Saudi Riyal: Types, Impact on Global Markets, Pros & Cons

The Saudi Riyal has a remarkable historical journey interwoven with the formation of the Kingdom of Saudi Arabia in 1932. Initially, Saudi Arabia operated under a bimetallic system, where British gold sovereigns and silver Riyals were the basis of its monetary structure. The transition towards a single currency, the Saudi Riyal, commenced and was initially backed by Saudi gold guineas until 1959, when the Saudi Arabian Monetary Agency established the Saudi Central Bank.
This monetary evolution marked a crucial transition from the bimetallic system to the adoption of a fiat money system, indicating a milestone in Saudi Arabia’s financial autonomy.

Before its peg to the U.S. dollar, the Saudi Riyal found its alignment with the Special Drawing Rights (SDR) basket created by the International Monetary Fund, facilitating stability through diversification. However, in 1986, Saudi Arabia decided to peg the Riyal to the U.S. Dollar at a fixed exchange rate of 3.75 SAR. This peg has endured, exhibiting resilience through various global economic upheavals.

The pegging of the Saudi Riyal to the U.S. Dollar holds a unique significance, offering stability and predictability in trade and investments. However, this alignment constrains independent monetary policy in Saudi Arabia. Notably, during the U.S. Federal Reserve’s interest rate reduction in 2007, Saudi Arabia opted to maintain the 3.75 SAR exchange rate to prevent potential hyperinflation. This decision highlights the Riyal’s interdependence with the dollar, significantly influencing Saudi Arabia’s economic policies.

Saudi Arabia stands as a formidable player in the global oil and gas industry. Contributing about 12% of the world’s oil output in 2020, it ranks as the second-largest oil producer worldwide. With extensive oil reserves and relatively low production costs, Saudi Arabia holds a prominent position among the top-three oil producers, ensuring continued global influence in the energy sector.

The country’s oil and gas industry predominantly falls under the control of Saudi Aramco, a government-owned company that underwent a historic shift with a 1.5% initial public offering in 2019. While international oil companies refrain from direct engagement in Saudi Arabia’s oil production, collaborative ventures with Saudi Aramco in joint-venture refineries and petrochemical plants are observable, forming strategic partnerships.

In the midst of the oil crisis in 2016, a discourse emerged about potentially devaluing the Riyal due to declining oil prices, impacting Saudi Arabia’s oil export revenues. Despite this pressure, the Saudi Arabian Monetary Authority refrained from modifying the peg. Subsequently, oil prices rebounded, alleviating some economic stress, demonstrating the Riyal’s resilience to market fluctuations.

The fixed exchange rate of 3.75 SAR to USD has remained constant since 1986, providing a consistent framework for international trade and financial transactions. Meanwhile, the SAR to Indian Rupee exchange rate, as of February 28, 2022, stood at 1 SAR equating to 20.13 Indian Rupees, impacting cross-border trade and investments between Saudi Arabia and India.

Saudi laws impose a restriction on carrying more than 60,000 Saudi Riyal out of the country. This limit finds its roots in the historical context of Riyal’s peg to the dollar, originating from the geopolitical and economic agreements between Saudi Arabia and the United States, notably during the Arab-Israeli war.

No, the Saudi Riyal is not a restricted currency. It can be freely bought and sold without any limitations or constraints, promoting free financial interactions.

The Riyal’s peg to the Dollar is a historical accord between Saudi Arabia and the United States, rooted in geopolitical negotiations. This agreement, inclusive of pricing oil globally in U.S. dollars, mutually benefits the Saudi economy and fosters enduring economic relationships.