Exchange Rate in the Saudi Financial Market: Concept and Impact

The exchange rate is the price at which one country's currency is exchanged for another. In the Saudi economy, the exchange rate of the riyal against the US dollar is the central axis of monetary policy. Since 1986, the Kingdom has adopted a fixed peg policy for the riyal to the dollar at a rate of 3.7500 riyals per dollar. The importance of the exchange rate lies in its determination of import and export costs, closely linked to the level of inflation, foreign investments, and capital flows. The exchange rate also affects the Kingdom's ability to compete in international trade and the planning of local companies, especially those reliant on imports or exports. Stability in the exchange rate allows for clear expectations for both the public and private sectors, reducing risks associated with foreign currency fluctuations, helping to attract foreign investments and stimulate economic growth.

Since September 1986, Saudi Arabia has adopted a policy of pegging the Saudi riyal to the US dollar at a fixed rate of 3.7500 riyals per dollar. This strategic peg aims to achieve monetary stability, reduce currency volatility, and control inflation rates. The Saudi Arabian Monetary Authority (SAMA) manages this peg by monitoring foreign reserves and intervening when necessary to ensure price stability. The peg restricts some local monetary policy tools, as Saudi Arabia often needs to align with the US Federal Reserve's decisions regarding interest rates to maintain the peg. This peg reduces currency risks for investors and companies, enhances confidence in the national economy, and makes the Saudi riyal a strong and stable currency in global markets.

The determination of the exchange rate in Saudi Arabia does not rely on daily supply and demand as in free markets, but is officially fixed by the Saudi Arabian Monetary Authority (SAMA). SAMA manages substantial foreign currency reserves (exceeding $600 billion by the end of 2023) and uses them to intervene in the market when needed. If pressures arise on the riyal or dollar in the local market, SAMA intervenes by buying or selling dollars to maintain the official price. Changes in this price are rare, as strict financial policies and large reserves ensure stability. SAMA also monitors banks and exchange companies to ensure compliance with the official price and prevents the existence of a parallel currency market, keeping price differentials minimal.

The stability of the exchange rate is a crucial factor in planning the Kingdom's foreign trade. All oil exports and petrochemical products are priced in dollars, ensuring that Saudi companies receive fixed returns in riyals upon conversion. On the import side, the fixed peg contributes to the stability of import costs, especially for essential goods and raw materials, reducing cost fluctuations for companies and consumers. Conversely, any global change in the dollar implicitly reflects on the purchasing power of the riyal, whether in imports from Europe, Asia, or elsewhere. Overall, thanks to the pegging policy, the Kingdom does not face sharp fluctuations in the prices of imported goods or exports, enhancing the competitiveness of the Saudi economy in regional and global markets.

Saudi banks heavily rely on exchange rate stability in managing their operations, especially concerning dollar-denominated deposits and loans. The fixed peg ensures that any conversions between the riyal and dollar occur at a known price in advance, reducing the risks of profits arising from currency fluctuations. This stability also supports the profitability of banks and encourages them to engage in international transactions without concern over sudden changes in the exchange rate. Additionally, it enhances banks' ability to provide trade finance, travel, and remittance services to citizens and companies more securely and transparently. If global interest rates change, Saudi banks often follow the trends of the Federal Reserve to maintain the peg, impacting borrowing costs and customer deposits.

Saudi listed companies on Tadawul, especially major exporters like oil and petrochemical companies, benefit from the fixed exchange rate of the riyal against the dollar. These companies receive their revenues in dollars and convert them to riyals at a fixed rate, providing them with stability in revenues and costs, facilitating budget management and long-term planning. For importing companies (such as automotive, electronics, and food companies), stability in the exchange rate ensures stable purchase prices and limits the impact of foreign currency fluctuations on profit margins. This financial stability positively reflects on the confidence of local and international investors in the Saudi market and encourages further investments in the industrial sector.

Exchange rate stability is considered an attractive factor for foreign investments in Saudi Arabia. Foreign investors are reassured that the value of their investments and returns will not be subject to significant fluctuations due to currency changes, enhancing the attractiveness of the Saudi market compared to countries experiencing currency volatility. Local investors also benefit from clear returns and avoidance of currency-related risks when investing in stocks, bonds, or industrial projects. Under Vision 2030, exchange rate stability is a fundamental pillar for attracting more foreign capital and enhancing the business environment, considering that any sudden change in the pegging policy may lead to asset repricing and changes in capital flows.

