It is important to understand the concept of inflation along with present value and future value of money as Saudi Arabia will be moving towards Saudi vision because time value of money will be providing us with the better idea of valuation of money in context of the time because it advocates that the similar amount of money today is having a higher worth than the similar money of amount tomorrow because of factors like inflation and other factors which can appreciate the value of money over time period and hence there will be a requirement of interest payment in order to compensate for the loss of value of money due to the time value factor.
There are important terms and concept which will be important for the managers in order to make decisions in regards to the global environment and they will be related to the monetary policy changes and the political instability along with the inflation and interest rates changes and they will also be looking at various macro changes that will be continuously impacting the business of these companies like exchange rate fluctuations should also be discounted.
These factors can positively or negatively impact the Saudi vision 20 30 because it can have the favorable outcome if black interest are lowered as well as inflation has been kept in check and other political situations are favorable but if they are adverbs in nature and interest rates are rising it will be leading to a difficulty in achieving of the Saudi visit like we can see that uncertainty in case of coronavirus concern has really proved as a matter of hindrance.
Question : Inflation one of the important market fundamentals having an impact on the economy overall because it is a systematic risk. How an increase in inflation rates would affect the economic activities in KSA?
Saudi Arabia has an aa free market based economic model and the country is a prime member of the OPEC countries. As such the market is largely dominated by the oil based commodity economy and the effects of inflation has slightly different effects for Saudi than in rest of the world . . Also regarding the banking and the financial system in the Saudi , it follows the principle of Islamic banking laws an system which also has slightly different rules and norms than the traditional or conventional standards .
· Effects on the Purchasing Power – The most common effect is the rise in the price of goods and services inside and within the regional economy with the rising inflation and as such it impacts the purchasing power provided the level of employment and the income remains constant .
· Increase in spending – Whit the rise in inflation, the value of money will drop significantly and as such there will be rise in the demands of the commodity which acts as a hedge against the inflation during the period . Hence capital expenditures increase beyond the stipulated limits which may impact the stability of the economy
· Effects in the cost of borrowing – In order to control the money supply in the hands of the common , the central govt generally applies the contractionary policy in order to restrict the money supply in the economy . The rise in the cost of borrowings and loans follows the similar set of actions taken to control the excessive growth in the inflation
· Weakening of the domestic currency - With the rise in inflation, the domestic currency Saudi riyal will also weaken as the demand for the foreign currency which are relatively stable would increase and as such the foreign exchange rates will be impacted also .
· Final effects on commodity prices – With excessive hoarding in the commodity segment in order to hedge against the inflation. The period after the inflation shows a sticky demand curve , with the subsequent falling of demand of the commodity like oil which was purchased in abundant during that time. Hence the oil prices between OPEN and BRENT countries will also be impacted and as such the trading instability can be pushed into the system due to unrolled inflation in the economy .
· Effects on the banking sector – majority of the Saudi banks do follow the principles of the Islamic banking system where interest free deposits are the major quantum part of the cash reserves and as such the banking sector is not affected that much .
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