RIYADH, 3 July 2006 — Saudi Arabian Monetary Agency (SAMA) announced twice in the past couple of months that it does not intend to revalue the Saudi riyal exchange rate against US dollar. The statements came after the revaluation of Kuwaiti dinar against the US dollar (by 1 percent). Kuwaiti authorities revalued the currency in order to contain inflation, which rose in the last couple of years as the dollar declined against the euro and other currencies and caused import-prices from these areas to rise. The Kuwaiti move led the markets to expect Saudi Arabia also to do the same.

The market has been pricing the forward Saudi riyal at a lower level than the spot (SR3.74 vs. SR3.75) since then.

Interestingly, the UAE central bank governor announced last week that GCC countries do not have the right to change their exchange rates against US dollar individually as per the GCC monetary union agreements they signed (to take place by 2010.

Is there a case for Saudi Arabia to revalue the riyal against US dollar?

Two factors are key: The current account balance and imported inflation. Saudi Arabia is enjoying the biggest current account surpluses in recent years, thanks to high oil prices. This has put Saudi Arabia in an enviable position of accumulating huge amounts of foreign assets (i.e., wealth) that any country would like. Unlike, in the case of a current account deficit, where a country would be bleeding foreign reserves, and a devaluation is almost a necessity in order for the country not to run out of foreign reserves, there is no compelling reason why a country with a current account surplus would want to stop accumulating foreign reserves.

The second issue, inflation pressure is also largely absent in Saudi Arabia. CPI inflation is not that high (about 0.4 percent compared to 3.5 percent in Kuwait and 8 percent in Qatar). Most of the inflation has occurred on asset prices (stocks and real estate). The Saudi economy is able to “contain” imported inflation by virtue of its size (e.g., it can negotiate lower prices for imports from euro zone or Japan), and by sourcing its imports as well as labor supply away from non-dollar countries like the euro zone and Japan (we have no hard data, but anecdotal evidence shows more products on store shelves from China than five years ago). Thus, the dollar’s weakness has had little impact on inflation.

The bottom line is that the case for revaluing the riyal must be a much more compelling one than now in order for Saudi Arabia to give up one of the most important cornerstones of its economic policy — a policy that has been in existence for almost two decades.

(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)