Saudi Arabia faces record inflation

Inflation averaged 4.1 per cent in 2007 and could rise to 4.7 per cent this year despite a series of measures announced by the government recently to ease the impact.

While absolving the weak US dollar from being responsible, Riyadh pointed a finger at housing supply shortages, strong domestic demand, a surge in liquidity, and high import prices.

“Many factors play a role in affecting inflation rate, and the influence of these factors differs from one to another according to the nature of the domestic economy,” the Saudi Arabian Monetary Agency said.

“These factors are concentrated in the demand side, especially the government expenditure, and level of domestic liquidity... The Saudi economy is an open-market economy. Therefore, the change in the prices of imported goods is an important factor affecting the level of domestic inflation. High degree of economic openness of a country indicates a possibility that the inflation rate would be affected by change in the prices of imports.”

Saudi Arabian Monetary Agency’s (Sama) figures showed inflation in Saudi Arabia’s key trading partners was one of the main factors that affected the Kingdom’s own inflation rate.

While its imports from the US, Saudi Arabia’s largest commercial partner, surged by around 68 per cent to SR36.6 billion (Dh36.6bn) in the first 10 months of past year from SR21.8bn in 2000, their share of Saudi Arabia’s total imports shrank to 13.4 per cent from 19.3 per cent because of a decline in inflation in the US to 2.7 per cent from 3.4 per cent, said Sama.

Imports from the euro zone jumped to SR66.9bn from SR26.8bn but the share slightly rose to 24.4 per cent from 23.7 per cent despite a modest drop in the Zone’s inflation to two per cent from 2.1 per cent.

The inflation problem was more underscored in imports from China as its share of Saudi Arabia’s total imports soared to 9.7 per cent last year from four per cent in 2000 and Sama blamed a surge in inflation in China from around 0.4 per cent to 4.5 per cent in the same period. India’s share also rose from 2.8 to 3.4 per cent in the same period after its inflation rate grew to 6.2 from four per cent.

The figures showed there was a decline in the percentage share of Saudi Arabia’s imports from Japan, which had a zero inflation in 2007.

“Inflation in Saudi Arabia is expected to rise further this year, picking up to an average 4.7 per cent from 4.1 per cent during 2007. Rents will remain the main source of inflation. Higher food prices will also continue to have a significant impact,” the Jadwa Investment Centre said in a study.

“The average will be higher this year despite an inflation fighting programme announced on January 28. This contained a combination of reforms to reduce bottlenecks in the housing market, encourage greater competition and reduce administrative fees, but did not extend price controls,” the Riyadh-based centre said.

It cited several factors for the problem, including an inflow of expatriate workers, internal migration, high population growth and a reduction of the size of the average household at a time when there is not sufficient new supply coming on stream to contain this growth in the near term.

While a plan to join the UAE and Qatar in enforcing caps on rents could help contain inflation in the short term, it could backfire in the long term, it said.

“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. Other more widespread price controls may be considered and further subsidies can comfortably be afforded, though the long-term disadvantages of both courses of action outweigh the short-term beneficial impact on inflation.”

Another Saudi study, expecting higher inflation rates in 2008, cited similar factors for the festering problem in Saudi Arabia and said the weak dollar plays a minor role in the problem.

“The rise in inflation is largely due to domestic factors, which 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 inflow of expatriates,” said the National Commercial Bank, the biggest bank in Saudi Arabia.

“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.”