JEDDAH, 20 April 2004 — Growth in Kingdom’s money supply was substantial during the twelve-month period ending February 2004.

It reflected a healthy macroeconomic situation due to high oil prices and production in recent months, which generated higher than expected revenues for the Kingdom, according to the National Commercial Bank’s Market Review and Outlook report. “Strong growth in bank deposits drove monetary expansion, possibly because alternative financial assets, both domestic and foreign, appeared less attractive due to the low interest rate environment. This, however, facilitated the growth of banks’ credit in order to finance domestic economic activities,” NCB Chief Economist Dr. Said Al-Shaikh said.

The narrow money supply (M1) surged by 12.4 percent on the twelve-month period ending February 2004 to reach SR321.4 billion. Demand deposits or non-interest bearing account (NIBs), accounting for 47.9 percent of total deposits, rose by 15.2 percent to SR174.8 billion, the report said.

Currency in circulation, the other component of narrow money, increased by an annual 4.4 percent by the end of February, to stand at SR56.7 billion. As an indicator of better liquidity positions, private sector deposits accounted for the bulk of the increase, as individuals and private firms added around SR21.9 billion or 14.9 percent to their holdings of current accounts. Moreover, government deposits increased by 28.1 percent or by SR1.1 billion during the twelve-month period. Also, Saudi consumers continued to expand their use of electronic means of payments, which was reflected by the annual 27.7 percent increase in the amount of “point of sale” transactions that totaled SR16.3 billion by the end of February 2004.

The NCB report said the number of ATM transactions rose by a massive 24.8 percent to 355.4 billion in February compared to last year.

The broader money supply aggregate (M2), made up of M1 in addition to time and savings deposits, expanded by 9.8 percent to SR345.3 billion for the twelve-month period ending February 2004, influenced by the 12.4 percent increase in M1. Time and saving deposits, which account for 31.2 percent of total deposits, grew by 5 percent to SR113.9 billion, partly attributed to the rise in government saving deposits that grew by 4.5 percent. Private sector saving deposits rose by a small 4.5 percent due to the continuous low interest rates, with the Saudi riyal interest rate averaging at 1.3 percent during the same period, and the incredible 85.8 percent growth in the Saudi stock market.

Furthermore, deposits in the banking sector rose by 10.7 percent to SR364.8 billion by February 2004, while combined assets of commercial banks in Saudi Arabia increased by 9.2 percent to SR559.5 billion during the same twelve-month period. As a result, the net domestic liquidity position, measured by the difference between total deposits and total domestic claims, has worsened with the gap widening by SR17.1 billion by the end of February 2004. Outstanding domestic claims reached SR416.5 billion, producing a net domestic claims shortage of SR51.7 billion. Banks claim on private and public sectors increased by 18.4 percent to SR234.9 billion and 9.6 percent to SR181.6 billion, respectively.

The broadest monetary aggregate (M3), which includes M2 in addition to quasi-monetary deposits, grew by 9.8 percent to SR421.4 billion. The growth in M3 was largely attributed to the sharp increases of 15.2 percent in NIBs, in addition to 9.7 percent rise in quasi-monetary deposits, which totaled SR76 billion by the end of February 2004.

The average three-month deposits rate on the Saudi riyal fell to 1.28 percent in February 2004. At the same time, the average rate on three-month US dollar deposits declined to 1.02 percent. As a result, the differential between the Saudi riyal and US dollar interest rates narrowed to 26 basis points in February 2004 from 68 basis points one year ago.

The Saudi government has seen interest payments falling sharply on its domestic debt piles, further supporting a massive fiscal surplus. Perhaps even more importantly, the private sector has been confronted by a banking sector with expanding deposit bases, an appetite for credit and an acceptance that low margins are the order of the day. The aggregate credit had exceeded a growth rate of over 14.4 percent to reach SR416.5 billion in the year ending February 2004. Dr. Said Al-Shaikh said “a rise in interest rates will slow the credit expansion, but US economic and political developments suggest the upturn is unlikely to come before for the fourth quarter at the earliest. Therefore, money will be rented cheaply in Saudi Arabia for most of this year.”