Saudi Arabia will raise wages, welfare payments and subsidies to counter rising disaffection over inflation, which has surged to a 16-year high as the central bank cuts interest rates to defend peg to the dollar.
Resentment over the cost of the living led the king's advisers to summon the central bank governor and finance minister next month to discuss the peg, which has forced the central bank to slash rates by 150 basis points since September.
With more US rate cuts looming and Gulf central banks under pressure to follow to avoid currency appreciation, investors are betting the Saudi Arabia and its neighbours will give up on their pegs and focus on fighting inflation.
Inflation, which hit 6.5 per cent in Saudi Arabia in December, has "many negative repercussions for the livelihood of citizens," the official Saudi Press Agency said on Monday, citing a cabinet statement.
The government of the world's largest oil exporter will increase public sector wages and pensions by 5 per cent for three years, the agency said.
The cabinet also agreed to raise social insurance benefits by 10 per cent and subsidise half the cost of shipping and some administrative expenses including those for driving licences and passports, it said.
The agency did not say how much the measures would cost.
The government would also review the way it licences to importers to avoid "monopolies". Saudi media have accused importers of price gouging.
Unable to raise interest rates, many of Saudi Arabia's Gulf Arab neighbours are also resorting to subsidies and price controls to cushion their populations from rising prices.
Qatar, Oman and the UAE have imposed ceilings on rent increases. Most Gulf states have either raised public sectors wages or said they are considering similar measures.
After riots in Dubai by migrant workers seeking compensation for savings lost to the tumbling dollar, UAE central bank governor Sultan Nasser Al Suweidi called in November on Gulf states to sever their pegs and track a currency basket as Kuwait has done.
Although he has since backtracked on those remarks, Gulf Arab policymakers including Qatar's finance minister have said reform is being discussed and that the neighbours could revalue their currencies together to preserve plans for monetary union.
Forward contracts showed investors expecting a 2.3 per cent appreciation in the UAE dirham and a 1.3 per cent appreciation in the Saudi riyal in a year. (Reuters)
Saudi raises wages, subsidies as inflation soars