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The Saudi Riyal (SAR) is the official currency of Saudi Arabia and holds significant importance both domestically and globally due to the country’s economic power, particularly in the oil sector. ‘
This currency has evolved over the years, playing a key role in facilitating trade and commerce in Saudi Arabia and the Middle East. In this article, we will look at the Saudi Riyal’s history, significance, and its impact on the economy.
The Saudi Riyal has been the official currency of the Kingdom of Saudi Arabia since the country was established in 1932. Prior to that, various forms of money, including silver coins known as Hejaz Riyals and Maria Theresa Thalers, were used. With the establishment of the modern Saudi state by King Abdulaziz Al Saud, the currency system was unified, and the Saudi Riyal was introduced as the national currency.
The early Riyal was pegged to silver, and it underwent several transformations over the decades. Eventually, in 1986, the Riyal was pegged to the US dollar instead, with a fixed exchange rate of 3.75 SAR per USD. This exchange rate stability has helped protect Saudi Arabia’s economy from volatile currency fluctuations, particularly important given the global nature of the oil market, where transactions are typically conducted in US dollars.
As one of the largest oil producers in the world, Saudi Arabia’s economy is deeply intertwined with global oil markets. The Saudi Riyal’s fixed peg to the US dollar ensures the country’s currency remains stable, regardless of fluctuations in oil prices. This stability is crucial because oil exports account for around 80% of the country’s revenue and nearly 40% of its GDP.
Saudi Arabia is a leading member of OPEC (Organization of the Petroleum Exporting Countries) and exerts considerable influence on oil prices worldwide. The pegged Riyal helps maintain a stable currency that is less vulnerable to external economic pressures, ensuring that oil revenues remain predictable and steady when converted into Riyals from USD.
The Saudi Arabian Monetary Authority (SAMA) plays a vital role in regulating and maintaining the stability of the Riyal. Established in 1952, SAMA acts as the central bank of Saudi Arabia and is responsible for managing the country’s monetary policy, including issuing currency, controlling inflation, and overseeing banking operations.
SAMA’s role in managing the Riyal’s peg to the US dollar ensures that the currency remains strong and resilient against external shocks, such as changes in oil prices or global financial crises.
SAMA also manages the country’s foreign reserves, ensuring there is enough liquidity to maintain the currency peg. In times of crisis or when oil prices fluctuate sharply, the central bank can intervene in currency markets to protect the Riyal’s value.
In June 1986, the Saudi Riyal was officially pegged to the International Monetary Fund´s (IMF) special drawing rights (SDRs). In practice, it has been fixed at the exchange rate 1 USD = 3.75 SAR for a long time, but this rate was finally made official on January 1, 2003.
In mid-September 2007, the United States Federal Reserve cut interest rates and the SAMA elected to not follow in suit, since they feared that inflation and a low riyal value would be the result of them lowering interest rates in the same way. As SAMA did not lower interest rates, the SAR briefly rose to a 20-year high. In early December 2007, it returned to its normal peg against the USD.
The 3.75 SAR to 1 USD peg is a key factor in the Riyal’s stability. This fixed exchange rate ensures that the Saudi economy remains shielded from extreme volatility in the foreign exchange markets, which could otherwise negatively impact the country’s heavy reliance on oil exports.
So, why is it pegged to the USD and not to something else, e.g. the price of silver to which it used to be pegged? The decision to peg the Riyal to the US dollar stems from the fact that oil is globally traded in US dollars. By linking the currency to the dollar, Saudi Arabia reduces the risks of currency fluctuations that could affect the value of its oil revenues.
By maintaining a stable exchange rate, SAMA helps control inflation and protects Saudi consumers from price volatility on imported goods, especially since many products are purchased internationally using dollars.
While the Saudi Riyal was not introduced until the Kingdom of Saudi Arabia was established in 1932, the name riyal is considerably older, and a currency named riyal was one of the primary currencies in the Mediterranean region during the Ottoman era. The riyal was the currency of Hejaz, and based on (but not equivalent to) the Ottoman 20 kuruş coin. The Hejaz riyal and the Ottoman 20 kuruş coin had the same weight, but the riyal was minted in .917 fineness instead of the .830 fineness used for the 20 kuruş coin.
When the Saudi Riyal was created, it used the same specifications as the Hejaz riyal, and circulated alongside other coins in the region, but the Saudi Riyal was worth 22 Ottoman kuruş.
In 1935, the Saudi Riyal was changed to coin that had the same silver content as the Indian rupee at the time.
Since 1963, 1 Saudi Riyal has been divided into 100 halalas. Prior to this, the Saudi Riyal was divided into qirsh instead, due to influence from the Ottoman Empire. The orignal Saudi Riyal was divided into 22 qirsh, but in 1960 the system was changed to 1 Saudi Riyal = 20 qirsh. This system was shortlived, as the division into qirsh was replaced by the 100 halalas in 1963.
In 1953, the Saudi Arabian Monetary Agency (SAMA) began issuing Hajj Pilgrim Receipts. They were not banknotes, but they resembled banknotes, and were intended for Muslims pilgrims from other countries travelling to and from Mecca in Saudi Arabia. Each Hajj Pilgrim Reciept was for 10 Saudi Riyals and pilgrims arriving from abroad could exchange their foreign currency for reciepts and use them in Saudi Arabia. Even though they were only intended for pilgrims, the reciepts quickly became a widely accepted form of payment in Saudi Arabia, and much more popular than silver coins for larger transactions.
Inspired by this, SAMA decided to create real banknotes, and on June 15, 1961, banknotes for 1, 5, 10, 50 and 100 Saudi Riyals were issued.
The Hajj Pilgrim Receipts continued to be in use until they were withdrawn on February 1, 1965.
Saudi Arabia’s ambitious Vision 2030 plan, spearheaded by Crown Prince Mohammed bin Salman, aims to diversify the country´s economy away from its heavy dependence on oil. Part of this vision involves increasing foreign investment, developing new industries, and modernizing infrastructure.
The stable Saudi Riyal plays a critical role in attracting foreign direct investment (FDI), as investors are more likely to commit capital to the Saudi market knowing that the Riyal’s peg to the US dollar reduces the risk of currency depreciation. Moreover, the Riyal’s stability ensures that foreign companies can safely repatriate profits without facing significant currency risks.
Despite its advantages, maintaining the Riyal’s peg to the US dollar does present some challenges. If the global oil market weakens for a prolonged period, Saudi Arabia could face difficulties in maintaining the peg due to a drop in oil revenues. Moreover, in a low oil price environment, the country’s reserves may diminish, which would put pressure on SAMA to adjust its fiscal policies to protect the currency. There have been periodic discussions about the long-term viability of the peg, particularly during the 2014-2016 oil price crash, but the Saudi government has reiterated its commitment to maintaining the peg.
The Saudi Riyal is a stable and reliable currency that plays a central role in both the Saudi and global economies. Its peg to the US dollar ensures that the currency remains stable in a highly volatile global oil market. The Riyal’s stability, backed by the Saudi Arabian Monetary Authority (SAMA), is crucial for maintaining confidence among investors and facilitating trade within the Middle East and beyond. As Saudi Arabia works to diversify its economy under the Vision 2030 initiative, the Riyal will continue to play a pivotal role in attracting investment and ensuring financial stability as the nation moves toward a more diversified, sustainable economic model.