JEDDAH, 17 September — The growth of monetary aggregates accelerated during the first seven months of this year with oil prices averaging at $23.5 per barrel for Brent crude, slightly below the $24.5 per barrel average oil price in 2001, but up from the $21.0 per barrel average during the first quarter of this year. The continued improvement in oil prices has allowed the government to purse a flexible monetary policy in order to improve the investment climate in the Kingdom. Meanwhile, liquidity continues to improve on the back of higher demand deposits (NIBs) as well as time and saving deposits despite lower interest rates. Furthermore, net foreign assets in commercial banks fell by 6.8 percent during the 12-month period to July 2002, mainly reflecting a 12.9 percent rise in foreign liabilities, which outweighed the 4.3 percent increase in foreign assets. On the assets side, fell by an annual 20.4 percent in July to SR34.6 billion, indicating asset repatriation into the Kingdom. Meanwhile due from foreign banks rose by a whopping 30.8 percent during the same period, which suggests an increase in Saudi banks’ portfolios overseas.

The narrowest money supply aggregate (M1) expanded by an annual 11.8 percent to SR194 billion in July of this year, mainly due to a 15.7 percent rise in demand deposits, which increased to SR146 billion compared to SR126 billion in June last year. Meanwhile, currency in circulation rose slightly by an annual 1.4 percent to SR48 billion by the end of July 2002. However, during the first seven months of this year, currency in circulation declined by 2 percent reflecting the increased reliance on ATM machines and other electronic means of payments, as indicated by the increase in the number of ATM cards issued, reaching 6.3 million cards by the end of May 2002 from 5.2 million cards a year ago. In addition, the number of ATM transactions (both at banks and using the SPAN network) rose by an annual 16.7 percent, during the same period, with the total value of cash withdrawals rising by 18.6 percent to SR14.3 billion.

The broader money supply aggregate (M2) grew by an annual 8.8 percent to SR284 billion in July of this year, mainly due to the 11.8 percent increase in M1 as well as a 3 percent rise in time and saving deposits, which amounted to SR89.9 billion by the end of July 2002 compared to SR87.3 billion during the same period the year before. The rise in bank deposits continue to provide liquidity to Saudi banks with NIBs constituting over 49 percent of total deposits, while time and saving deposits accounted for 31 percent of the total. Consequently, deposits in Saudi banks rose by an annual 10.1 percent to SR298 billion in July 2002, compared to SR271 billion a year ago. As a result, combined assets of Saudi banks increased by 9.2 percent to SR496 billion by the end of July 2002, compared to SR454 billion last year. Meanwhile, total domestic claims grew by 9.5 percent to SR340 billion by the end of July 2002, mainly due to a 15.3 percent rise to SR207 billion in claims on the private sector as well as a 1.6 percent increase to SR133 billion in claims on the public sector. As a result, the net domestic liquidity position worsened by SR2.1 billion in July of this year compared to the same period the year before, resulting in a gap of SR41.7 billion, slightly below June’s record high of SR45 billion liquidity gap. This, however, was mainly caused by a slight dip in bank deposits during the month of June to SR292 billion, most likely due to summer holidays.

The broadest monetary aggregate (M3) expanded by an annual 8.8 percent to SR346 billion at the end of July 2002, compared to SR318 billion during the same period last year. This was mainly due to the strong 15.7 percent growth in demand deposits (NIBs) as well as an 8.5 percent rise in other quasi-monetary deposits, which amounted to SR62 billion. The other quasi-monetary deposits include residents’ foreign currency deposits with local banks, deposits held by banks as margins for LCs and LGs, as well as remittances pending for onward transfer. The growth in domestic liquidity during the first seven months of this year reflected increased transactionary money in the system suggesting continued growth in private demand.

Given the de facto peg of the Saudi riyal to the US dollar, domestic interest rates continued to broadly track those in the US during the first seven months of 2002, with the average three-month deposit rate on the Saudi riyal falling to 2.11 percent in July 2002 compared to 3.73 percent during the same period the year before. However, rates on the Saudi riyal have increased from their low level of 2.05 percent in May of this year, despite the continued decline on US dollar rates during the same period. As a result, the Saudi riyal-US dollar interest rate differential has increased slightly to 34 basis points in July this year compared to 24 basis points in May and from as low as 5 basis points in July of last year. It is interesting to note that banks’ total claims expanded by SR15.8 billion during the first six months of this year, while the customers deposits provided additional funding resources of SR11.3 billion. This suggests that there was a net domestic liquidity shortage of SR4.5 billion, which explains the rising interest rate differentials. The continued 90 basis points interest rate differential in August and 85 basis points in early September this year were more due to the regional uncertainties than any monetary factor. The net domestic liquidity position, however, has eased in August and early September. Meanwhile, SAMA’s total official foreign reserves minus gold rose by 6.9 percent to $18.4 billion (SR69 billion) by the end of May 2002, from $17.3 billion during the same period a year ago. This increase was mainly due to a 72 percent rise in SAMA’s reserve position with the Fund, which was boosted to $3 billion by end-May 2002 from $1.7 billion during the same period last year, while foreign exchange reserves declined slightly by 1 percent to $15.1 billion during the same period.

(Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah)