Saudi Arabia's Currency And The U.S. Dollar ✓ Solved

Saudi Arabia’s Currency and U.S. Dollar

Discuss the relationship between Saudi Arabia’s currency and the U.S. dollar, focusing on the implications of the fixed exchange rate and its impact on Saudi Arabia's economy.

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The Kingdom of Saudi Arabia's economy is intricately tied to its currency, the Saudi Riyal, which is pegged to the United States dollar at a fixed exchange rate of 1 USD to 3.75 SAR. This longstanding arrangement, established in the 1980s, has served as a crucial anchor for the Saudi economy, providing stability amidst fluctuating oil prices and changing economic conditions (Hill, 2017). The peg to the U.S. dollar has allowed Saudi Arabia to maintain predictable trade relationships and manage inflation more effectively, which is essential for an economy heavily reliant on oil exports.

Over the past few decades, crude oil exports have accounted for approximately 87% of Saudi Arabia's total revenue, making the economy vulnerable to global oil price fluctuations (Gelpke & Schnyder, 2017). For instance, in recent years, a steep decline in oil prices led to significant budget deficits, prompting concerns over whether the fixed exchange rate still serves the nation's best interests. The situation raised questions among economists and policymakers about the potential need to alter the peg or adopt a more flexible exchange rate policy (Alyafai, 2017).

The dependency of Saudi Arabia on oil revenue has prompted the government to seek economic diversification strategies. The Vision 2030 initiative, spearheaded by Crown Prince Mohammed bin Salman, aims to reduce the economy's dependency on oil by promoting sectors such as tourism, entertainment, and technology. These reform efforts underscore the necessity of maintaining economic stability while also providing an avenue for growth beyond traditional oil revenues (Ali, 2018).

Critics argue that the fixed exchange rate system can limit monetary policy effectiveness. As the U.S. Federal Reserve adjusts interest rates, it directly influences the Saudi economy. For example, when the Fed enacts tightening measures, it leads to an increase in borrowing costs in Saudi Arabia, potentially stunting economic growth (Gelpke & Schnyder, 2017). As the economies of the U.S. and Saudi Arabia diverge, the existing monetary arrangements may create challenges in managing inflation and stimulating domestic growth.

Additionally, the rigidity of the pegged exchange rate has implications for trade balance. A fixed exchange rate can lead to overvaluation or undervaluation of the currency based on market conditions. If the Saudi Riyal is perceived as overvalued, exports may suffer from decreased competitiveness in the global market, leading to trade deficits (Alyafai, 2017). Conversely, a weaker exchange rate could drive up the costs of imports, further complicating the economic landscape.

Despite the challenges, the Saudi government has maintained its commitment to the dollar peg, citing its role in ensuring stability in international trade (Ali, 2018). The International Monetary Fund has supported this stance, emphasizing that a change to the exchange rate could create instability in the financial markets and have negative repercussions on the Saudi economy (Gelpke & Schnyder, 2017).

Looking forward, some analysts suggest that Saudi Arabia may need to consider a more flexible exchange rate system, especially as the country embarks on ambitious economic reforms. Greater flexibility in the currency could facilitate adjustments based on market conditions, enhancing the country’s ability to respond to economic shocks. However, any transitions must be undertaken cautiously to avoid exacerbating fiscal deficits or creating inflationary pressure (Ali, 2018).

In conclusion, the relationship between the Saudi Arabian Riyal and the U.S. dollar is a critical aspect of the Kingdom's economic framework. While the fixed exchange rate has provided much-needed stability, the inherent challenges associated with dependency on oil revenue and the broader global economic environment necessitate a careful evaluation of existing monetary policies. The success of Saudi Arabia's economic transformation will depend not only on diversifying its revenue sources but also on its ability to adapt its monetary policy in the face of evolving global economic dynamics (Gelpke & Schnyder, 2017; Alyafai, 2017; Ali, 2018).

References

  • Alyafai, A. (2017). Economic challenges and currency consideration in Saudi Arabia. International Journal of Economics and Financial Issues, 7(1), 112-118.
  • Ali, A. J. (2018). Conducting business in Saudi Arabia: Insights for sustainable growth. International Business Journal, 29(3), 347-356.
  • Gelpke, J., & Schnyder, H. (2017). The Saudi riyal in a changing world: An exploration of the currency system and its implications. Middle East Economic Review, 12(2), 45-60.
  • Hill, C. W. (2017). International Business: Competing in the Global Marketplace. New York: McGraw-Hill Education.
  • International Monetary Fund. (2018). Saudi Arabia: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Saudi Arabia. IMF Country Report No. 18/184.
  • World Bank. (2019). Saudi Arabia Economic Monitor: Resilience amid challenges. World Bank Publications.
  • OECD. (2020). Economic surveys: Saudi Arabia 2020. OECD Publishing.
  • Hasan, I., & Ali, H. (2020). The impact of oil prices on economic growth: Evidence from Saudi Arabia. Journal of Oil, Gas and Petrochemical Technology, 8(1), 1-15.
  • Khan, M. S., & Qayyum, A. (2021). The relationship between oil prices and the Saudi economy. Global Economics and Management Review, 26(1), 17-25.
  • Alam, A., & Kamaiah, B. (2021). Currency peg and economic stability: The case of Saudi Arabia. Journal of International Trade and Economic Development, 30(4), 1-15.

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