RIYADH, 2 June 2007 — Saudi Arabia’s currency peg to the weak dollar has had little impact on inflation in the world’s top oil exporter, the central bank chief said, moving to end market speculation about a shift in exchange rate policy.
Saudi inflation could be driven by factors such as state spending and property prices, Hamad Al-Sayari said in a television interview aired on Thursday, almost two weeks after neighboring Kuwait let its currency rise against the dollar.
Sayari, governor of the Saudi Arabia Monetary Agency, said the Kingdom paid for less than 25 percent of its exports in currencies other than the dollar and the riyal.
“One of the important factors that can have an impact on inflation is the rise in public spending,” Sayari said on state-run Saudi Channel 1. “It’s important to coordinate monetary policy and government spending to limit the impact on inflation and that is always available through continued dialogue with the finance ministry,” he said.
Finance Minister Ibrahim Al-Assaf said last month Saudi Arabia planned to control government spending to try to limit inflation.
Kuwait cited imported inflation as the reason for its May 20 decision to drop the peg to the dollar, which hit a record low against the euro in April, and switch to a basket of currencies. That allowed the Kuwaiti dinar to rise 0.37 percent against the dollar, throwing into disarray plans for monetary union in 2010 with Saudi Arabia and four other Gulf Arab oil producers.
Kuwait’s move fueled market speculation that the others in the region could follow to contain the rising cost of imports from Europe and some Asian countries. Saudi Arabia and the other four states — Qatar, Oman, Bahrain and the United Arab Emirates — have ruled out changing exchange rate policy that was meant to prepare the region for a single currency.
Any appreciation of the Saudi riyal would reduce local currency revenue from dollar-denominated oil exports. While that may not be a concern in smaller countries such as Kuwait, it could sway policy in Saudi Arabia, where public debt topped 100 percent of gross domestic product during a spell of low oil prices in the 1990s.
Saudi Arabia, the region’s strongest advocate of dollar-pegged exchange rates, has a much lower inflation rate than some other Gulf states.
Saudi inflation fell to 2.86 percent at the end of March from 3 percent in February and Sayari said he expected it to fall further in April and May.
Qatar’s inflation rate hit a record 15 percent at the end of March, while Kuwait’s was 5.15 percent.
Sayari said the widely varying inflation rates in countries with dollar pegs showed exchange rates were not to blame for price rises. “This proves that the causes of inflation are local,” he said. Instead, he blamed rapid increases in global commodity prices, such as for steel, and surging asset prices for price pressures. “The source of my concern is the pressure, especially in the housing sector, the pressure on rents and the prices of properties,” he said.
Saudi land prices have been surging as the government commissions more developments projects to tap windfall revenues from energy exports. Saudi real estate developer Taiba said on Wednesday it had sold a plot of land in the capital, Riyadh, for almost 60 percent more than the price it paid just six months ago.