JEDDAH, 29 October 2007 — There has been a lot of talk about increasing inflation rates in the Kingdom primarily due to the weakening of the US dollar. Some Saudis have even gone as far as to suggest that the Kingdom should unpeg it’s currency from the US dollar to lessen inflationary worries and pass on at least a percentage of the Kingdom’s windfall of petrodollars to its citizens in the form of a decrease in the cost-of-living.
However, Hamad Saud Al-Sayari, govenor of the Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank reiterated on Saturday that it would continue to maintain its 21-year peg to the US dollar despite rising inflation which Al Sayari had earlier blamed on an increase in rents especially in Riyadh and other factors such as higher import costs which have created an amount of “imported inflation.”
According to data retrieved from the Central Department of Statistics in the Ministry of Economy and Planning, Saudi Arabia’s inflation rate reached 4.4 percent in August of this year, one of the highest rates for the Kingdom on record.
A report written by Saudi British Bank’s Chief Economist Dr. John Sfakianakis shows that prices have leaped dramatically over the past two quarters of this year stating that food prices have showed the most significant increase with beef rising by 15 percent, fish by 20-35 percent, fresh vegetables by 21-45 percent and fresh fruit by as much as 50-80 percent.
The increase, he said, is due to a shortage of laborers in the agricultural sector who have been lured by attractive salaries into the construction sector that are partially to blame for the increased price in produce.
Bad weather in both Egypt and Turkey, the origin of a majority of the fruits and vegetables sold in the Kingdom, is also a factor in the increase in food prices creating what Sfakianakis deemed as “Ag inflation.”
“I believe that the hike in inflation and pricing is not due to imported inflation in Saudi Arabia as is the problem on a global scale but instead is being domestically generated due to a lack of supplies in the local market,” Sfakiankis told Arab News. He added that subdued inflation in the US economy coupled with similar trends in the euro zone, on the back of a strengthening euro and a weak dollar, was also to blame.
“ The emerging economies are faced with greater price increases due to strong growth and a greater weight of rising food prices within consumer indices,” he said.
“The rise in food prices has reflected pressure from the rising use of corn and other food items for biofuel production, bad weather in some countries as well as an increase in demand for food as the world’s population continues to grow making inflation not just a Saudi problem but a global problem,” he added.
Still some experts have raised the question that ironically the very thing that has created an economic boom for Saudi Arabia and the region could very well be the cause of the Kingdom’s inflation hike and the rise in consumer prices. Many experts begin to point the finger at the high price of black gold as the culprit which on Friday set a new record of $92.22 a barrel last week.
One such expert, Abdulraheem Al-Saeedi, professor of economics at King Abdul Aziz University in Jeddah, was quoted by a local Arabic newspaper as saying that he believes that the high price of oil is possibly one of the primary factors in the increase in inflation and consumer prices in Saudi Arabia. He explained that since many of the countries that produce a majority of exported goods to the Kingdom are being forced to pay higher oil prices, then the higher price of manufacturing these goods are being passed on to the consumers in the Kingdom.
Dr. Zahid Khan, chief economist at Riyad Bank, added that high oil prices and the depreciating US dollar when converted into other currencies could have some effect indirectly. He said the Kingdom’s increase in oil revenues has created a lot of liquidity in the local economy and too few goods, coupled with an increase in demand for those goods, has amounted to a classic case of inflation.
He explained that inflation pressures being felt in the region was partially imported due to the US dollar, which has shown depreciation against the euro and other foreign currencies and that the goods imported from those areas, especially the euro zone which exports roughly 25 percent of the Kingdom’s goods, would cause a slight rise in inflation.
However, Brad Bourland, head of research and chief economist at Jadwa Investment, disagreed.
He said “manufacturers abroad don’t usually use a lot of oil in the production of goods. Oil is primarily a transportation fuel and with a majority of foreign manufacturers using electricity for their energy needs, I don’t really think that the recent increase in oil prices is leading to a hike in consumer pricing in Saudi Arabia.”
Other experts said that competitive pricing on the part of the US, the Kingdom’s largest importer, not rising oil prices, could also be a key to inflation worries.
They said that if the Kingdom decides to renegotiate trade partners shifting to a less expensive ones such as China and other Asian markets, could be a remedy for lowering consumer prices.
Khan further said that “SAMA would have to do either of two things. First, they would have to raise interest rates which would cut inflation but hurt money growth, or another option would be to cut back government spending which would have a negative effect on the economy due to the fact that it is currently being used on a number of construction projects to improve and expand the Kingdom.”
At this point, the debate in Saudi Arabia about high oil prices, inflationary pressures and a rise in the cost of living is one that should just be accepted as the price of progress, some said.