Saudi Arabia steps up its war on inflation
The Kingdom's top Muslim scholars devoted open-air prayers in the holy city of Mecca last week to plead for a fall in rain and in prices, and to warn that society could be plagued by burglaries and bloodshed if prices go out of control.
The sermon came hours before King Abdullah bin Abdul Aziz, who headed a cabinet meeting on Monday, approved a new strategy to combat inflation which hit a record high level last year and is heading for another record this year.
Addressing thousands of Muslims who gathered in the holy city for rain prayers, Mecca Mosque preacher, Sheikh Saleh bin Mohammed Al Taleb, launched a virulent attack on traders and said they are to blame for inflation. "They have no fear of God the Almighty. Their greediness is pushing them to increase prices in without any regard or consideration of the feelings of the people...they are raising prices, monopolising goods, storing supplies, and infringing on the rights of Muslims without any fear of God and without any mercy on the people," Sheikh Taleb said.
"These greedy people should be stopped and must be forced to respect the teachings of Islam and the holy Koran otherwise they could spread disputes, wars and robberies."
Like other Gulf oil producers, Saudi Arabia has been reeling under soaring inflation rates because of high rents and food prices, a costlier import bill due to the ailing US dollar to which its currency is pegged, and an economic boom that has triggered an upsurge in projects. After many years of relative financial and monetary stability, inflation in Saudi Arabia jumped to 4.1 per cent last year and could more than double this year. According to the official media, King Abdullah approved a new strategy to deal with this problem when he headed a cabinet meeting late Monday. "The cabinet agreed on a number of steps in the short and long term within an integrated strategy aimed at meeting the needs of the citizens, protecting the market from unstable prices and preserving the living standards in the Kingdom," the official Saudi press agency reported.
It gave no details of the strategy, which followed a 17-point alleviation plan announced by the Government in January to curb inflation. But according to Saudi bankers, the new strategy could include more subsidies on foodstuffs and other consumer items, reduction of some fees, and caps on rent increases similar to those enforced by the UAE and Qatar.
The 17-point plan that was launched on January 28 included increases in salaries of public sector workers and in social insurance benefits, cuts in governments fees, stronger control of prices of basic commodities, and the establishment of a national housing agency.
Despite such measures, inflation continued to soar in Saudi Arabia, with the rate surging to a 27-year-peak of 9.6 per cent in March against 8.7 per cent in the previous month, spurred mainly by increase in rents and food prices. The rate could double through 2008 and experts warned that a sustained price increase could trigger widespread public discontent. Its per capita income of around $17,000 (Dh62,500) in 2007 was also far lower than that in Qatar, Kuwait and the UAE, estimated at $70,000, $45,000 and $35,000 respectively.
"Rising inflation is unpopular in Saudi Arabia, particularly as higher food prices have a disproportionately large impact on the lower income sections of the population," said Brad Bourland, an expert at Jadwa Investment in Riyadh. "Various official consultations have begun on ways to contain inflation and over the last few months subsidies on rice and baby milk were introduced and prices were frozen on a number of imported medicines.
"Further similar small steps are likely to be taken," the press reported.
"There will probably be pressure for rent controls (similar to those introduced in the UAE and Qatar), but these have been ineffective and discourage the provision of accommodation over the longer-term."
According to the National Commercial Bank of Saudi Arabia, the surge in inflation rates in Saudi Arabia, which had recorded as low as 0.1 per cent inflation in most years over the past three decades, was caused mainly by domestic factors.
They include rising aggregate demand, given the acceleration in private investments related to the mega projects and high government expenditure, the
expansion in credit to the private sector and a tight housing market associated with a rapidly increasing population and increasing inflow of expatriates.
"Inflation is also due to external factors including the surge in world prices of food, capital equipment, and raw materials, and to a much lesser extent the depreciation of the Saudi riyal against the US and other major trading partners. We believe inflation will accelerate further in 2008 on the back of high oil prices, and hence strong liquidity and economic growth, and expectations of another Fed rate cut," the bank said in a recent study.
Saudi Arabia, which controls nearly a quarter of the world's recoverable oil resources, had suffered from its highest inflation rate of three per cent in 1991 but it was because of a sudden surge in most prices due to the Gulf war. Inflation was estimated at around 2.2 per cent in 2006 and only 0.7 per cent in 2005. It was almost flat in the previous three years while it ranged between negative rate to one per cent in the previous two decades.