DAVOS, Switzerland (Reuters) – Saudi Arabia benefits from keeping its currency pegged to the U.S. dollar, although the weak dollar has caused a Gulf region-wide inflationary problem, the governor of Saudi Arabia’s General Investment Authority told Reuters on Wednesday.
Gulf Arab economies, of which Saudi Arabia’s is the biggest, are experiencing high inflation but central banks have limited options as the peg forces them to track U.S. monetary policy at a time when the Federal Reserve is cutting interest rates.
Saudi inflation is widely expected to continue rising in 2008 after reaching 6.5 percent in December, its highest rate in at least 12 years.
“(Because of) the decreasing value of the U.S. dollar, all our imports from markets other than the U.S., in terms of cost, have gone up significantly in the last 12-24 months,” Amr Al-Dabbach, the head of SAGIA, said on the sidelines of the World Economic Forum.
“It is a problem not exclusive to Saudi Arabia; the whole region is facing these problems.”
With inflation now higher than official interest rates, it becomes cheaper for Saudis to borrow than keep money in bank deposits where they get negative real returns.
Al-Dabbach, however, said the falling dollar has not affected investment flows into the world’s largest oil exporter, adding, “There are good rationales behind having the riyal fixed to the dollar.”
Saudi Arabia has not changed the riyal’s rate of 3.75 to the dollar since 1986. With the Gulf’s largest population, the kingdom ran budget deficits in the 1990s and fears a revaluation would cut the riyal value of dollar-denominated oil revenue.
The SAGIA is a government agency aimed at improving the country’s business laws and policies according to international best practices.