While Saudi Arabia seeks to diversify its economy, the Saudi economy is dominated by the petroleum sector. In addition, the Saudi Arabian Riyal (SAR) is pegged to the U.S. Dollar.
In a critical essay, discuss the advantages and disadvantages of the pegged exchange rate. Indicate the main considerations Saudi Arabia faces from a currency perspective (e.g., currency values, interest rates, inflation, and trade issues) that ensue given two scenarios:
The second scenario is a dramatically increasing world oil price.
Directions:
Your essay is required to be four to five pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements.
Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles. follow APA style guidelines.
Requirements: 5 pages
Answer preview
The current COVID -19 pandemic has also lowered the level of oil consumption in the United States, which has caused a significant recession in Saudi Arabia and other major oil-exporting countries. This has increased the budget deficit, and the government is being forced to increase its debt ceiling from the current 30% to 50% of its GDP. Suppose Saudi Arabia decides to de-peg its currency from that of the United States. In that case, Riyal will be evaluated at a rate of at least 2.7% for about twelve months from the current 3.75 to 3.85 Riyals per every Dollar (Elbadawi et al., 2017). Other countries like Qatar, the UAE, and Kuwait also hold a U.S. Dollar peg. However, it is easier for them to maintain the peg regardless of the current oil prices fluctuations because they have sufficient central bank reserves and Sovereign Wealth Fund (SWF) assets.
