RIYADH, 5 October 2007 — The Saudi Consumer Price Index hit 4.4 percent in August, according to the latest report of the Saudi General Statistical Department yesterday.
In the face of rising prices, Custodian of the Two Holy Mosques King Abdullah demanded a report from the Interior Ministry and provincial governors on the reasons for the unprecedented increase in the prices of essential commodities.
The report attributed the seven-year record in inflation to the steep rise in rents and the costs of food and beverages. While the rents registered a 12.1 percent rise, food and beverages prices surged 6.6 percent.
The Saudi Arabian Monetary Agency (SAMA) declined to match the US Federal Reserve’s interest cut last month, driving the riyal to a 21-year high on speculation that the SAMA would allow the currency to rise against the tumbling dollar.
The inflation in the Kingdom has been rising steadily in recent months. It was 3.83 percent in July and 2.96 percent in May.
The Shoura Council, which advises the government on draft laws, urged the authorities last month to tackle inflation and asked the trade and commerce minister to appear before it to discuss the problem.
John Sfakianakis, chief economist for SABB, said the prices would continue to rise into 2008. “The local economy is not yet adjusted to the supply bottlenecks that we see high demand building up because of economic growth,” he said.
Bandar Abdul Kareem, a leading Saudi economist, warned that the Kingdom’s inflation might reach five or six percent in a few months. Abdul Kareem also said the economic growth was projected to slacken in 2007-2008 in the Kingdom.
Attributing the Saudi inflation to the weakening dollar, Abdul Kareem stressed the need to drop the riyal’s peg to the US dollar.
“Since one of the basic functions of SAMA is to combat inflation, it should release riyal from the hold of the US dollar. It was with the aim of eliminating inflation that the riyal was in the first place pegged to the dollar when it was the strongest currency in the world,” Abdul Kareem said.
He did not think that steadying the interest rate of riyal would halt the rising inflation.
The inflation became noticeable with the increase in the public spending and a lack of understanding on the capacity the local economy to cushion its effects. SAMA Gov. Hamad Al-Sayyari said last week that he was concerned by the rising inflation which he attributed to rising rents and higher prices of some imported commodities.
However, the general belief among the local economists is that the Saudi economy is capable of containing the inflationary pressures in the long run and would continue the rapid economic development.
Kuwait, which dropped its peg to the dollar, had cited the peg to a weak currency as the reason for its inflation. The move to ditch the dollar allowed the Kuwaiti dinar to rise 0.37 percent against the dollar, though the region’s plans for monetary union in 2010 was upset.
Kuwait’s move fueled market speculation that other Gulf states could follow suit to contain the rising cost of imports.