downturn in domestic interest rates. Both total deposits in the banking sector and commercial banks’ assets increased during the first half of this year albeit at a slower rate than that in 2000.
Deposits in the banking sector rose by 4.2 percent to SR274.7 billion during the first six month of 2001 compared to 5.3 percent over the same period last year. Commercial banks’ total assets increased by 2.2 percent to SR463 billion in the first half of the year compared to 3.3 percent over the same period last year, as claims on both private and public sectors grew by 3.6 percent and 4.5 percent during the same period respectively.
The total money supply, M3, expanded by 3.0 percent to SR324 billion in the first half of 2001 compared to a 2.1 percent over the same period last year. The strong growth in M3 was mainly due to the robust growth of NIBs in addition to the 1.0 percent rise in quasi-money. The increase in quasi-money reflected a 2.3 percent rise in foreign currency deposits in the first half of 2001 compared to a 0.3 decline the previous year. However, foreign currency deposits share of total deposits declined slightly to 18.3 percent by end of the first half compared to 18.6 percent in 2000 and from as high as 21.3 percent in 1998 following the crash of oil prices.
Commercial banks’ credit grew by 4.4 percent to SR181.2 billion during the first half of 2001 compared to a 1.1 percent decline over the same period last year. This growth reflected a 5.4 percent rise in credit to the private sector as a result of lower interest rates and improved economic conditions. However, credit to government and quasi government institutions continued to shrink, dropping by 7.8 percent during the first six month of the year.
In terms of maturity, both short- and medium-term bank credits declined slightly during the first six months of the year, while long-term bank credit witnessed a sharp rise of 37.0 percent to SR36.5 billion in the same period from SR26.6 billion at the end of last year. Interest rates on the Saudi riyal declined during the first six months of the year inline with those in the US. By June of this year, average 3-month deposit rate on the Saudi riyal fell to 3.8 percent from 6.7 percent last December, and was down from a peak of 7.1 percent last July. Furthermore, interest rate differentials between the Saudi riyal and US dollar rates declined substantially to less than 7 basis points by June 2001, averaging 15 basis points for the first six months of the year.
(The author is chief economist at the National Commercial Bank in Jeddah)