Essay on Currency Crisis Impact on Saudi Arabia

        In the whole world, KSA is actually counted with the huge economics. By exporting oil-based products, an economic growth was experienced by Saudi Arabia in the past. KSA is the biggest exporter in terms of oil-based products and goods in the whole and gets huge profits from it. Its exports actually compromised of almost 73%.

        Around 73% export of Saudi Arabia was made up petroleum products. Therefore, due to this high dependence on the petroleum and gas industry the economy of the Kingdom experienced considerable decline due to the fluctuating oil prices in the global market.

        Moreover, the price fluctuation has also affected the exchange rates of the Saudi Arabia. The oil export corporations dominate the economy of the kingdom there fore it has direct impact on the exchange rate of the country. Hence, with the increase in oil prices the exchange rates of the Kingdom also increased whereas the decline in oil prices affects the exchange rates adversely (Liao, Shi and Xu 2018).

        The exchange rate has considerable impact on the overall economy of the word. The overall economy of Saudi Arabia has experienced significant of changing exchange rates as it has direct affect on the inflation rates, trade and other economic factors. Moreover, these affects was not only experienced at the national level abut also at the corporate level (Brahmasrene, Huang and Sissoko 2014).

        Following the adverse impact of changing exchange rates the government of Saudi Arabia has taken multiple initiatives to control the in order to control and stabilize the control rates. In this way, the government can avoid different issues associated with the changing exchange rate. In this regard, the government has initiated research studies to access the possible option for the government to regulate the exchange rate. Following this, the research will be conducted from the Saudi Arabia’s perspective. In this regard, the impact of exchange rate will be accessed on the various countries whereas; the exchange rate of Saudi Arabia will be examined in a comprehensive manner.

        The interest rates of US policy are expected to increase due to the decreasing oil prices in the global market. Consequently, the Kingdom of Saudi Arabia has facing double shocks and it will have considerable impact on the economic outlook of the country.

        As per the findings of the Empirical studies the influence of the oil price depends upon the dependence of the economy on the oil revenues as well as the way of filtering oil revenues through the actual economy. However, the impact of oil prices on the national economy is determined significantly by the size and fiscal policies of the government as these policies plays a primary role in this regard.  (Husain, Tazhibayeva, and Ter-Martirosyan (2008)).

        According to the recent studies, Alghaith et al (2014) a positive relation has been found in the oil prices and the national economic development based on the spending of government of Saudi Arabia. Likewise, based on the findings of Eltony and AlAwadi (2001) the government expenditures are mainly responsible for transmitted the oil price shocks on the economy of Kuwait.

        Moreover, the result of research studies conducted in 23 countries has found a positive connection between the impacts of oil prices on the stock market of these countries. Conversely, the changes in the interest rate have considerably less impact on the national economic outcome. According to Sheehan and Russer (1995), the monetary policy channel has limited impact on the Saudi Arabian economy.

        It is mainly because the tighter policy of the Kingdom is associated with the growth periods based higher oil revenues. Alghaith et al (2014) has find out that the non-oil output of the Kingdome has merely experienced any impact due to the increase in the Federal fund rates of United States of America however; it has negatively impacted the inflation rate of Saudi Arabia up to a considerable extent. Hence, if the federal funds rate is achieve through the improving economy of US that than the interest rate merely affect the Saudi Economy in adverse manner

        The Customer might have to purchase the products in higher price following the, adverse impacts of fluctuating rates of exchange on the national economy. With the decline in the national economy, the living standards of the people also effected and so as the purchasing power of the customer (Atrill 2014).

        Therefore, considering the importance marketing with respect to the exchange rates the government is intended to remove these negative impacts and stabilize the national economy. For avoiding the floating in the international market as achieving the stability in the exchange rates some countries peg their national currencies with the dollar.

