JEDDAH, 31 December 2007 — Consumers across the Kingdom were forced this past year to dig deeper into their wallets in order to make ends meet and counter the sharp rise in the consumer price index.
The inflation rate that stood at 2.2 percent at the end of 2006 doubled to 4.4 percent and nearly tripled in some Saudi cities by the third quarter of 2007, according to a recent report by the Saudi Arabian Monetary Agency (SAMA). Riyadh saw a hike in prices to 5.9 percent, the southern city of Najran grew to 5.2 percent and Hail saw the sharpest rise at 6.1 percent, the report said.
Accounting for the largest share of the increase in consumer spending, food costs in the Kingdom rose 6.6 percent on the back of increased demand and a shift in consumption patterns worldwide. Rising income levels in China and India, which account for over one-third of the world’s population at 2.5 billion, sent the prices of staple foods such as rice and wheat higher.
The increased use of biofuels for energy production is another prime reason for wayward inflation.
“The problem of inflation and thus higher prices that plagued consumers in 2007 actually started in 2006,” said Dr. Said Al-Shaikh, chief economist at the National Commercial Bank (NCB) in Jeddah.
With a view to reducing the financial burden on Saudi citizens, Custodian of the Two Holy Mosques King Abdullah ordered subsidies on baby milk and imported rice following results of an investigation conducted by the Ministry of Finance into the reason for the recent hike in consumer prices.
The two factors that weighed heavily on the Saudi economy in the closing year were both internal and external, Al-Shaikh said. “The first factor which is internal is the combined increase in demand for goods and services and the huge rise in spending by the private sector and the increase in government spending as the country improved its infrastructure accompanied by the increase in money supply by a 16 percent year-on-year growth,” he pointed out.
The external factor is imported inflation. The Kingdom’s currency peg to the weakening US dollar and the preference for the use of the dollar by the Kingdom’s Asian, US and European trading partners, rather than their own currencies, raised the costs of imported goods by five percent in the last 18-month period alone, he further said.
Al-Shaikh suggested that revaluation, not a de-pegging of the riyal from the US dollar, would help in lowering consumer prices.
Rise in rental prices affecting as much as 37.5 percent of the population worsened the situation. Rental prices Kingdom-wide have risen by 15 percent, with the biggest 20-25 percent rise felt in Riyadh.
Dr. John Sfakianakis, chief economist at Saudi-British Bank (SABB) in Riyadh, agreed that with the high economic growth that Saudi Arabia has been witnessing over the past year, inflation has become a reality. He told Arab News that “the problem of high prices is mainly domestic as the increase in rental prices was due to speculation and high demand but limited supply.”
However, he believed that higher import prices had little impact on the rise in inflation in the past year, adding that a revaluation of the Saudi riyal against the US dollar would not be enough to rectify price pressures in the year to come.
“Consumers should remember that despite the rise in inflation, Saudi Arabia is still the largest economy in the Gulf and the country which has been enjoying the lowest rate in the GCC,” he noted.