Currency Crisis in Saudi Arabia (Essay Sample)

Currency Crisis in Saudi ArabiaNameInstitution
Currency crisis refers to a situation where there is the insufficient foreign exchange in a country's central bank. The effect of this small foreign exchange leaves a country in a position where it is not able to maintain the fixed exchange rate. Therefore, there is an imbalance in the market and a deficit in the state balance of payment. The currency crisis often leads to a desperate economic crisis and usually it is classified as one type of financial crisis. The effect of the currency crisis in one country has a general effect on others countries in the sense that the country is an open economy. This is caused by various factors such as trade and foreign investment. Saudi Arabia is one state that has been affected by the currency crisis. Since it is one of the major oil producing countries and a major partner in the OPEC, the effects of the currency crisis were spread to the other countries. The major currency crisis took place recently in the year of 2015 (Sfakianakis, 2014). The source of the crisis, various resolutions to curb this menace, the role of the international financial bodies in how they responded to this crisis and how the country has recovered from this crisis are discussed in this essay.
One of the principal causes of the currency crisis in Saudi Arabia during this period was the continued diminishing of the oil prices. On average the price of crude oil declined by approximately half comparing with the prices of the oil in the year 2013 and 2014. Crude oil is the primary source of foreign revenue of this country. As a member of the oil producing countries (OPEC), Saudi Arabia was hit most by this decline in the oil price. It is approximated the 70% of the Saudi Arabia government revenue comes from the oil (Wael, 2012). A fall on this source of foreign income saw the nation currency reserve fall by US dollars 116 billion in the year 2015. This sudden deficit triggered a major currency crisis in the country since the country was not in the position to gain any other source of balancing its trade with other nations.
Another major contributor to the currency crisis in Saudi Arabia was the continued government spending to various areas. Under this case, the significant spending was channeled to the workforce. In this country, the majority of the human resources work for the government. It is approximated that 70% of the labor is absorbed by the government. To maintain such a high workforce, the government was forced to spend a lot of the state revenues to meet the demands. Furthermore, the government of Saudi Arabia has the third largest military investment in the world after the USA and China (House, 2012). A large sum of the revenue is channeled to meet this significant demand and thus upsetting the amount of the money that is used in maintaining a healthy and sustainable balance of trade. It should be noted that the imbalances of the trade often triggers the foreign reserves which in turn causes the currency crisis. Moreover, the government of Saudi Arabia spends a lot of money in sustaining one of the largest forms of subsidized energy and food programs. Although such a program was met to increase the availability of the energy and food, the amount of the money channeled to these projects is much and usually upset the trade balances with other countries. The government as mentioned earlier spending caused the government to outsource the money by the form of external borrowing to meet the budget. Once the loan was made the foreign reserve continued to get depleted. As a result, the currency crisis was experienced in the country.
The final primary source of the currency crisis in Saudi Arabia was the overall effects brought about by the mixing of politics and religion. Also, the role the nation had played in the Arab world affected the economic and foreign policy that saw the deficient in the foreign reserve and ultimately the start of the currency crisis. The nature of Muslim religion in the country affected the overall economic output of the country. For example, the issue of women and how they are viewed in the workforce. The women are not supposed to join the various jobs in the country. Continued observation of this culture, hunted the economic progress of the Saudi Arabia in the sense that all people were not involved in the economic output. The per capital income is reduced, and to maintain the population that is not providing the output the country can result in borrowing.
Various resolutions had been proposed to curb the currency crisis in Saudi Arabia. The first strategy that was put forward by the government was the adoption of vision 2030 as a comprehensive economic plan. The plan was adopted by the new government of Prince Mohamed who took over the government in 2015. One of the primary goals of the economic plan was to ensure that there was diversification of the economic activities. This was meant to curb the over reliance and dependency on oil trade by the Saudi. Areas such as tourism were identified and various challenges were identified that hinders those activities. One of the major hindrances to tourism was the isolation of other Muslim groups that are viewed as divergent. Good examples of this are the Iraqi Shiites and some Iranian tourism. The terrible and hearse treatment of this group of people was removed to encourage them to visit the country. The idea of this plan is to ensure that the number of tourists increases and in doing so to raise the revenue collected from such activities (Sfakianakis, 2014). The Vision 2030 also, championed the production of other minerals that are non-oil. Furthermore, the economic plan advocates for increased funding for the research and development. Saudi Arabia was one of the countries that invested the small amount of money in these fields. The project advocates for increased funding so as to gauge those areas that can be utilized. Also, there will be an identification of underutilized sectors. The main idea was to ensure there was the reduction of dependency on the oil trade. This was a significant step in ensuring that the oil prices decrease will not cause a currency crisis in the nation.
On the issue of the government spending, there were some measures that were put in place to curb the currency crisis in the country. The first measure was the reduction of the state workforce. There was finding that about the 30% of the labor force in Saudi are immigrants. This was a major area that was explored in the reduction of the workforce. Although this employment would hurt the economic output and efficiency, the amount of the government spending in this area would be reduced. Also, the issue of provision of subsidized energy and food was reduced. Another major step that was taken to ensure the reduction in government spending so as to maintain the foreign reserves and thus save the currency was the issuance of government bonds. The government also announced the plans to sell the 5% of the national oil company by the name of Aramco (Wael, 2012). The sale of the share to the private sector can ensure that Aramco is more transparent regarding the cost and the likes and thus an increased in running and operations. All these steps were taken to ensure that the government was reducing the external borrowing by maintaining its internal workings costs and thus the foreign reserves were not imbalanced.
On the issues of the administration and the role it on the play in the Arab world, there was a new and transformational changes made in the new government that were formed by Princes Mohamed in 2015. There were people who were appointed to the office and had a clear and a more committed point in the economy of Saudi. The traditional economic segregation of the women was overruled, and more right was given to women. Due to this more women can engage in the economic activities. Another major financial thing done by the current Saudi government is to offer discounts on the oil that is sold in the Europe. This is meant to increase the sales of the oil and thus increasing the foreign trade. This is intended to ensure that the external reserve of the country is balance and a situation where there is offset is not reached. Therefore, the currency crisis is avoided.
The currency crisis in Saudi Arabia saw the intervention of foreign financial institution like the International Monetary Fund (IMF). The IMF prepared a report that was highlighting the danger and the various recommendations that the government of Saudi needed to take to reduce the currency crisis. The report had highlighted the real challenge that faced the kingdom and also helped in amplifying the issues to ensure immediate steps had to be taken (House, 2012). The report highlighted the issues of continued decline in the oil prices as the primary reason that caused the crisis. To counter this menace, the report that was presented to the kingdom by the officials of the IMF stressed the need for diversification in the nation. The issue of the seriousness of the issue helped the new government to come up with the economic blueprint o vision 2030 which has stressed the need for diversification. Also, there is a deliberate action that the government is undertaking to ensure that there is diversification concerning other sectors mainly the tourism. The work of the IMF thus helped in the realization of the danger that Saudi Arabia was facing and thus showed how the serious steps needed to be taken to reduce the currency crisis.
The IMF also came up with a package of reforms that the government of Saudi Arabia needs to meet for it to help in the recovery of the currency. One of the issues that were highly advanced was the increase of the women right in working. By so doing the result of this is to increase the economic output of the general population....