        To achieve the stable exchange rates Saudi Riyal has pegged with the US dollar that enables it not the float in the international market. The Saudi economy has great dependence on the export of petroleum therefore, due to the recent oil price crisis in the global market Saudi Arabia has experienced considerable decline exchange rates along national revenues derived through export of petroleum.

        The pegged of Riyal and US Dollar doesn’t allow the Saudi currency to float independently in the international market but following the decline in oil prices and challenges associated with it Riyal has to be allowed float in order t managed the decreasing revenues of the Kingdom  

        According to the finding of this research the exchange rate of the Kingdom has experienced considerable effects of fluctuating oil prices. Saudi Arabia enjoyed increase in exchange rates with the increase in oil prices whereas the exchange rates decreased with the decreasing oil prices. Therefore, due to heavy dependency of petroleum industry the Kingdom has experienced considerable economy shock. In this regard, to avoid the uncertainty associated with the oil pricing and ensuring the stable economic growth it has become integral for the Saudi Arabia to diversify its national economy

        In the Kingdom of Saudi Arabia the petroleum sector contributes 40% of GDP, 85% of Export revenues and 90% of annual revenues of the government. Therefore, due to the heavy investment in this sector the non-oil sector is also dependent on oil prices

        However, following the adverse impact of oil price fluctuation on the national economy has decided to diversify its economy to reduce the reliance on petroleum sector. In this regard, the government has taken some effective steps to manage its foreign exchange rate by pegging with US dollar that has proved effective and the risk of exchange rate price has decreased (Arouri and Rault 2010).

            Now the Saudi Arabia is managing the exchange rate of money by nailing the currency rate with the United States so this strategy decreases the rate of risk for Saudi economy. This strategy has proved very beneficial for the traders as after this step the number of traders has been increasing day by day as traders don not find any difficulty in trade and in future they are willing to invest more in trading.

         Inclusively it will not wrong to say that the strategy made by Saudi Arabia has succeeded to manage the rate of foreign exchange efficiently but at the same time they have to cooperate with monetarist policy and Saudi are bound to follow the strategies decide by US (Kilian 2007).

        The recent challenge from which the Saudi Arabia is going through is due to obstinacy of monetary policy. The total revenue of country has effected as the oil prices of the state is going in decline. By considering this situation the economy of Saudi Arabia will be greatly affected in future and they have to detriment if they do not step back to monetary policy (Eslamloueyan and Kia 2015).

        In recent decades the cost of pegging of Saudi Arabia is improving which is advantageous for the economy of country as they can grab the opportunity to alternate the policy so their revenues can increased again. There is a need to censoriously think to choose unpeg policy because with this policy the economy of Saudi can extremely effected in future. It is very essential for Saudi Arabia to analyze this issue with different point of views and then take a wisely decision to minimize the threat for economy.

        Any change in exchange rate will definitely effect the both Saudi as well United States as the increase in the oil prices will cause upsurge the exchange rate of Saudi also which will be directly effected on the economy of Saudi in a positive way by increasing their total revenues. But at the same time the economy of United States will hurt as they have to purchase oil in more prices (Christoffersen 2011).

        By increasing the prices of oil Saudi Arab can take much advantage by this time as the economy of Saudi is much dependent on the trade of oil by increasing the prices it will be great opportunity for them to generate more revenues as much as they can. The states which are buying the oil from Saudi Arabia are giving much profit to them as in return of export of oil (Melville, 2017).

        Where the Saudi Arab have great benefit by the occurring change in the exchange rate in the same time it will be great loss of United States as it might be possible that there economy will suffer much challenges. It is considered that the rate of exchange should be stable so that traders can trade without any financial or other difficulty. By the continuing change in the rate of exchange will also affect the both states as the investors do not earn profits than they won’t invest in these countries also (Arouri and Rault 2010).

        The result of the research indicates that by decreasing the prices in the production of oil will directly influence on both the states by changing their GDP rate. The production of the oil will be effected by declining the rate of oil. This writing also states that inflation rate of the countries will also effected when there will be decline in the production of oil.

