WASHINGTON: Saudi Arabia’s currency peg to the dollar provides macroeconomic stability benefits that currently outweigh its contribution to short-term inflationary pressures, the International Monetary Fund said yesterday.
In a report following the IMF’s annual consultation with Saudi authorities, the IMF’s executive board said controlling inflation was the Kingdom’s biggest challenge amid strong growth powered by rising oil output.
“Most Directors considered the benefits of maintaining the peg to outweigh the cost of higher short-term inflation, provided current inflationary pressures prove temporary. If, however, inflation should persist and the Gulf Cooperation Council monetary union be delayed, they recommended to consider ... alternative exchange rate regimes,” the IMF said.
But the IMF said a number of directors held the view that given the limited role of monetary policy available under the peg and the riyal’s undervaluation, all policy options, including alternative exchange rate regimes, should remain under review. They urged Saudi authorities to monitor inflation developments closely.
Of the six Gulf oil producers, Saudi Arabia and four other states all peg their currencies to the dollar, which means they had to match Federal Reserve interest rate cuts in recent months — further stoking economies that were already booming from high oil prices.
The IMF said Saudi economic growth, after accounting for inflation, is projected to reach 5 percent in 2008 as oil output rises to 9.2 million barrels a day and growth in non-oil sectors accelerates.
It said Saudi inflation would peak around 10.6 percent in 2008, exacerbated by imported commodities and domestic supply constraints, but would ease in subsequent years.