Dollar to Riyal: Understanding Exchange Rates in Saudi Arabia

The term Dollar to Riyal refers to the official exchange rate between the US dollar (USD) and the Saudi riyal (SAR), which forms the basis of the monetary system in the Kingdom of Saudi Arabia. For decades, Saudi Arabia has adopted a policy of pegging the riyal to the dollar at a rate of 3.75 riyals per dollar, with SAMA managing this peg to achieve monetary stability and support the national economy. The importance of the Dollar to Riyal stems from it being the primary indicator that determines the value of the riyal in international transactions, contributing to the stability of imported goods prices, import costs, and export revenues (especially oil). It also plays a crucial role in attracting foreign investments, providing foreign investors and financial analysts with certainty regarding the value of the local currency, and reducing the risks of exchange rate fluctuations. Furthermore, the Dollar to Riyal indirectly affects government financial policies, as most government revenues depend on dollar-denominated oil exports. Therefore, understanding the mechanism of the Dollar to Riyal is essential for all followers of the Saudi financial markets, whether they are investors, analysts, or individuals seeking to understand macroeconomic dynamics.

Saudi Arabia officially began its policy of pegging the riyal to the US dollar in the mid-1980s, specifically in 1986, when SAMA fixed the riyal exchange rate at 3.75 against the dollar. This step was a response to fluctuations in oil and global markets at that time, and a desire to provide a stable monetary environment that supports trade and investment. Prior to this, the Saudi riyal underwent various pegging phases, including being pegged to the British pound and then to the US dollar in an unstable manner. Saudi Arabia specifically chose the dollar because most of its oil revenues are denominated in dollars, and because the dollar is considered the world's most important reserve currency, enhancing national economic stability. The peg to the dollar helped mitigate the effects of global financial crises, such as the Asian crisis in the 1990s and the global financial crisis in 2008, as the local currency did not experience sharp fluctuations as seen in economies with floating currencies. Thanks to this peg, Saudi Arabia has achieved long-term stability in the exchange rate, allowing investors and the private sector to plan their finances with greater confidence.

SAMA acts as the responsible authority for managing monetary policy in the Kingdom, including fixing the exchange rate of the riyal against the dollar. To achieve this, SAMA relies on substantial foreign currency reserves, especially US dollars, and uses these reserves to meet any demand for dollars in the local market, whether from banks, companies, or individuals. When demand for dollars increases, SAMA intervenes by selling dollars and buying riyals to maintain the official price. If demand decreases, SAMA buys dollars and sells riyals. SAMA also monitors the differences between local and US interest rates, typically adjusting to any changes in interest rates set by the US Federal Reserve to maintain the attractiveness of the riyal and prevent capital flight. Additionally, SAMA imposes strict controls on speculative operations and currency conversions to prevent any undesirable fluctuations in the exchange market. This precise mechanism ensures continued monetary stability and is based on the strength of foreign reserves, which cover more than 30 months of imports, reflecting SAMA's ability to support the peg even during periods of economic pressure.

The fixed exchange rate between the dollar and the riyal affects several economic aspects in the Kingdom. Firstly, it contributes to the stability of local prices, especially for imported goods, which constitute a significant portion of local consumption. Thanks to the peg, the risks of imported inflation resulting from fluctuations in foreign currency prices are reduced. Secondly, the peg provides stability in government revenues, as most of the state's revenues from oil exports come in dollars and can be easily converted to riyals without exchange rate losses. Thirdly, the peg enhances the confidence of both foreign and local investors, ensuring them stability in the value of their investments denominated in riyals. Fourthly, the peg helps reduce the cost of government financing and major projects, as bonds and sukuk can be issued in dollars or riyals without facing currency fluctuation risks. However, the peg carries some challenges, such as the loss of flexibility in local monetary policy, as SAMA is forced to follow changes in US interest rates even if they do not align with local economic conditions. Additionally, the peg may weaken the Saudi economy's ability to absorb external shocks in case of changes in oil prices or global financial crises.

