Saudi Riyal (SAR): Definition, History, Exchange Rate to Dollar

What Is the Saudi Riyal (SAR)?

The SAR is the currency abbreviation for the Saudi Riyal, which is the official currency of Saudi Arabia. The Saudi Riyal is made up of 100 halala, and is often presented with the symbol SR. The Saudi riyal is pegged to the U.S. Dollar at an exchange rate of 3.75 SR.

Understanding the Saudi Riyal (SAR)

In 1932, the Kingdom of Saudi Arabia, as a country, was formed by combining the Kingdom of Hejaz and the Sultanate of Nejd. After its creation, Saudi Arabia utilized a bimetallic monetary system based on British gold sovereigns and silver Riyals.

In 1952, the monetary system was reformed to use a single currency. This currency, the Saudi Riyal, was backed by Saudi gold guineas equivalent to the British gold sovereign until 1959 when a system based on fiat money issued by the Saudi Arabian Monetary Agency was created, which is the Saudi Central Bank.

Speculation on the Riyal briefly rose to a 20-year high in 2007 when the U.S. Federal Reserve slashed interest rates in the wake of the Great Recession. The Saudi Central Bank chose not to follow for fear of hyperinflation, maintaining the exchange rate of 3.75 SAR. Because the Riyal is pegged to the U.S. dollar, its only correlation is to the "greenback."

Saudi Arabia's Economy

Saudi Arabia's economy is driven largely by its oil and gas industry. In 2020, the country produced 10.82 million barrels of oil per day: 12% of world output. From 2003 to 2018, Saudi Arabia and Russia fought for the top spot as the largest oil producer, when the United States experienced a surge in oil production, holding onto the top spot since then; however, Saudi Arabia remains the world's largest petroleum exporter.

With proven oil reserves of about 261 million barrels (as of 2020) and relatively low production costs, Saudi Arabia should maintain its position as a top-three oil producer for the foreseeable future.

Saudi Arabia's oil and gas industry is controlled by Saudi Aramco, which is controlled by Saudi Arabia's Ministry of Petroleum and Mineral Resources and the Supreme Council for Petroleum and Minerals. Saudi Aramco is mostly state-owned but had an initial public offering (IPO) of 1.5% of the company in December 2019.

Although international oil companies do not participate in oil production in Saudi Arabia, there have been several partners with Saudi Aramco in joint-venture refineries and petrochemical plants such as ExxonMobil and Sumitomo Chemical Co. In 2019, the company formed new partnerships with Total S.A. and Royal Dutch Shell PLC.

In 2016, there were talks of a potential devaluation of the Riyal. As oil prices plunged, Saudi Arabia was receiving fewer receipts from its oil exports. Because oil is denominated in U.S. Dollars, a devaluation would see them receive more Riyal for each barrel sold; however, despite the oil crisis, SAMA refrained from shifting the peg, and ultimately oil prices rebounded off their lows to alleviate some of the pricing pressure.

Saudi Arabia is a member of the Gulf Cooperation Council and in 2010 there were talks of a single currency for the Gulf region. This has yet to come to fruition, although the topic has come up periodically in the region since.