{"id":3035,"date":"2024-12-14T11:43:39","date_gmt":"2024-12-14T11:43:39","guid":{"rendered":"https:\/\/rajaalmarzoqi.com\/rajaalmarzoqi\/?p=3035"},"modified":"2024-12-15T16:19:25","modified_gmt":"2024-12-15T16:19:25","slug":"changes-and-exchange-rate-of-the-saudi-riyal-and-alternative-monetary-policy","status":"publish","type":"post","link":"https:\/\/www.rajaalmarzoqi.com\/?p=3035","title":{"rendered":"Changes and exchange rate of the Saudi riyal and alternative monetary policy"},"content":{"rendered":"
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The Kingdom follows a fixed exchange rate policy with the dollar, despite the benefits that the Kingdom has gained from this monetary policy in the past for several reasons, including that the dollar is the dominant currency in the global economy and most countries in the world are linked to the dollar, in addition to the fact that imports from the dollar zone (the United States and countries whose currencies are fixed to the dollar) represent more than 70 percent of the Kingdom’s imports, and the Kingdom’s exports are valued in dollars. All of these variables in the past made the link to the dollar an appropriate policy for the Saudi economy. However, with the global changes in the global economy, some of which were discussed in the previous article on the future of the Saudi riyal, the global situation necessitates considering reconsidering the monetary policy pursued by the Kingdom for the economic consequences on the Saudi economy and the economic well-being of the citizen due to global and local changes.
\nThe economic effects of the Kingdom’s current monetary policy on the government sector and on the economic well-being of the citizen vary. Since oil is priced in dollars and the oil sector is owned by the government and constitutes no less than 90 percent of government revenues, pegging the riyal to the dollar makes it easier for the government sector to estimate domestic spending due to the stability of the relationship between the riyal and the dollar, and reduces the costs incurred by the government sector as a result of changes in the exchange rate of the local currency with the dollar. However, pegging the riyal to the dollar negatively affects the economic welfare of the citizen and the Saudi economy. The government does not seek to maximize its profits, but rather its primary goal is to maximize the economic welfare of the citizen, even if it bears additional costs for the greater benefits that are reflected on the citizen and the local economy.
\nThe fixed exchange rate policy for the riyal leads to the lack of independence of the Kingdom’s monetary policy, so the Kingdom is affected by the decisions of the monetary policy of the United States of America, which may conflict with the economic situation of the Kingdom. The economic cycles of the Saudi economy are often different from the economic cycles faced by the American economy. During this decade and before the global financial crisis, we find that the American economy is facing an economic recession that forced the US Federal Reserve to adopt expansionary monetary policies, while the Saudi economy faces the risk of inflation. However, since the riyal is pegged to the dollar, it is inevitable that the monetary policy on the dollar will be affected. The money supply at a fixed exchange rate also becomes an internal variable that is difficult for the monetary authority to control, because it is affected by the economic variables of the macroeconomy. The influence of the money supply on the economic variables of the macroeconomy limits the ability of the monetary authority to control the money supply and adopt a monetary policy appropriate for the local economy.
\nIn the case of the Kingdom, since fiscal policy, especially in terms of spending, is the policy that influences the local economy and this policy is affected by fluctuations in the global oil market, there is an urgent need for a more flexible monetary policy that can absorb some of the effects of changes in government spending on the local economy. However, monetary policy in the Kingdom increases the negative effects of changes in spending in the event of a boom or a sharp decline in oil prices through a large change in the money supply affected by economic variables that the monetary authority is unable to control, which contributes to raising inflation in the Saudi economy to a greater extent. The current situation of the Saudi economy and its severe impact on oil price fluctuations necessitates the importance of a more flexible monetary policy to absorb the negative effects of oil price fluctuations through fiscal policy on the Saudi economy.
\nIn addition to the previous variables, the global economy is facing a currency war that leads to fluctuations in currency prices against each other to achieve the economic goals of those countries, and linking to a single currency will affect the national interests of the linked country. If we take into account that the dollar, to which the riyal is linked, is facing internal economic problems, it will be affected by the changes in the global economy that were mentioned in the previous article, which contributes to changing its value against other currencies. In addition to the global trend of many countries in the world to adopt a more flexible monetary policy, this has led to a decrease in the number of countries adopting a fixed exchange rate policy. The percentage of countries that peg their currency to a single currency, most often the dollar, has decreased in recent decades to reach approximately 12 percent of the total countries in the world, while this percentage represented 63 percent of the total countries in the world in 1975. This decrease is explained by the fixed exchange rate system that prevailed during the period from 1944 to 1971, which obliged the countries that signed the agreement at that time to fix their currency against the dollar. This change and the long-term downward trend in the value of the dollar will affect the purchasing power of the Saudi riyal and will not be reflected in the benefits expected from stimulating Saudi exports in the event of a decrease in the value of the riyal against other currencies, because more than 95 percent of the Kingdom’s exports are oil and petrochemicals that are priced in international markets in US dollars. Foreign workers in the private sector constitute no less than 60 percent of the total workforce, and thus the decline in the riyal due to the decline in the dollar will lead to a decline in their real wages and demands for wage increases. Most of the local demand is met through imports from all over the world, and with the decline in the value of the riyal against most currencies of the world, the purchasing power of the riyal will decline, which will reduce the real wages of the workforce and prompt demands for wage increases, which constitute an average of 60 percent of the total cost of production in non-petroleum or petrochemical industries, which in turn raises the cost of production and weakens the competitiveness of local products at home or in international markets.
\nThe negative economic effects of continuing the fixed exchange rate policy, some of which were discussed in this article, on the local economy and the economic well-being of the citizen raise the importance of considering reconsidering this policy in a way that achieves maximizing the economic well-being of the citizen, which the state and all its agencies are supposed to seek to achieve. Since the Saudi economy depends on oil and due to the severe fluctuations in this sector, a fully floating exchange rate policy is not suitable for the Saudi economy. In light of the economic data of the Saudi economy and international variables, the exchange rate policy linked to a currency basket that takes into account the rates of imports, future changes, and the distribution of the workforce in determining the weights of these currencies to which the Saudi riyal is linked is the most appropriate to give greater flexibility to monetary policy to achieve economic well-being. Since the four Gulf countries (Saudi Arabia, Kuwait, Qatar, and Bahrain) are working together to create a single Gulf currency, a monetary council was established to achieve this goal, and one of the most important requirements is to stabilize their currencies against each other. All of these countries fix their currencies against the dollar, while Kuwait is linked to a basket of currencies, which violates the most important condition prior to launching the currency, which is fixing it against each other. Therefore, establishing this basket in the Monetary Council and linking the currencies of the Gulf countries to it may be a strategy that achieves more than one goal for the region.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

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