Economics Assignment

21/11/2020 Originality Report

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SafeAssign Originality Report (Current Semester - الفصل الحالي)ECN-500: Global Economics 13936-D… • Module 11: Critical Thinking • Submitted on Sat, Nov 21, 2020, 12:35 PM

MOHAMMED ALGHAMDI View Report Summary

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%100Running head: SAUDI ARABIA’S CURRENCY AND U.S. DOLLAR 1 SAUDI ARABIA’S CURRENCY AND U.S. DOLLAR 7

Saudi Arabian Riyal and the U.S. Dollar

Mohammed Ali Hussein Al-Ghamdi

Student ID: G200001237

Saudi Electronic University

Course: ECN-500

CRN: 13936

Date: 21 November 2020

Saudi Arabia’s Currency and U.S. Dollar Kingdom of Saudi Arabia is among the Gulf Cooperation

Council nations. The currency of the country has been pegged to the United States dollar. Just like the currency of Kuwait, it has been attached to a basket of currencies dominated by the dollar. This circumstance has happened for almost thirty years with the dollar peg serving Saudi Arabia tremendously well. In keeping with Hill (2017), it has delivered a reliable and dependable anchor of steadiness. What’s more, it has streamlined the macroeconomic policy conduct, in addition to reducing the costs of the transaction. In the meantime, regardless of some development in diversification, Saudi Arabia, together with other countries of the Gulf Cooperation Council has remained at the mercy of the United States to some changing degrees. This dependency has been on gas, oil, and other activities related to the sector. The Saudi Riyal refers to the name of the official Saudi Arabia currency. According to Gelpke & Schnyder (2017), the Riyal has been the country’s currency ever since before the existence of the Saudi Arabia name. The Kingdom of Hejaz as well used the Riyal as its currency between 1916 and 1925. At present, the Saudi Riyal is fixed to the United States dollar at the rate of 1 US dollar for 3.75 Saudi Riyal. The economy of Saudi Arabia is greatly reliant on the petroleum industry. In fact, 40% of the GDP and 87% of exports emanated from the sector of oil. In line with today’s estimations, the country controls approximately 20 percent

of the total oil reserves of the world (Gelpke & Schnyder, 2017). The present government of Saudi Arabia is trying to reduce its dependency on oil and inspire growth in alternative sectors and industries. In doing so, the government prioritizes a number of significant public functions, including electricity and telecommunications. What’s more, the stock market index of Saudi Arabia, often referred to as the Tadawul, remains the leading Middle East stock market. The country is one of the world’s fastest-growing nations and there is an expectation that its per capita income will increase in 2020 from 15,000 US dollars in 2006 to more than 33,000 US dollars, due partly, to the development of six modern economic cities. Whilst the price of oil has plunged ever since mid-2004, circumstances have as well varied in perhaps irreversible and fundamental ways. In consequence, Saudi Arabia and other countries of the Gulf Cooperation Council have questioned the suitability of policies that have been there for years and years. As ascertained by Ali (2018), the issues have been particularly pressing for Saudi Arabia. The country has been pressed despite being the most complex and largest of the region’s six economies and, applicable, with the most determined strategies to fix its economy. The transformation plan has embraced far-reaching objectives. It was pronounced in 2016 by the Deputy Crown Prince Mohammad bin Salman (Gelpke & Schnyder, 2017). The project offered a challenge to the tradition by recommending Aramco’s part- privatization. It similarly recommended the most critically changing structure of the labor market for Saudi women and other nationals, as well as the reduction of subsidies, the ‘jewel in the crown’ of the industrial structure of Saudi Arabia, and the introduction of local taxation from 2018 in the form of a Value Added Tax. Dramatically Declining World Oil Price

The biggest question today has followed the radical rearrangement in the works of Saudi Arabia and

has endeavored to know whether there is a need for the authorities in the country to consider alteration in the dollar/riyal peg. Many market observers and analysts have raised concerns over the matter in the perspective of current spontaneity in the Saudi foreign exchange markets and interbank (Gelpke & Schnyder, 2017). The Saudi Riyal, without a doubt, has increased in value by 17 percent since mid-2014 in real practical terms. The currency could keep on rising more and more as the monetary policy objectives of the growth of the United States and Saudi diverge into the future. The effect of the collapse of oil price has been dramatic. Alyafai (2017) asserted that in four years, the current account of Saudi Arabia has changed from an excess of 165 billion US dollars in 2012 to a shortfall of 32 billion US dollars in 2016. In keeping with the author, the budget similarly went from an excess of 88 billion US dollars in the same period to a deficit of 105 billion US dollars. The government in response has liquidated almost 220 billion US dollars of global assets and borrowed massively from international financial markets, as well as the local banks. Together with the timely actions of the central bank, such measures at least for now have helped to ease pressures in the market.