The exchange rate is closely linked to the inflation rate in the Saudi economy. Thanks to the fixed peg with the dollar, the central bank can keep inflation rates relatively low, with the inflation rate in 2024 being around 2.0%. This price stability helps protect the purchasing power of citizens and facilitates financial planning for companies and households. From a monetary perspective, SAMA is committed to adjusting local interest rates in line with the US Federal Reserve, ensuring stability in returns and capital flows. If the global economy experiences a rise in the dollar, the cost of imports may increase relatively, but the impact remains limited due to the pegging policy and high foreign reserves.

Although the primary peg is with the US dollar, the exchange rate of the riyal against other currencies (euro, pound sterling, yen, yuan) is determined based on global dollar movements. In 2024, the average exchange rate of the euro was around 4.00 riyals, sometimes rising to 4.2 riyals with global euro fluctuations. The pound sterling reached about 4.5 riyals. These prices indirectly reflect the strength of the dollar, as any movement in the dollar affects the riyal in the same direction. Therefore, companies dealing in other currencies monitor global dollar movements to estimate their future costs in riyals, knowing that fluctuations remain limited compared to economies with free-floating currencies.

In the Kingdom of Saudi Arabia, SAMA oversees all foreign currency conversion and trading operations through licensed banks and approved exchange companies. There is no active parallel or black market for currencies, and all transactions occur according to the officially announced price, with slight differentials representing conversion fees. Banks play a pivotal role in meeting the foreign currency needs of individuals and companies, whether for travel, trade, or investment. They also provide updated spot exchange rates to their clients, relying on SAMA's reference price for their pricing. This strict system ensures stability and prevents illegal speculation, enhancing confidence in the Saudi financial system.

The oil sector is the cornerstone of the Saudi economy, with nearly all oil exports priced in US dollars. The fixed peg between the riyal and the dollar enhances the stability of the Kingdom's oil revenues when converted to riyals, facilitating the preparation of the public budget and financial planning for the government and oil companies. During periods of rising global oil prices, the Kingdom's foreign reserves increase, supporting SAMA's ability to maintain the peg. Additionally, the stability of the national currency reduces financial risks associated with oil price fluctuations, making the Kingdom more capable of facing global market volatility without significant impact on the local exchange rate.

The exchange rate is linked to several important economic indicators such as foreign reserves, inflation rate, interest rates, and credit ratings. By the end of 2023, the Kingdom's foreign currency reserves reached approximately $600 billion, reflecting the strength of the economy and its ability to defend the peg. Saudi Arabia's credit rating rose to Aa1 in May 2024, reflecting international institutions' confidence in the stability of monetary and financial policy. Additionally, inflation rates remained low, and local interest rates stabilized in line with US policy. These combined indicators support the fixed exchange rate system and reflect the robustness of the Saudi economy.

The years 2024 and 2025 witnessed notable stability in the exchange rate of the Saudi riyal against the dollar, with the pegging policy remaining unchanged. Saudi Arabia aligned with the US Federal Reserve's trends in adjusting interest rates, reflecting on local monetary policy. The Saudi market did not record any significant fluctuations in the exchange rate, despite global dollar volatility. The International Monetary Fund and Saudi government entities confirmed that the peg will remain as long as foreign reserves are strong and oil prices are supportive. Additionally, high credit ratings have bolstered investor confidence in the Saudi financial system, while no official indicators suggest an intention to change the exchange rate policy in the foreseeable future.

While the fixed peg achieves monetary and economic stability, future challenges may compel policymakers to review current mechanisms. Among the main challenges are sharp fluctuations in the US dollar, changes in global oil markets, geopolitical shifts, and the growth of foreign investments that may require greater flexibility in monetary policy. Additionally, the shift towards economic diversification under Vision 2030 may impose new requirements on the exchange rate system. Nevertheless, official entities continue to affirm that the current peg serves the Kingdom's economic interests at present, with readiness to review policies if economic conditions necessitate.