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Saudi dollar peg to stay 'till oil dependency'

Jeddah, April 25, 2011

Saudi Arabia will keep its currency peg to the US dollar as long as the Opec member's economy is heavily reliant on oil but this may change eventually, its central bank governor said on Monday.

The dollar has been sliding this year, touching a three-year low against a basket of currencies last week. Its weakness tends to boost inflation in the world's top oil exporter, where some 70 per cent of imports are priced in dollars.

Asked whether the dollar link to the Saudi riyal is forever, Central Bank Governor Muhammad al-Jasser said: 'Nothing is forever in the economy; if the circumstances change, for example if oil becomes 10 or 15 per cent of the economy and we have an agriculture, industry and services-based economy ... then there must be a change in the outlook.'

'But as long as the economy is highly dependent on one product, which is oil ... then the dollar remains,' he told a university event in Jeddah.

Oil accounts for around half of the output of the biggest Arab economy. The kingdom, a key US ally, depends on exports of crude, which is priced in dollars, for around 85 per cent of its government revenue.

'It is noteworthy to point out that the decision to peg the exchange rate of the riyal to the dollar is based on pure economic interests,' Jasser said. He also echoed recent comments by the kingdom's finance minister, saying that the king's orders to increase housing supply will decrease some of the inflationary pressures coming from rents in the future.

Saudi inflation eased to a one-year low of 4.7 percent in March, although analysts say demand will be boosted by a package of government handouts worth around $130 billion prompted by political turmoil elsewhere in the Arab world.

Economists in a Reuters poll in March saw Saudi consumer price growth averaging 5.6 per cent this year, slightly higher than in 2010. This is still well below a record high of 11.1 per cent seen in July 2008, a year when a speculation on revaluation of Gulf currency pegs swirled.

The peg - at 3.75 to the dollar - limits the Saudi central bank's scope to combat inflation because it needs to keep interest rates closely aligned with US benchmarks to avoid excessive pressures on the riyal.-Reuters

Tags: Saudi Arabia | banking | economy | inflation | dollar peg | finance |

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