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Monetary Policy in Saudi Arabia

Essay by   •  January 8, 2014  •  Case Study  •  266 Words (2 Pages)  •  1,119 Views

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Monetary policy in Saudi Arabia

Introduction:

Monetary policy is one of the ways through which the government can affect the financial system. In Saudi Arabia, this job is done by the Saudi Arabian Monetary Agency (SAMA) as a representative of the Government. Monetary policy should focus on fiscal policy. Every so often monetary policy is practiced to polish up the effects of monetary policy. Limitations to fiscal policy in Saudi Arabia are because of the candidness of the economy, with the riyal efficiently secured to the US dollar from the time when the deferral of the SDR/riyal took place in May 1981.

Objectives of the policy:

* issuing and strengthening the Saudi riyal and stabilizing its internal and external value;

* handling the banking matters of the government

* Controlling commercial banks and exchange brokers.

Management of exchange rate:

* Saudi Arabia follows a strategy of connecting the riyal to the US dollar

* The government runs a financial surplus when oil trades are stronger and the economy is in external surplus.

Inflation:

* Housing and food prices are inflation drivers in Saudi Arabia

* Rents were increased by demographic pressure

* Food prices increased due to famines and the rise in domestic demand in the commodity-exporting countries.

Prices of asset:

* Inflation of asset prices and bubbles cannot be overlooked by central banks

* The main reason of crises is weak administration of financial institutions and markets

Policy instruments:

* Minimum reserve policy

* Repos

* Foreign exchange swap

* Placement of public funds

Conclusion:

Price stability permits constant monitoring and proper policy reactions to comprise inflationary forces in an economy where interest rate indications have not as much of significance. Lower and steady inflation will allow enhanced growth on a continuous basis in an environment of complete stability.

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