The US dollar is the dominant currency in international trade and gains additional importance in the Saudi economy due to the heavy reliance on oil exports. Almost all Saudi oil contracts are priced and executed in dollars, making the Kingdom's oil revenues entirely dollar-denominated. This reality reinforces the logic of pegging the riyal to the dollar to avoid exchange rate fluctuation risks when converting revenues to the local currency. In addition to oil, most non-oil exports and imports are also linked to the dollar, either directly or indirectly. In the trade balance, the stability of the exchange rate facilitates the pricing of goods and services, helping Saudi companies manage their international financial obligations clearly and consistently. Companies engaged in exporting and importing benefit from the riyal-dollar peg by reducing the need to hedge against currency risks, positively impacting operational costs and financial planning. At the individual level, the stability of the riyal's value against the dollar is a motivating factor for remittances from expatriates and the import of consumer goods.

The fixed exchange rate plays a pivotal role in evaluating stocks and companies listed on the Saudi financial market (Tadawul). Most companies' financial statements are prepared and valued in riyals, but many large companies, especially in oil and petrochemicals, generate revenues in dollars. The stability of the exchange rate means that the profits of these companies are not affected by currency fluctuations, providing significant clarity in their annual financial results and making them more attractive to local and international investors. Additionally, the peg reduces the risks of fluctuating declared profits due to exchange rate changes, which is important for investment funds and financial portfolios. Conversely, the peg may restrict the flexibility of companies that rely on importing currencies other than the dollar, as their costs remain tied to the prices of those currencies against the dollar rather than the riyal directly. Moreover, the Saudi market is influenced by the global investment climate, as changes in the global value of the dollar and movements in US markets lead to changes in investor sentiment, despite the riyal's local stability.

Foreign reserves are one of the most important tools ensuring the continuity of the riyal-dollar peg. By the end of 2024, the Kingdom's foreign currency reserves reached approximately $505 billion, equivalent to more than 30 months of imports. This substantial reserve gives SAMA the ability to intervene in the exchange market whenever necessary, whether by selling or buying dollars to maintain the official price. Additionally, foreign reserves provide strong support for confidence in the Saudi economy and enhance the Kingdom's credit ratings with international rating agencies. The existence of this large reserve means that the Kingdom can meet its international obligations and cover any demand for dollars even during periods of crises or declining oil revenues. The growth in foreign reserves is a positive indicator of the strength of the Saudi economy and its ability to face financial challenges, reflecting the efficiency of monetary policy management in the Kingdom.

Due to the peg of the riyal to the dollar, SAMA follows the monetary policies of the United States, especially regarding interest rates. When the US Federal Reserve raises interest rates, SAMA often raises local interest rates by the same or a similar percentage to maintain the attractiveness of the riyal and prevent capital flight. In 2024, the repo rate in Saudi Arabia increased from about 3% to 5.5%, in line with US monetary policy. This approach achieves two main objectives: first, supporting the peg between the riyal and the dollar by maintaining an appropriate interest rate differential; and second, combating local inflation resulting from rising global commodity prices. On the other hand, the peg limits SAMA's flexibility in adjusting interest rates to suit local conditions, as it may sometimes be necessary to raise or lower interest rates for internal reasons, but the necessity dictates following US policy. Nevertheless, monetary stability remains a top priority for decision-makers in Saudi Arabia.

Saudi banks play a pivotal role in implementing the peg policy between the riyal and the dollar. They manage accounts in both currencies for their clients and settle international trade transactions through a vast network of banking relationships with US and global banks. Banks are committed to SAMA's instructions regarding exchange rates and the controls imposed on currency conversions. In the event of a sudden and large demand for dollars, banks communicate with SAMA to ensure that requests are met at the official price. Banks also play a role in educating clients about currency risks and providing the necessary hedging tools for companies engaged in international trade. In the context of financial services, Saudi banks offer a variety of products related to foreign currency management, such as international transfers, trade financing, and currency risk hedging services. The stability of the Dollar to Riyal allows banks to focus on developing their products without having to bear currency fluctuation risks, positively impacting the financial sector as a whole.

