OXFORD, England, (Reuters) – Saudi Arabia’s fixed exchange rate regime of a currency linked to the dollar serves its oil-based economy well and supports its counter-cyclical policy, its central bank governor said on Wednesday.
Muhammad Al-Jasser, who heads the Saudi Arabian Monetary Agency, also said the country may not have a budget deficit as currently predicted by the government if oil prices remained at current levels.
The Saudi economy is heavily dependent on oil — it accounted for about 85 percent of its budgetary revenue in 2009 and around 31 percent of its gross domestic product — leaving the kingdom exposed to price volatility.
Jasser said some economists believed a flexible exchange rate policy would enable Saudi Arabia to stimulate exports by devaluing the riyal currency during the downturn.
“But this ignores the composition of our exports. They’re overwhelmingly oil and gas, or oil and gas based. We do not yet produce a diversified spectrum of goods and services. Hence devaluing the riyal will not stimulate exports,” he said in a speech in Oxford.
“The riyal has been pegged to the dollar. We believe this policy has served us well… Foreign exchange reserves are the cornerstone of Saudi Arabia’s countercyclical policy,” adding that the government draws down on reserves to increase spending when the economy is facing a downturn.
The biggest Arab economy has accumulated huge reserves during a six-year oil price boom and is planning to spend more than $400 billion over the five years to 2013 to upgrade infrastructure, including airports and roads.
Jasser said revaluation to rein in inflation in boom times was unlikely to be effective.
“We disagree with this proposal because it will not slow down the export sector nor growth. Imports will become cheaper… but that will aggravate inflation by increasing domestic demand. Indeed, revaluation is akin in our case to fiscal stimulus at a time when the economy is running on all engines,” he said.
His comments come as Group of 20 finance chiefs gather in Paris this weekend to discuss issues including ways to gradually reduce the world’s reliance on the U.S. dollar.
The G20 agenda also includes grand proposals to curb the volatility of food and fuel prices.
Jasser said food inflation is a key challenge as food stuffs accounted for more than a quarter of Saudi Arabia’s consumer prices index.
“The Saudi economy is extremely open to trade. Openness and free competition is the best way to keep a lid on inflation tendencies,” he said, adding that subsidies were effective last time food prices were rising.
“We import most of our food stuffs and this presents us with a challenge when import food prices rise as they did in 2008 and it’s happening again… Conventional ways of dealing with inflation by putting up interest rates or tightening fiscal policy do not work in this case.”
Tensions in the Middle East drove Brent oil prices to their highest in nearly 2-1/2 years on Wednesday LCOc1 while crude oil prices CLc1 remained at almost $85 a barrel.
“This year the government is predicting a deficit but if oil prices remained as healthy as they are we may not have a budget deficit,” Jasser said. Gulf Arab states typically base their budgets on a very conservative oil price, which they do not reveal.
State-owned National Commercial Bank said in December Saudi Arabia is likely to post a 77 billion Saudi riyal ($20.53 billion) surplus based on an oil price of $80 a barrel.