• Home
• News Article

Saudi Arabia's money supply grows as investment programs bear fruit

JEDDAH: Fairly secured against the weakening situation in Europe, and with solid fiscal foundations to sustain its domestic economy should the need arise, the Kingdom is looking forward to 2012 with a degree of expectation, particularly as its investment programs start to bear fruit.

The Kingdom looks set to maintain its solid growth this year, recent data have suggested.

Public and private sector analysts monitor changes in money supply because of its possible effects on the price level, inflation and the business cycle.

During the first quarter of last year, official data from the Saudi Arabian Monetary Agency ( SAMA ) shows that broad money (M3) recorded a rise of SR139.1 billion or 13.8 percent to SR1.15 trillion compared to an increase of SR44.9 billion or 4.7 percent during the first quarter of 2010.

Money supply (M1) and (M2) increased by 26.5 percent and 14.9 percent or SR143.8 billion and SR127.9 billion respectively, according to the SAMA report.

The agency's 47th annual report reviewed key developments witnessed by the Saudi economy in 2010 and the first quarter of last year.

It revealed that broad money (M3), consisting of currency outside banks and all types of bank deposits, recorded an increase of SR51.4 billion or 5 percent to SR 1.1 trillion in 2010 compared to a rise of SR99.8 billion or 10.7 percent in 2009.

The SAMA report said that bank deposits, that represented 91.2 percent of M3, rose by SR44.3 billion or 4.7 percent but at a lower rate compared to 11.2 percent or SR94.4 billion in 2009. Currency outside banks rose by SR7.1 billion or 8.1 percent compared to a rise of SR5.4 billion or 6.5 percent in the preceding year.

Contrary to the preceding year, the growth in bank deposits in 2010 was accounted for by growth in demand deposits, but it was a lower rate that in the previous year.

Demand deposits grew by 22.4 percent (SR96.9 billion) compared to a rise by 26.5 percent (SR90.7 billion) in 2009.

Other quasi-monetary deposits decreased by 15 percent (SR27.5 billion) compared to a rise of 35.3 percent (SR48 billion) in the preceding year. Similarly, time and savings deposits dropped in 2010 by 7.8 percent (SR25.1 billion) compared to a decline of 12 percent (SR44.2 billion) in 2009.

Information on the relative weights of the components of money supply (M3) during 2010 indicates that there was a rise in the relative share of currency outside banks from 8.6 percent in 2009 to 8.8 percent in 2010, which represented a 9.2 percent rise, ending the continuing decline that started in 2000. The share of demand deposits rose from 42.1 percent to 49.1 percent.

The SAMA report said 2010 witnessed a decline in the share of time and savings deposits in broad money (M3) from 31.4 percent to 27.6 percent and that of quasi-monetary deposits from 17.9 percent to 14.5 percent.

Narrow money supply (M1) -- currency outside banks + demand deposits -- decelerated by 2.7 percentage points, rising by 19.9 percent, against 22.6 percent in the previous year. The deceleration of M1 resulted from a lower increase in demand deposits by 4.1 percentage points. However, there was an increase in currency outside banks by 1.6 percentage points.

The growth rate of M3 decelerated by 5.7 percentage points, falling down to 5.0 percent against a rise of 10.7 percent in the previous year.

The deceleration of M3 resulted from a notable decrease in quasi-monetary deposits.

M2 increased by 2.8 percentage points to 9.3 percent against an increase of 6.5 percent in the previous year.

This increase in M2 resulted mainly from a lower fall in time and savings deposits by 4.2 percentage points.

As a result of these developments, the ratio of M1 to M3 rose during 2010 to 57.7 percent against 50.7 percent in the preceding year, while that of M2 to M3 increased by 85.5 percent against 82.1 percent.

An analysis of the factors affecting broad money (M3) indicates that the deceleration in its growth rate in 2010 occurred despite an increase of SR58.2 billion in net domestic expenditure of the government, a contraction of SR12.3 billion in the private sector's balance of payments deficit and a pick-up in commercial banks' claims on the private sector (by SR41.5 billion) from their stagnant position in the preceding year.

The deceleration in the rate of monetary expansion resulted from smaller increase in net of domestic expenditure of the government in and miscellaneous factors.

The increase in net domestic expenditure of the government at SR58.2 billion in 2010 was about half the increase of SR116.7 billion in the preceding year.

The miscellaneous factors which include, inter alia, suspense items, turned contractionary to the extent of SR12.3 billion in 2010 against their expansionary impact of SR145 billion on M3 in the preceding year.

Monetary base in 2010 grew by 2.5 percent (SR6.3 billion) to SR254.8 billion compared to an increase of SR68.3 billion in the preceding year.

Currency outside banks went up by SR7.1 billion or 8.1 percent to SR 95.5 billion from SR88.4 billion in 2009.

The decrease in the monetary base resulted from the decline in the other component of the monetary base, namely, the amount of bank reserves (commercial banks' cash in vault and banks' deposits with SAMA ) which went down by SR0.8 billion or 0.5 percent compared to a rise of 64.8 percent in 2009.

The monetary multiplier went up from 41.4 in 2009 to 42.4 in 2010 due to the decline in the ratio of bank reserves to bank deposits from 17 percent in 2009 to 16.2 percent in 2010 whose effect was not evident in money creation due to the increase in currency outside banks to deposit ratio (which had an increasing effect on money creation) from 9.4 percent in the preceding year to 9.7 percent in 2010.

Income velocity of money is defined as the ratio of the non-oil sector's GDP at current prices to the average level of money supply. The ratio serves as an indicator of the number of times money is used to finance economic transactions.

The oil sector's GDP is excluded from calculation because it is not included in the domestic economic transactions.

Data shows that income velocity of money in the definitions (M2) and (M3) went up from 0.89 and 0.74 in 2009 to 0.92 and 0.78 respectively in 2010. However, income velocity of money (M1) went down from 1.53 in 2009 to 1.40 in 2010. The descending trend of (M2) and (M3) respectively, changed for the last 12 years. This resulted from the slowdown trend in money supply growth against the upward trend in that of GDP of the non-oil sector of the economy.

In the Kingdom, the report said that the demand for currency usually rises significantly during the last quarter of each year according to the Islamic calendar (Hijri year) which stretches from Ramadan to Dhul Hijjah and tends to taper off after the end of the season as it is indicated by data on seasonal trends of currency outside banks for 2010 through recording highest and lowest levels of currency outside banks in terms of both Hijri and Gregorian months.

The demand for currency reached its seasonal peak of SR97.6 billion at the end of August 2010 while it declined to its lowest level of SR88.4 billion at the end of January 2010.

© Arab News 2012