The Saudi riyal (SAR) is the official currency of the Kingdom of Saudi Arabia. Created in 1925, the riyal has a fascinating history that provides insights into Saudi Arabia’s economic development. This article will provide a comprehensive overview of the SAR, including its origins, exchange rate policy, circulation, security features, and role in the modern Saudi economy.

Origins and History of the Saudi Riyal

The riyal was introduced in Saudi Arabia by King Abdulaziz in 1925, replacing the Gulf rupee that had been used previously. The name “riyal” comes from the Spanish word “real” which was used for the silver coinage in Ottoman times.

Initially, the Saudi riyal was equivalent to and exchangeable with the British pound sterling. This reflected the influence of the British in the region at the time through its protectorate status and close association with the emerging Saudi kingdom.

In the 1930s, the riyal was devalued in line with devaluations of the pound sterling. It was then pegged to the U.S. dollar in the 1970s at a rate of 1 USD = 3.75 SAR.

This fixed exchange rate was maintained until 1986 when declining oil revenues put pressure on the SAR. In the face of these economic challenges, the fixed peg became unsustainable and the riyal was devalued to a rate of 1 USD = 3.65 SAR.

Since 1986, the exchange rate has continued to be managed and pegged closely to the U.S. dollar. This exchange rate policy provides economic stability and predictability for traders and investors dealing in the riyal.

Modern Circulation and Denominations

Today, the Saudi riyal is issued exclusively by the Saudi Arabian Monetary Authority (SAMA), the nation’s central bank. The main banknotes in circulation are the 1, 5, 10, 20, 50, 100, and 500 riyal notes. The banknotes feature iconic Saudi landmarks and images of Kings Abdulaziz and Faisal on the obverse.

The main coins in circulation are the 5, 10, 25, 50, and 100 halala, and 1 riyal coins. The 1 riyal coin is produced in both silver and bronze versions.

Lower denominations of coins such as 1 and 5 halala are rarely used anymore due to inflation over the years. Cash transactions are often rounded to the nearest 5 or 10 halala in daily life.

The Saudi riyal banknotes are printed on high-quality cotton paper with multiple security features including watermarks, serial numbers, latent images, and metallic threading. These features help prevent counterfeiting and maintain integrity of the currency.

Exchange Rate Policy and Convertibility

As mentioned earlier, the Saudi riyal has been pegged to the U.S. dollar at a rate of 1 USD = 3.75 SAR since 1986. This fixed exchange rate provides critical stability for the economy given its reliance on dollar-denominated oil exports.

While the riyal is the strongest currency in the Middle East region in terms of its peg to the dollar, it is not a freely convertible currency. There are certain restrictions on exchanging or transferring large sums of SAR both within Saudi Arabia and abroad. The currency can only legally be exchanged or transferred by authorized local banks and exchange establishments.

For smaller everyday transactions, the SAR is easily exchangeable and can be freely used by foreigners visiting Saudi Arabia. Its peg to the dollar facilitates easy calculation and conversion of prices for tourists. SAMA also exercises stringent controls to prevent illicit flows of the riyal abroad.

Role in the Saudi Economy and Foreign Trade

As the national currency, the Saudi riyal plays an essential role in the country’s economy and foreign trade. It serves as a medium of exchange, store of value, and standard for deferred payments within the Kingdom. As one of the most stable currencies in the Gulf region, it also attracts foreign investment inflows, loans, and aid for economic development.

Saudi Arabia’s position as the largest oil exporter globally means the riyal is heavily influenced by international oil prices which are denominated in dollars. When oil prices rise or fall, it directly impacts the supply of petrodollars and subsequently the riyal’s exchange rate and overall money supply.

The country also relies heavily on imports for goods and services. The strength and stability of the riyal against other currencies is crucial for paying for critical imports, facilitating inward remittances, and determining costs of living for average Saudis.

A weaker riyal makes imports more expensive for Saudi consumers and businesses. But it conversely makes Saudi Arabian exports cheaper and more competitive abroad. Striking the right balance is an ongoing dance for the country’s economic policymakers.

Challenges and Outlook

In recent years, there has been gradual pressure on the Saudi Arabian riyal due to declining oil revenues and economic uncertainties. This has put the decades-long dollar peg under scrutiny by analysts. In the long run, threats of global energy transition away from hydrocarbons also hang over the future relevance of the SAR.

Nonetheless, currency devaluation comes with its own pains. Preserving the riyal’s value provides critical import-purchasing power and economic stability most desired by the government and businesses.

Going forward, timely fiscal reforms, privatization initiatives, and economic diversification plans like Saudi Vision 2030 would be crucial to sustainably strengthen the foundations of the currency. Expanding non-oil industries, foreign investments, tourism revenues and private sector growth could help bolster the riyal over the next decade.

The SAR will continue serving as the lifeblood of trade and economic growth for the Kingdom. Its fortunes will remain entwined deeply with Saudi Arabia’s hydrocarbon exports, overseas trade, and dollar-linked monetary policy.

Key Facts and Figures

  • Official ISO currency code: SAR
  • Issued by: Saudi Arabian Monetary Authority
  • Symbol: ر.س or SR
  • Introduced: 1925
  • Pegged to: U.S. dollar (1 USD = 3.75 SAR)
  • Banknotes: 1, 5, 10, 20, 50, 100, 500 riyal
  • Coins: 5, 10, 25, 50, 100 halala, 1 riyal
  • Popular nicknames: Riyal, Rial

Conclusion

For almost a century, the Saudi riyal has served as a stable medium of exchange and store of value both within Saudi Arabia and abroad. Its fortunes remain tied to the country’s oil exports and currency policy pegged closely to the U.S. dollar.

While economic diversification could allow more flexibility for the riyal in the long run, the dollar peg provides critical stability for now. With prudent reforms and proactive economic planning, the SAR can continue to support trade and monetary policy for the Arab world’s largest economy.