RIYADH, 13 January 2008 — Saudi Arabia needs to gradually change the riyal currency’s peg to the weak US dollar to protect the value of its reserves, most of which are invested in the United States, state-owned National Commercial Bank (NCB) said.
The Kingdom’s central bank — Saudi Arabian Monetary Agency — has repeatedly ruled out changing the riyal’s exchange rate to the dollar, which was set in 1986 at 3.75 to the dollar.
The central bank’s net foreign assets were worth about $285 billion on Nov. 30. “The time has come to reconsider the continued pegging of the Saudi riyal to US dollar, provided that this is done gradually, taking into account unfavorable impacts on official reserves, which are mostly in dollars,” Said Al-Shaikh, chief economist at the Kingdom’s largest bank by assets, said. The government invests most of its surplus revenue in US Treasuries, Shaikh said in a statement.
“The continuing weakness of the dollar and declining interest rates would shrink returns achieved by these investments,” he said.
“With the continuing rise of inflation rates, real returns may become less and even risk dwindling,” the NCB’s chief economist said.
The dollar peg forces the Saudi central bank to track US monetary policy at a time when the Federal Reserve is cutting interest rates and inflation in the Kingdom was at its highest in at least 12 years in October.
The US dollar fell more than 10 percent against the euro last year and more than 6 percent against the yen, driving up the cost of Saudi imports from those countries and fuelling inflation.