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Tuesday, 31 January 2017

The Saudi riyal/dollar peg: time for a change?

The Saudi riyal/dollar peg: time for a change?:

"The Gulf Cooperation Council countries’ currencies have been pegged to the US dollar (Kuwait’s is pegged to a dollar-dominated basket of currencies) for nearly three decades and the dollar peg has served these countries well. It has provided a credible anchor of stability, reduced transactions costs and simplified the conduct of macroeconomic policy. Meanwhile, despite some progress in diversification, GCC countries remain dependent, to varying degrees, on oil and gas and related activities.

With the oil price plunge since mid-2104, conditions changed in fundamental and possibly irreversible ways. As a result, GCC countries have had to call into question the appropriateness of policies that had been in place for decades. The issues are especially pressing for Saudi Arabia, with the largest and most complex of the six economies in the region and, appropriately, with the most ambitious plans to overhaul its economy.

The far-reaching transformation plan announced by Deputy Crown Prince Mohammad bin Salman last year challenged tradition by proposing partial privatisation of Aramco, the ‘jewel in the crown’ of the Saudi industrial structure, reducing subsidies, introducing domestic taxation in the form of a VAT from 2018 and, most critically, altering the structure of the labour market for Saudi nationals, including women."

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