An overview of the effects of monetary policy in Saudi Arabia on GDP and inflation, from 1981 to the present day.
% annual growth rate:
Sources: M3 from the Saudi Arabian Monetary Authority database and nominal GDP from IMF database, as at September 2023
The medium-term relationship between money and nominal GDP growth in Saudi Arabia, 1981-2022
Five-year moving averages of annual % changes, with 1993 being the start of the first five-year period
Comment on monetary trends in Saudi Arabia
Since the development of the first oilfields in the 1930s, Saudi Arabia's economy has been an export-driven economy dominated by oil. The rate of money growth has been determined to a considerable degree by fluctuations in the oil price as the money balances drawn in from abroad, which are deposited in banks, constitute a substantial component of M3 broad money.
The volatility of the price of oil over the years is reflected in the graph above. It reached a peak in the first half of 2008, which also saw the highest M3 growth rate. With oil prices never attaining these levels since, broad money growth, GDP and inflation have all declined in the last decade. The Saudi riyal has been tightly pegged to the US dollar since 1986, which has helped to keep inflation down. The peg has worked well inasmuch as Saudi Arabia's government has built up substantial dollar-denominated deposits on which it can draw when oil prices are weak, providing the necessary liquidity to defend the riyal and thus maintain the peg.
Since 2017, the Crown Prince, Mohammad bin Salman, has introduced some reforms aimed at diversifying the country's economy to reduce its dependence on oil. The wisdom of such a move is apparent given not only the 2020 collapse in oil prices but also the recent sluggish growth rate of the economy, especially in the middle of the last decade.
Saudi Arabia suffered a drop in GDP in 2020 but did not engage in any substantial stimulus programme apart from a modest cut in borrowing costs. Broad money growth did not pick up substantially and a spike in consumer price inflation (to 6%) in 2021 soon dissipated. Higher oil prices have helped the Saudi economy recover, but the linking of Saudi interest rates to those of the USA has caused the central bank to engage in a series of rate hikes in 2022-3 which could slow broad money growth to very low levels.