Question

What will be the effect of COVID-19 pandemic on Saudi Arabia in terms of their balance of payments, the credit market and interest rates, and given the fact that their currency is pegged to the USD, what will happen to their currency? How can the Kingdom finance their fiscal deficit; by debt or raising taxes or etc?

Answer 1

Overview of the current economic situation in Saudi Arabia:

1. The economic activities are hit due to movement restrictions. Therefore the local industries and commerce are not generating revenue.

2. Oil production and export is one of the highest revenue generating sector in Saudi Arabia. Due to restrictions in oversees trades and shutting down of industries consuming oil, the demand for oil has reduced drastically.

3. Tourism, entertainment and leisure sector, other important revenue generating sectors are almost shut.

Effect of COVID-19 pandemic on Saudi Arabia's economy:

1. In terms of their balance of payments- Saudi Arabia has an export-based economy. In words of balance of payment, the value of exports exceed imports in Saudi Arabia. Since crude oil constitutes the major portion of the exports, whose overseas demand has fall sharply, the total value of exports shall fall too.

Regarding imports, machines, computers, vehicles, cereals and medicines are the major import items of Saudi Arabia. A large portion of these import items are consumer-based goods and are likely to be in-demand, though at a lower volume.

Thus, we can say that the balance of payment will narrow down, in other words, the gap between the values of exports and imports shall reduce due to the COVID-19 pandemic in Saudi Arabia.

2. In terms of the credit market- The credit market in Saudi Arabia is likely to suffer too as during financial crisis, people's tendency to invest falls. Since the economic activities are not functioning properly and no guaranteed time frame to exit from the pandemic, people are not willing to invest in the market. Therefore the credit market has witnessed a fall too.

3. In terms of interest rates- The interest rates in Saudi Arabia has decreased. Since people are not investing, the demand of funds has declined. Therefore, fall in demand has led to fall in interest rates in response.

4. In terms of valuation of Saudi Arabia's currency, i.e. Saudi Arabian Riyal (SAR), since it is pegged to the USD- Due to the economic crisis, SAR has fall below the pegged USD 2.66, i.e. 1 riyal = 2.66 dollars. This imples devaluation of SAR in comparision to USD.

Few Suggestions to finance Saudi Arabia's fiscal deficit:

1. By providing financial support to industries to revive them.

2. By adopting measures to increase cash flow in the economy such as reducing repo rate, interest on loans etc.

3. By reducing taxes to increase the disposable income of consumers.