Saudi Arabia: Ready for Take-Off?

i) Are there any hidden assumption of price rigidities in Saudi Arabia that might inhabit market force indicators from revealing the true economic health of the country, there by either preventing government policy actions from correcting the problems or otherwise making them ineffective and counterproductive? How difficult is it to invest and repatriate profits and how would you deal with the need for educated managers and executives that can operate effectively in Saudi Arabia?

Ans:
The case talks about vision of SAGIA which says “… to attract sufficient investment to achieve sustainable rapid economic growth, while capitalizing on the Kingdome’s competitive strength as global capital of energy and as a major hub between east and west“. This vision depicts the fact that high importance is given to oil revenues. In a survey of global competitiveness, high ranking of KSA is attributed by its macroeconomic stability. However it does not show major problems identified for doing business in KSA.
Thehidden assumptions of price rigidities in Saudi Arabia, inhabitingmarket force indicators from revealing the true economic health of the country, shows the extent offoreign exchange exposure.Sustained real exchange rate misalignment can cause severe macroeconomic disequilibrium which is one of the threats for KSA.

 Real exchange rate stability is crucial to developing countries since it affects capital inflows, foreign direct investment, and trade according to comparative advantage. KSA preferred to maintain a predictable riyal exchange rate. To achieve this goal, the monetary authority adopted a policy of a fixed exchange rate regime. It is well known that fixed exchange rates where foreign exchange reserves play a major role in money supply fluctuations are conducive to the transmission of foreign disturbances into the domestic economy. A small open economy like that of Saudi Arabia (where there is one dominant export sector) can be subject to severe exogenous