Dollar sanity Saudi Arabia

Falling oil prices, crazy world, monetary policy and the instability in the Middle East are forcing governments around the world to make difficult economic decisions. So thanks to Riyadh for the fact that he does not abandon them made discreet but uncomfortable choice and continues to bind the Saudi currency to the dollar. This region is clearly not necessary to further instability.

The Central Bank of the Kingdom this week confirmed that it intends to continue to maintain unchanged for three decades riyala rate of the dollar at the previous level of 3.75. Investors meanwhile suggest that Riyadh may be forced to abandon the dollar peg because of the problems with the budget deficit, which reached about 15% of gross domestic product. This was due to rising costs in the last year on their way, despite the 50 percent drop in the price of oil - the main source of income in Saudi Arabia. In other countries, such an imbalance will sooner or later destroy the currency peg. In particular, since oil prices, together with the stone sank the Russian ruble, when Moscow in 2014, tried to gently move to a floating exchange rate.

While Riyadh can protect the exchange rate with the help of their dollar reserves, which in November amounted to 636 billion dollars. Compared with last year, these reserves had declined by more than $ 100 billion. However, much more important budgetary reforms that the Government is to maintain financial stability, despite the drop in oil prices. Budget expenditures for 2016 were reduced by 14% compared to 2015. Saudi Arabia’s willingness to cut spending could reassure investors, who fear that the fiscal chaos could eventually bring the matter before the devaluation.

It will require tough political decisions - such as a sharp reduction in fuel subsidies and the suspension of infrastructure projects. However, Riyadh, apparently believes that the painful consequences of such reforms will be easier to bear than the economic and political instability caused by the surge in imports and the loss of investor confidence. Data history of the world confirms the correctness of the Saudi leadership.

Nowadays, the idea of ​​stability of exchange rates is not popular in many circles. Against this background, good to see the government do not be tempted to competitive devaluations and prefer the path of monetary stability and internal reforms.

16 January 2016

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