The Saudi Arabian Monetary Agency, 1952-2016: Central Bank of Oil

341 Pages·2017·10.592 MB·English

by  Ahmed Banafe, Rory Macleod (auth.)

Financial Institutions, Reforms,
and Policies in Muslim
Countries
Series Editors
Hossein Askari
George Washington University
Washington, DC, USA
Dariush Zahedi
University of California, Berkeley
Orinda, California, USA
Althoughstrongevidencepointstotheexistenceofarelationshipbetween
economicdevelopmentandgrowthandawell-developedfinancialsystem
that promotes efficient financial intermediation through a reduction in
information,transactionandmonitoringcosts,thislinkageandthedirec-
tion of causation is not as simple and straightforward as it may at first
appear.Theformoffinancialintermediation,thelevelofeconomicdevel-
opment,macroeconomicpolicies,andtheregulatoryandlegalframework
are some of the factors that can complicate the design of an efficient
financial system. Most, if not all, Middle Eastern countries could benefit
fromfinancialreformsthatwouldenhancetheeffectivenessoftheirfinan-
cial system while making them less susceptible to crises. While most
Middle Eastern countries have adopted the conventional interest-based
financial system, a few, most prominently a non-Middle Eastern country
Malaysia, are looking into financial reforms that would embrace and
introduce elements of Islamic finance. The Palgrave Macmillan series on
Financial Institutions, Reforms, and Policies in Muslim Countries breaks
new ground by proffering studies that broadly address financial reforms
and financial policies, whether in the context of conventional or Islamic
finance in the broader Middle East, instead of the general pattern of
focusing on financial or economic development in various Middle
Eastern countries. As such, the series will also serve as a guide for the
adoption offundamental financialreformsin the MiddleEast region.
More information aboutthisseries at
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AhmedBanafe(cid:129)RoryMacleod
The Saudi Arabian
Monetary Agency,
–
1952 2016
Central Bank of Oil
AhmedBanafe RoryMacleod
SaudiArabianMonetaryAuthority ObjectiveAnalysisLtd.
Riyadh,SaudiArabia London,UnitedKingdom
FinancialInstitutions,Reforms,andPoliciesinMuslimCountries
ISBN978-3-319-55217-0 ISBN978-3-319-55218-7(eBook)
DOI10.1007/978-3-319-55218-7
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Thisbook is dedicatedto thestaff and advisors –past,presentand to
come –ofSAMA
P
REFACE
This book has been 30 years in the making. It dates back to when we
worked in SAMA’s Investment Department and Rory Macleod prepared
hisownhistoryofSAMA,whichformsthebasisforthefirstpart.In1993
Ahmed Banafe published his book on the Saudi financial system. The
decades of working together since have deepened our understanding of
theSaudieconomy,thefinancialsystemandthecentralbank’srolewithin
them. The Department’s internal language and archives are mainly in
English so they lend themselves to this enterprise. We do not believe we
arebetraying any confidences.
ItisourbeliefthatalmostallwritingaboutSaudiArabiasuffersfroma
lack of knowledge about how the government system actually works. In
particular,therearenoadministrativehistories.Contrastthis,forexample,
withtheseriesofvolumespublishedinLondonafterWorldWarI,which
explained how the British government had coped with the challenges of
theconflict–inwarfinance,foodrationingandsoon.Thesedepartmental
histories proved invaluable reference documents during World War II as
they showed what had been effective last time round. This tradition has
beencontinuedinBritainandtheUnitedStatesuptothepresentday.In
the same way we hope that current and future officials at SAMA will
benefit from our account of past events and how the central bank coped
with them.
We also hope that we can demonstrate the administrative competence
of that part of the Saudi government which we understand from the
inside. We have done this by describing the policy challenges facing the
centralbankandhowtheyarerationallyanalyzedanddealtwith.Factsare
vii
viii PREFACE
the best disinfectant for conspiracy theories, so we also trust that we can
lay to rest the species of analysis that peddles various myths about the
Saudigovernment,aswellasthetypeofacademicwritingthatimposesthe
author’s favorite theoretical framework on Saudi policy-making. In other
words,wewanttospreadtheideathat–infinancialmattersatleast–the
kingdom is a country just like any other, though to be sure with its own
particular distinctiveness. Saudi policy-makers know that oil is a curse as
well as a blessing, that it brings great vulnerabilities as well as great
strengths, andthey havehandled thisdilemma withskill.
TheintroductorychaptersetsoutthefourparadoxesofSaudifinances;
thefirstpartofthebookrecountswhereSAMAcamefrombytellingthe
story of its founding and first sixty years; and the second part discusses
current questions. Chapter 8 analyzes the likelihood of a Gulf Monetary
Union. Managing the foreign reserves is the subject of Chapter 9, while
Chapter 10 looks at how the domestic bond markets might develop.
Monetary policy and the future of the currency peg are taken up in
Chapter 11, while Chapter 12 examines Saudi Arabia’s role in the multi-
polar monetary system that may be emerging. Chapter 13 reviews the
Saudibankingsystem,whilethefinalchapterconsiderswhatchallengeslie
ahead forSAMA andforthe economyof the kingdom.
Just as we were finishing this book, SAMA changed its name to the
SaudiArabianMonetaryAuthority,andthegovernmentlauncheditsmost
determined attempt yet to end the country’s dependence on oil. Both
events markthe endof the periodwhich our workcovers.
Riyadh andOxford,May 2017 Ahmed Banafe
Rory Macleod
A
CKNOWLEDGMENTS
WearegratefultothefollowingfortheirhelpinRiyadh,OxfordandNew
York: SAMA’s Research & International Affairs Department for careful
readingandcorrections;ScottUrbanfortheinitialdraftofthechapterson
Gulf Monetary Union, the currency regime and the international mone-
tary system; Jeremy Smith for all the illustrations in the book; Gerry and
TabithaButtforactingaseditorsandagents;SteffenHertogandAndrew
Cunningham for expert reading of an early draft; the team at Oxford
Analytica for intellectual debate; Ricardo de Soares Oliveira for insights
from other oil economies; and Rachel Crawford, Sarah Lawrence and
Allison Neuburger, our editors at Palgrave Macmillan. Finally, we would
like to thank family, friends and colleagues whose help, support and
encouragement have enabled us to complete this book – especially our
wives whohave put upwith allof thisfora longtime.
We acknowledge the support SAMA management and ex-Governors
havegivenus,buttheviewsandanalysisinthisbookareourownanddo
notrepresent thoseof SAMA.
ix
C
ONTENTS
1 Background toSaudiArabia’sFinancial Challenges 1
PartI History
2 Discovery ofOil andthe Foundingof the Saudi Arabian
Monetary Agency, 1902–1952 17
3 Financial Developmentbefore the First Oil Crisis,
1953–1974 33
4 Petrodollar Recycling andSaudization of the Banking
System, 1975–1982 49
5 DecliningForeign Exchange Reserves andIraq’sInvasion
of Kuwait, 1983–1993 77
6 Low Oil Prices,Rising Government DebtandExternal
Crises, 1994–2004 109
7 Impact of theGlobal Financial Crisis andItsAftermath,
2005–2016 135
xi