The economic benefits of pegging the Saudi riyal to the dollar

The Saudi Arabian Monetary Authority (SAMA) recently re-affirmed its commitment to its exchange rate policy of pegging the Saudi riyal to the US dollar as a strategic choice.

It indicated that the peg has supported national economic growth in Saudi Arabia for more than three decades. Furthermore, it confirmed that maintaining the official exchange rate of 3.75 riyals to the dollar was an anchor of monetary and financial stability.

It also said that the Kingdom’s foreign exchange reserves remain sufficient to meet all demands of the national economy and cover 43 months of imports and 88 percent of broad money (M3).

One could conclude that the government’s decision to continue with its long-standing policy of pegging its currency to the greenback at a fixed exchange rate is not based on arbitrary emotional thinking but rather on a strategic national interest.

Moreover, it is also good for the broader commercial trade activities of the country. This is because it stabilizes the cost of foreign exchange required for any type of trade, which in turn allows businesses engaging in trade-related activities to fix their costs in advance and accordingly save lots of money.

The fact remains that most of the Kingdom’s foreign reserves are dollar-based and, based on International Monetary Fund data, the US dollar makes up some 62 percent of all known central bank foreign exchange reserves.

Talat Zaki Hafiz

Finally, by pursuing a firm policy of pegging its currency to the dollar and fixing the exchange rate, the Kingdom has helped the country not only to maintain financial and monetary stability, but also to achieve sustainable economic growth and control inflation.

This is especially important as the bulk of the government’s cash inflow and outflow is either dollar-based or valued by the dollar.

In the past, periods of dollar weakness have raised objections to the peg by some economists because of the corresponding negative impact on the strength of the Saudi currency. 

But that is to ignore the many benefits that the peg has brought over the decades. The fact remains that most of the Kingdom’s foreign reserves are dollar-based and, based on International Monetary Fund data, the US dollar makes up some 62 percent of all known central bank foreign exchange reserves.

Moreover some 90 percent of forex trading involves the US dollar while almost 40 percent of the world’s debt is issued in dollars.

 

• Talat Zaki Hafiz is an economist and financial analyst. @TalatHafiz