JEDDAH: The proposal by Shoura Council member Waleed Arab Hashem last week to the council’s inflation committee urging possible revaluation of the Kingdom’s currency exchange rate has yet again pushed the issues of rising inflation, increased consumer pricing, and rumors of de-pegging from the weak US dollar back to center stage.
Furthermore, calls from local citizens saying that it is becoming increasingly difficult to make ends meet is a sign experts say that Hashem was right in making the proposal by 20 percent as the situation of skyrocketing prices have become drastic enough for a need for a solid plan of action in addition to the government’s decision in January to offer salary hikes for civil employees and pensioners by 5 percent.
Aymen R, a Saudi navy officer told Arab News that since the increase in salary six months ago rising inflation has made the salary hike practically insignificant. “I have to show gratitude to the government for giving us the increase in salary but I feel that as prices have risen since then that they need to find further solutions to help such as giving us an additional salary increase or finding a way to decrease prices,” he said.
The inflation rate, which stood at nearly 7 percent in January, has risen this month, according to the Central Department of Statistics to 10.5 percent making it the highest rate in 27 years. Despite the latest data, however, Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank, have repeatedly voiced their firm stance on the issue saying they would absolutely not de-peg the riyal from the greenback or consider allowing the riyal to appreciate in value over the greenback as it is not in the Kingdom’s best interest to do so.
“Floating the Saudi riyal would not be appropriate for an economy that relies on oil exports,” SAMA Gov. Hamad Al-Sayari was quoted as saying in an interview with Al-Arabiya television last month.
“Floating (the currency rate) is beneficial when the economy and exports are diverse, as for the Kingdom it remains reliant on the export of a single commodity,” he reportedly added.
However, the problem of rising inflation economists have echoed has mainly to do with Saudi imports not exports. In an article published recently in The Financial Times written by Martin Feldstein, professor of economics at US-based Harvard University, the author provided evidence of how revaluating or even de-pegging could be a prime solution against inflation.
In the report Feldstein states, “The riyal’s peg to the US dollar is raising Saudi inflation by increasing the cost of imports as the dollar declines relative to the euro, the yen, and other global currencies. The 15 percent decline of the dollar relative to these currencies during the past year meant that the prices paid by the Saudis for the goods that they bought from Europe, Japan, and elsewhere rose by more than 15 percent.
He added that the large US trade deficit is likely to continue to force the dollar to decline against major currencies resulting in a continuation of imported inflation in Saudi Arabia and other countries that tie their currencies to the dollar.
Feldstein continued by adding that fighting inflation in Saudi Arabia is not impossible but would involve painful choices by either shifting the dollar peg to a policy of linking the riyal to a basket of currencies with a heavy weight on the euro, or to a market-determined “floating” exchange rate.
Further saying that the shifting the dollar peg would assist in the reduction of imported inflation but had drawbacks limiting the SAMA’s ability to pursue a completely independent anti-inflationary interest rate policy and that opting for a floating exchange rate, even one managed by the central bank, would be the best course to take as it would allow SAMA to pursue an anti-inflationary policy by allowing potential inflow of funds in response to a higher Saudi interest rate limited by investors’ uncertainty about the future value of the riyal.
Feldstein continued by saying in the report that the immediate effect of freeing the currency from its dollar peg would be a rise in the value of the riyal relative to the dollar and other global currencies automatically reducing the cost of imports and therefore lowering price levels. “The Saudi government could even use this decline in the overall price level to reduce its very wasteful subsidies on domestic energy prices,” he said.
Howard Handy, chief economist of Samba Financial Group, confirmed to Arab News that they are forecasting the Kingdom’s inflation rate to remain above 10 percent for the remainder of the year. He also agreed with Feldstein by saying,” The revaluation of the riyal would have a significant and positive effect on the local economy as it would help reduce the cost of imports in riyal terms against the US dollar. He said that he believes that the central bank is continuously downplaying the prospects of a currency de-pegging or revaluation in order to squash speculation over the value of the currency exchange rates. “It is an international regulation that SAMA cannot openly speak about making a change one way or another to the monetary exchange rate due to the fact that any open discussion would lead to a flood of foreign exchange investors and cause further problems, he said, continuing that at this point whether the proposal made by Hashem would have any impact on the monetary decision to revalue is difficult to say.”