Exchange Rate Volatility & Implications for Saudi Arabia's Foreign Trade

Abstract

The volatility of a country's foreign exchange rate affects its economic competitiveness. Exports of goods and services become comparatively more expensive and imports become comparatively less expensive if the domestic currency appreciates relative to the currencies of major foreign trade partners. A real appreciation of the domestic currency will adversely affect exporters' sales chances in foreign markets and will shift domestic competition in favor of imported goods and the balance of trade, the difference between exports and imports, will tend to deteriorate as a result of real appreciation. The converse of the above is true if the domestic currency depreciates relative to that of major foreign trade partners. The Saudi Riyal is pegged to US Dollar and there have been demands to revalue the Saudi Riyal due to the continuous weakening of US Dollar against major currencies of the world during the past two years and the not so bright outlook of US economy during the next twelve months. In the context of this the article reviews and analyzes the Kingdom's foreign trade during 2001-06 in terms of major sources and destinations of foreign trade, major import and export commodities, exchange rate movements on the Kingdom's foreign trade and trade balance. Further, broad strategies have been suggested for coping with current exchange rate volatility having implications for the Kingdom's foreign trade.