        This research can be proving much advantageous for the policy or strategy designer and for economists. This studies show that any change in any in the production of oil will be effected on the economy of both states at the same time it might be possible that change will prove good for one and other get in lose but it will influence both whether in positive or negative way.

        This study has also declares that the any change in the oil price whether increasing or decreasing it will be impacted on the stock rate of countries but at the same way the rate of change in stoke prices does not influence the rate of oil in any way. So it is said that to estimate the any type of changing the investigating team who are examining in the sector of oil have look at the change in stock prices well.

        Before several decades in past US currency means dollars was pegged by the Saudi Arabia. With the passage of time the policy of the Gulf countries and the kingdom of Saudi Arabia was proved very advantageous and effective for the state and due to its effectiveness the GCC countries and Saudi Arabia was successfully managed risk of exchange rate of their economy. 

        By the analysis of this research it has is clarified that the prices of Oil has play a primary role in the economy of Saudi Arabia as it is determinant  of financial growth as well as the macroeconomics of the country. It is difficult to remember the grater rates of the interest but it is not very essential to remember to determine the rate of interest but then oil rates, there is still chances for the economy to be effected. The period of the declining in the prices of oil can play a primary role in understanding the financial and economic influence on the state of Saudi Arabia.

        Furthermore the decreasing of prices of oil for long term will need the monetary amendment which will influenced on banking sectors as well as growth of economy.  The structural strategies, financial and fiscal policies have significant role in managing the difficulty which a country face by decline the oil price it also helps to generate higher rate of interest.

        The economic diversification will enable the government to focus on other priorities instead of oil only. On the structural side to by diversifying economy the other non-oil industries will also get benefits boost their growth which will be advantageous for the economy of the country.

        To achieve the stable exchange rates Saudi Riyal has pegged with the US dollar that enables it not the float in the international market. The Saudi economy has great dependence on the export of petroleum therefore, due to the recent oil price crisis in the global market Saudi Arabia has experienced considerable decline exchange rates along national revenues derived through export of petroleum.

        The Customer might have to purchase the products in higher price following the, adverse impacts of fluctuating rates of exchange on the national economy. With the decline in the national economy, the living standards of the people also effected and so as the purchasing power of the customer. Therefore, considering the importance marketing with respect to the exchange rates the government is intended to remove these negative impacts and stabilize the national economy. For avoiding the floating in the international market as achieving the stability in the exchange rates some countries peg their national currencies with the dollar.

        The interest rates of US policy are expected to increase due to the decreasing oil prices in the global market. Consequently, the Kingdom of Saudi Arabia has facing double shocks and it will have considerable impact on the economic outlook of the country. As per the findings of the Empirical studies the influence of the oil price depends upon the dependence of the economy on the oil revenues as well as the way of filtering oil revenues through the actual economy.

References of 

Arouri, Mohamed El Hedi, and Christophe Rault. 2010. "Oil Prices and Stock Markets: What Drives what in the Gulf Corporation Council Countries?" 1-23.

Atrill, Peter. 2014. Financial Management for Decision Makers . 7. Pearson Higher Ed.

Brahmasrene, Tantatape, Jui-Chi Huang, and Yaya Sissoko. 2014. "Crude oil prices and exchange rates: Causality, variance decomposition and impulse response." 44: 407–412.

Christoffersen, Peter. 2011. Elements of Financial Risk Management. Academic Press.

Eslamloueyan, Karim, and Amir Kia. 2015. "Determinants of the Real Exchange Rate in Oil-Producing Countries of the Middle East and North Africa: A Panel Data Investigation." 51: 842–855.

Kilian, Lutz. 2007. "A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries." 1-50.

Liao, Jia, Yu Shi, and Xiangyun Xu. 2018. "Why Is the Correlation between Crude Oil Prices and the US Dollar Exchange Rate Time-Varying?— Explanations Based on the Role of Key Mediators." 6: 1-13.