JEDDAH, 11 November 2007 — Saudi Arabia’s money supply accelerated to SR744.13 billion at the end of September from SR709.30 billion in the second quarter, according to the Saudi Arabian Monetary Agency’s third quarter report which is available on its website.

The money supply was SR677.84 billion at the end of first quarter of this year.

There was a steady growth in the Kingdom’s money supply from SR340.19 billion in 2001 to SR390.43 billion in 2002 and SR417.47 billion in 2003.

At the end of 2004, the money supply was SR496.09 billion, in 2005 it reached SR553.68 billion and in 2006 it surged to SR660.58 billion.

Dr. John Sfakianakis, chief economist of SABB, said “Money supply is one of the indicators of inflationary pressures to come in an economy. Although money supply (M3) has been consistently above 18 percent since June, M3 for September is lower than the high of July (21.5 percent, the fastest year-on-year increase since November 2004). The September M3 figures could be interpreted as a temporary one-off decline which has little impact on the buildup of prices or a gradual decline in money supply which is for good inflationary pressures in the economy.”

He added “In an environment of high liquidity it is hard to anticipate a real and continuous decline in money supply.” Sfakianakis said “At a time when Saudi Arabia is going to witness a record high year in oil revenues of above $195 billion and a booming economy, it is quite normal to witness the growth of money supply of above 18 percent.”

He said “The growth in demand deposits, which constitutes the largest part of the money supply system in Saudi Arabia, grew by 23 percent, a bit slower than the growth witnessed in time and savings deposits, which they grew by 24.7 percent. However, demand deposits did see a marked increase over August which surged by 19.6 percent.”

Saudi bank deposits also showed increase in the third quarter of this year. Bank deposits reached SR675.03 billion at the end of the third quarter compared to SR642.29 billion in the second quarter and SR612.77 billion in the first quarter.

In 2001, bank deposits were SR290.99 billion and they grew to SR435.97 billion in 2004 and SR591.26 billion in 2006.

According to Dr. Mohamed Ramady, professor of finance and economics at King Fahd University of Petroleum and Minerals, the continued sharp rise in Saudi money supply is posing a quandary for SAMA. “The monetary agency has seen the Kingdom’s reserves and government spending balloon over the past year. The hope was that this injection would be matched by increased domestic productivity and output, as well as reduced international prices from the fall in the dollar’s value, feeding off key imports. The constraints, however, are still domestic and concentrated in key sectors such as construction, housing supply and labor cost. Higher imported food prices are still a problem for key commodities, but should these continue, then over the long term there could be a shift toward cheaper food product substitutes.”

He added “The raising of the domestic bank’s reserve requirements on current accounts is a significant indicator of SAMA’s determination to try and curb on bank lending.”

Ramady said “Raising the reserve requirement on demand deposits to 9 percent from 7 percent after 27 years of not using this monetary tool indicates that SAMA will use all its monetary arsenal as a regulator, including reserve requirement adjustment, which, in theory, works backward to reduce banks’ ability to create further money supply through multiple deposit and loan creation.

“However, this tool has been rarely used by central banks, as it takes time to trickle through the banking loan approval system, and central banks have relied more on open market operations or the sale of government securities to curb money supply growth. It will be interesting to see if the 2 percent reserve requirement on savings and time deposits will also be raised, as this has not been changed for nearly 27 years. The latest growth in time deposits is somewhat higher than the more volatile demand deposits, indicating more depth and maturity in the Saudi financial markets, and this should give some comfort to SAMA.”

Ramady added “The Kingdom, however, is being put into a difficult position to maintain unchanged the current Saudi riyal peg, especially following the Fed’s last action to cut interest rates by 25 basis points and continued signs of a weakening US economy and dollar. The increase in SAMA’s foreign assets should assist SAMA in curbing speculative purchases of Saudi riyals and defend the current fixed peg, but any further Fed move to cut back on dollar interest rates will create some significant arbitrage opportunities between the two linked currencies. The bottom line is that continued higher oil prices, without compensating increases in domestic supply for key commodities, is not welcome for the Kingdom, even if in real terms, oil is still underpriced compared with imported goods and services to the Kingdom.”

The SAMA report also said Saudi Arabia’s total official reserves minus gold jumped to $31.54 billion at the end of third quarter compared to $23.91 billion in the second quarter and $26.99 billion in the first quarter. In 2006, Kingdom’s reserves totaled $27.52 billion compared to $26.53 billion in 2005 and $17.59 billion in 2001.