Saudi Arabia in the grip of surging inflation
A surge in food prices and rents have thrown Saudi Arabia into the throes of inflation after basking in relative stability for more than 20 years, prompting calls for currency revaluation and other measures.
Official figures showed inflation in the world’s oil powerhouse hit a record 4.1 per cent in 2007 mainly because of a surge in rents as well as the prices of food, beverages, fuel, water and other goods and services.
It was the highest inflation rate to hit the Kingdom since the end of the first oil boom in early 1980s, although it remains far lower than inflation levels in other neighbouring oil producers, mainly Qatar and the UAE.
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 prices due to the Gulf war aftermath. The situation last year, which extended a steady rise in inflation over the previous couple of years, was different.
“There has been a rise in rents over the past few years because of a steady increase in prices of most building materials and a strong demand due to an upsurge in the economy and investments, which attracted more expatriates,” said Ihsan bu Hulaiga, a well-known Saudi economist.
“Prices of some products have also increased mainly because of higher import costs since a large part of Saudi Arabia’s imports come from non-dollar countries and the US dollar has been steadily declining against other currencies.”
Figures by the Saudi Arabian Monetary Agency [central bank] showed there was a sharp rise in rents, food and beverage prices and other products in 2007.
Its cost of living index showed the prices of foodstuffs and beverages jumped seven per cent last year, while the prices of other goods and services soared by 5.3 per cent. Rents, house renovations, fuel and water prices shot up by 8.1 per cent and medical care by 4.9 per cent.
In contrast, the price of clothes and footwear declined by around one per cent, while home furniture, transport and telecommunications, recreation and education services remained almost unchanged.
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.
Sama’s figures showed inflation in 2007 picked up in the second half of the year, surging by nearly 5.9 per cent between June and December, after recording negative growth in some months in the first half.
Rising inflation rates have caused widespread concern in Saudi Arabia and other Gulf Arab states, most of which link their currencies to the weak US dollar. Such concerns have prompted calls for detaching the regional currencies or revaluing them, along with several other measures.
In recent statements, the IMF said Gulf states also need to trim spending and tighten money supply within stricter fiscal policy to curb inflation.
“Fiscal policy is the only effective instrument to control inflation in Gulf Co-operation Council states,” said Gene Leon, deputy chief of the GCC division.
According to the Kuwait-based Inter-Arab Investment Guarantee Corporation (IAIGC), a massive influx of expatriates to the GCC states due to accelerated economic growth is another major reason for the rise in inflation.
“Gulf states are witnessing another boom because of high oil prices and this has created a fresh influx of expatriates… this has put pressure on housing and other services and given rise to high prices,” it said in a study.
Like other Gulf states, Saudi Arabia has sharply boosted spending over the past few years following a surge in its petrodollar income that hit a record $180 billion (Dh660bn) and is projected to be even higher this year. The 2007 income is nearly five times the Kingdom’s 1998 income of only $36bn. Sama’s figures showed there has been a steady and rapid growth in the country’s money supply, which is normally associated with inflation.
Money supply M1, covering demand deposits and currency outsize banks, jumped to SR383bn (Dh380bn) at the end of 2007 from SR312bn at the end of 2006. Money supply M2, including M1 plus quasi-money, surged to SR666bn from SR538bn in the same period. Money supply M3, comprising M2 plus other quasi-monetary deposits, also swelled to a record SR789bn at the end of 2007 from SR660bn at the end of 2006.
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