The Kingdom of Saudi Arabia has been experiencing a steady decline in its foreign exchange reserves in recent years, and the trend seems to be continuing. The country’s foreign currency reserves, which are used to support its currency, pay for imports and finance government spending, have fallen from a peak of nearly $800 billion in 2014 to just over $400 billion in 2021. This article aims to explore why Saudi Arabia’s forex reserves are continuing to fall.
One of the primary reasons for the decline in Saudi Arabia’s forex reserves is the drop in oil prices. Saudi Arabia is the world’s largest exporter of crude oil, and its economy is heavily dependent on oil revenues. The plunge in oil prices, which began in 2014 and continued until 2016, severely impacted the country’s economy, leading to a decline in government revenues and a rise in budget deficits. The government was forced to dip into its foreign exchange reserves to finance its spending, leading to a significant reduction in its forex reserves.
Another factor contributing to the decline in Saudi Arabia’s forex reserves is the ongoing conflict in Yemen. Saudi Arabia has been involved in a military intervention in Yemen since 2015, and the conflict has been costly, both in terms of human lives and financial resources. The war has put a strain on the country’s finances, and it has had to rely on its forex reserves to finance its military operations.
Moreover, the COVID-19 pandemic has also had a significant impact on Saudi Arabia’s economy, leading to a further decline in its forex reserves. The pandemic has resulted in a drop in oil demand and prices, leading to a decline in government revenues. The country has also had to spend heavily on healthcare, social welfare, and business support programs to mitigate the impact of the pandemic, putting further pressure on its forex reserves.
Another contributing factor to the decline in Saudi Arabia’s forex reserves is the Kingdom’s efforts to diversify its economy. The Saudi government has been trying to reduce its dependence on oil revenues by promoting non-oil sectors such as tourism, manufacturing, and technology. While diversification is a long-term strategy, it requires significant investment, and the revenue generated from non-oil sectors is not enough to compensate for the loss of oil revenues in the short term.
Furthermore, Saudi Arabia’s forex reserves have also been impacted by the government’s decision to increase its spending to boost economic growth. The government has been investing heavily in infrastructure projects, including the construction of new cities, transportation networks, and energy facilities, to create jobs and stimulate economic growth. However, these investments have come at a cost, and the government has had to use its forex reserves to finance these projects.
In conclusion, the decline in Saudi Arabia’s forex reserves is a result of a combination of factors, including the drop in oil prices, the ongoing conflict in Yemen, the COVID-19 pandemic, the government’s efforts to diversify the economy, and its investment in infrastructure projects. While the reduction in forex reserves is a concern, Saudi Arabia still has a significant amount of reserves to weather economic challenges, and the government is taking steps to address the issue, such as implementing fiscal reforms and diversifying the economy.