Saudi Arabia is a part of Gulf Cooperation Council (GCC) which is a union of the gulf countries for political and economic cooperation. The GCC countries are oil producing countries and most of them are pegged to the US dollar. The pegged exchange rate refers to a fixed rate against the USA. This means there will be no fluctuation. The basic aim of the strategy is to avoid uncertainties in the international transactions. However the stability comes at the cost of being able to control the monetary policy which means there is less flexibility and dependency on Dollar rate.  The less control means they cannot control the growth in the sector and money supply also the interest rates. Saudi is trapped in the dilemma as if it opts out of the peg it will mean to trade Riyals in open market and sell dollars not only this but price of Oil will experience a low that may hurt the Saudi Arabian economy. The cost of maintaining the peg with benefits is high but a strategic opts out will benefit the economy to become independent (Alkhareif, Barnett, & Qualls, 2017)

             Saudi Arabia has very less control over the inflation rates and the interest rates. LIBOR is not even stable and everything is dependent on the US dollar stability. This is not as bad as it sounds as there is market stability. But this is greatly affecting the growth and this is the reason Saudi Arabia is going towards oil production based on global demand and wants a stable rate. Not only this Saudi Arabia is looking towards expansion but due to constraints from pegged currency they have not been able to do much. They have introduced Value added tax. The VAT has caused inflation as Saudi Arabia doesn’t really have the means to maneuver the money supply and other factor. They have to take these measures to facilitate growth.

References of The Pegged Currency and Economy of Saudi Arabia’s Currency and the U.S Dollar (Analysis on Economy)

Abed, G. (2017). The Saudi riyal/dollar peg: time for a change? Retrieved November 15, 2018, from https://www.ft.com/content/37e30e30-4d13-39d0-bef9-2315c06d8eff

Alkhareif, R. M., Barnett, W. A., & Qualls, J. H. (2017). Has the Dollar Peg Served the Saudi Economy Well? International Finance and Banking, 4(1), 145-162.