ABU DHABI, 16 February 2006 — Saudi Arabia’s finance minister said yesterday he saw no inflationary pressure building in the Kingdom despite rapid economic growth and government spending of record oil revenues.
The Saudi economy grew 6.5 percent in 2005, when the state posted a record SR214 billion ($57 billion) budget surplus. Despite the economic boom the cost of living index rose just 0.4 percent last year and the non-oil GDP deflator, seen by economists as a more accurate benchmark for inflation, was up 1.14 percent. “Over the past years growth has been high but despite that the inflation rate is low; less than 1.0 percent ... We hope it will be at the same level in 2006,” Finance Minister Ibrahim Al-Assaf told Reuters in an interview in Abu Dhabi. “There are no inflationary pressure currently ... we are monitoring prices closely so that there will be no pressure.”
Speaking on the sidelines of a meeting of Arab economy and finance ministers, Al-Assaf said the inflation rate was “notably low despite a rise in government and private sector expenditure and private sector growth”. Al-Assaf said economic growth appeared poised to match or even beat the 2005 figure.
“I do not wish to make a forecast after only one month into the year, but based on current factors I do not see any reason why my expectations should be less than the levels in 2005 ... if not similar then maybe more.”
Riyadh plans to use at least part of its projected SR55 billion 2006 budget surplus to trim its domestic debt of that now stands at SR470 billion, he said.
The world’s biggest crude exporter ran its third budget surplus in a row after two decades in the red when low oil prices left it struggling to finance a generous welfare system and pushed debt up to 119 percent of GDP. Its liabilities to Saudi institutions now stand at about 40 percent of GDP.
Asked how much Riyadh plans to allocate for debt repayment, Al-Assaf said: “This depends on the actual volume of surplus ... There are big needs, most important of which is repaying a larger part of public debt and to continue implementing the basic infrastructure program.”
Like fellow Gulf oil producers, the Kingdom is trying to diversify its economy to reduce reliance on fluctuating oil income despite expectations that oil prices will stay firm for a few more years.
Non-oil private sector activity grew by about 6 percent in 2005, said Al-Assaf. “The Kingdom is aware of the fluctuation on oil prices and the impact they might have on state revenue and therefore we are exerting efforts (to address it).” He said the Kingdom was not considering levying income tax to make revenue more sustainable but was studying, along with fellow Gulf states, the possibility of a sales tax.
Al-Assaf said a recent corporate tax cut was likely to boost revenue by encouraging more investments and better collection practices.