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Ali (2018) affirms that risks to the stability of the market, however, will not quickly go away. In his piece

of an inscription, the writer mentions the expectation of oil prices over the medium term to be at the range of 50 to 60 US dollars per barrel. Such projection is far below the financial breakeven price of the Country

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21/11/2020 Originality Report

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and suggests persistent deficits. In line with the expectations of the International Monetary Funds, reforms should steer the achievement of fiscal balance by the year 2021. Nevertheless, this should assume no public debt and shortfalls that were nearly absent just two years in the past. In light of this attainment, the fiscal balance would increase to surpass 30 percent of the Gross Domestic Product. On the other hand, the foreign assets of the central bank would fall from the 96 percent highest in 2014 to 40 percent of the Gross Domestic Product. Based on the considerable reserves of Saudi Arabia, funding will remain readily achievable. As affirmed by Ali (2018), the exchange rate and pressures on liquidity, however, will be a recurrent subject for some time. More to the point, the authorities in the country have argued continuously against a variation or alteration in the US dollar peg. The International Monetary Fund has equally supported this position. The two bodies have pointed out that the import and export elasticity of prices have been remarkably low. In addition, they noted that at best, the effect on the balance of trade would be marginal. Besides, they pointed out that a variation after stability, in the long run, would be worrying to the markets and that repercussions domestically could be challenging in the social perspective. A change in the arrangements of exchange would as well call for close cooperation with other Gulf Cooperation Council states where an agreement could be hard to attain. Undoubtedly, the roots of the exchange rate and liquidity pressures are the huge fiscal rigidities and deficits present in the labor markets and product. Therefore, the focus of policy right now should precisely be on making sure that the intended structural reforms and planned fiscal start to produce results in terms of efficiency improvement of the economy’s resource allocation. In this perspective, the occurrence of greater flexibility in the rate of exchange could play a significant part towards the support of the process of reform. The avoidance of unsolicited volatility requires that the need for change should not be an unexpected depreciation. It, however, calls for the need of change to take the form of a detached or disconnected shift to a bag of currencies appropriately organized with the aim of achieving and then maintaining effectiveness. The exploration of alternative options could happen in the fullness of time. In starting and undertaking a determined initiative to transform the economy of Saudi Arabia, the authorities in the country will require the complete range of political dexterity, policy choices, institutional capacity, and resources to traverse through the challenges. Whilst a decision on the exchange rate may not be necessary at this moment, it is important that the Saudi authorities keep open all the policy options. In this regard, the rate of exchange could be a powerful tool for accomplishing preferred policy goals, in particular, if used in a convenient way and combination with suitable supporting processes. Dramatically Increasing World Oil Price

On the losing end, the world should be in such a way that the currency of commodity country rises

with the increase of the price of the commodity. Looking at the dollar against the Saudi Riyal, it is observable that Saudi Arabia pegs to the US dollar at a rate of 3.75 SR to the dollar, something that seems basically flat. Alyafai (2017) is surely right to mention that the increasing prices of oil have changed the current account surplus of the world to the Middle East. Apart from Russia, Saudi Arabia is in the offing of running current account surpluses of more than 100 billion US dollars this year. Saudi Arabia is not alone in this. A number of other oil exporting countries either intervene deeply to resist currency appreciation or peg to the dollar. To sum up, Saudi Arabia and other GCC nations have remained at the mercy of America to some changing degrees. The dependency of this country on the United States has followed the exploitation of gas, oil, and other activities related. The currency used by Saudi Arabia, Riyal, has been fixed to the United States dollar at the rate of 1 USD for 3.75 SR. Compared to the currency of Kuwait, the Saudi Riyal has been attached to a basket of currencies dominated by the dollar. This situation has transpired for nearly thirty years with the dollar peg serving Saudi Arabia extremely well. Thus far, the dollar has provided a steady anchor of balance, in addition to streamlining the macroeconomic policy conduct and reducing the costs of the transaction.

References

Ali, A. J. (February 01, 2018). Conducting business in Saudi Arabia:

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