Currency exchange and conversion companies are widespread in various regions of the Kingdom and are subject to strict oversight by SAMA. These companies play a role in meeting the needs of individuals and businesses for currency conversion and facilitating trade and travel operations. Thanks to the stability of the exchange rate between the dollar and the riyal, currency conversion operations are characterized by clarity and ease, as customers know in advance the exchange rate they will receive without the risks of price fluctuations. Exchange companies benefit from commission differentials when converting large amounts, but do not face price change risks as in countries with floating currencies. Additionally, these companies provide money transfer services abroad, especially for expatriates and residents, and support the flow of international financial remittances, which represent an important part of the Saudi economy. SAMA and the Capital Market Authority are keen to monitor currency exchange operations to prevent illegal speculation and ensure transparency in the market.

The peg policy between the riyal and the dollar plays a fundamental role in facilitating the preparation of the state budget and implementing government financial plans. Since the Kingdom's main revenues from oil exports come in dollars, converting them to riyals at a fixed exchange rate allows ministries and government institutions to plan accurately and reduce revenue fluctuation risks. For example, if one billion dollars is allocated for a government project, its value in riyals will always be 3.75 billion riyals, regardless of changes in global markets. This financial stability positively reflects on the implementation of major projects, infrastructure financing, and social spending. On the other hand, in cases of a declining dollar or falling oil prices, the government may face challenges in balancing the budget, but the substantial foreign reserves and flexible financial policies give the government the ability to cope with such circumstances. Overall, the peg provides a strong foundation for the stability of public finances in the Kingdom.

Most Gulf Cooperation Council (GCC) countries share a policy of pegging their currencies to the US dollar, albeit at different rates and exchange prices. For example, the UAE dirham is pegged at about 3.6725 dirhams to the dollar, and the Bahraini dinar at 0.376 dinars to the dollar. This similarity in monetary policies achieves regional stability and enhances economic integration among Gulf countries, especially with a significant volume of shared trade and investments. The main difference between the riyal and other Gulf currencies lies in the size of foreign reserves, the strength of the national economy, and accompanying financial policies. Saudi Arabia, being the largest economy in the region, enjoys substantial foreign reserves and greater financial flexibility, giving it a greater ability to defend the peg of the riyal to the dollar even during crisis periods. In contrast, some other countries may face challenges more quickly in the event of economic pressures or declining oil revenues. Overall, the peg policy to the dollar remains the strategic choice for most Gulf countries until mid-2025, with no indications of significant changes in this policy.

Under the fixed peg policy between the riyal and the dollar, local investors have less need to seek alternative investment havens due to currency risks. However, some resort to investing in gold, cryptocurrencies, or foreign assets for diversification or seeking higher returns. It is worth noting that alternative currencies such as the euro or Japanese yen do not compete with the dollar in the Saudi market in terms of stability and liquidity. As for cryptocurrencies, while they are witnessing increasing global interest, their impact on the Saudi market remains limited due to regulatory constraints and the absence of official trading in the local market. Gold is considered a traditional haven during periods of economic volatility, but the stability of the riyal makes the demand for it for currency-related reasons less intense compared to markets with floating currencies. Overall, the dollar remains the primary currency in the Saudi market, and the stability of the riyal against the dollar gives the local economy a competitive advantage in facing global fluctuations.

The years 2024-2025 have seen several developments related to the peg policy between the riyal and the dollar. SAMA has repeatedly affirmed its commitment to the peg policy, emphasizing that this option is strategic and serves the stability of the national economy. On the other hand, the Saudi government's issuance of dollar-denominated sukuk and bonds in global markets has enhanced international investors' confidence in the Saudi economy. SAMA has also continued to develop the national digital currency project, while confirming the continuation of the peg to the dollar and not affecting the current monetary policy. Among the future challenges, there is a need to continue strengthening foreign reserves and keeping pace with developments in global markets, especially in light of rising US interest rates or fluctuations in oil prices. It also requires careful monitoring of capital flows and foreign investments to ensure that no sudden pressures occur on the exchange market. The flexibility of financial policy and the strength of foreign reserves remain the fundamental guarantees for the continuity of the peg and the stability of the Saudi economy in the long term.