JEDDAH, 28 April 2008 — Saudi Arabia announced yesterday that the country's annual inflation rate rose to a 27-year-peak of 9.6 percent in March 2008 against 8.7 percent in the previous month, spurred by increase in rents and food prices.

An official report carried by the Saudi Press Agency said rents and fuel and water charges increased by 15.8 percent during March 2008, goods and services 14.5 percent, food and beverages 14.2 percent and healthcare costs 7.5 percent.

The report pointed out that the Kingdom's cost of living index went up to 114.2 points by the end of March compared to 104.2 points in the previous month. It also noted decrease in two indices: Textile & clothing index down 1.0 percent and transport & telecommunication index 0.5 percent.

The report came two days after Hamad Al-Sayari, governor of Saudi Arabian Monetary Agency (SAMA) predicted that inflation in the Kingdom could cross 10 percent this year. He also predicted that consumer price rises could ease in the second half as a result of government's anti-inflationary measures and fall in global demand for commodities.

John Sfakianakis, chief economist at SABB, echoed Al-Sayari's views and said inflation would continue to rise this year. "Food, which is the largest component in the cost of living index in Saudi Arabia, will continue to witness a hike in prices as reliance on food imports is considerable," he said.

Saudi Arabia is restrained in its inflation fight by a currency peg to the falling US dollar, which forces it to track US interest rate cuts and makes imports more expensive. Senior Saudi officials have repeatedly ruled out any change to the riyal's exchange rate, which has been fixed at 3.75 to the dollar since 1986.

Rents in the Kingdom jumped 16.7 percent in January 2008, a report issued by the General Statistics Department of the Ministry of Economy & Planning said. "Housing costs were the main driver of inflation," said Sfakianakis. "It is becoming obvious that the rental component is having a greater upward impact on inflation than any other item," he said.

The government has tried to offset the impact of rising prices on its 25 million people through measures including public sector cost of living allowances, welfare payments and subsidies.

Rice Prices to Soar

It has increased the subsidy for rice to SR1,000 per ton but traders have warned that rice prices would go up further as a result of export restrictions imposed by producing countries including India, Pakistan, the US and Vietnam.

Minister of Commerce and Industry Abdullah Zainal Alireza has promised Saudi traders during a recent meeting that the government would put pressure on New Delhi to ease rice exports to the Kingdom.

The move comes after the Indian Parliament asked producers to stop export of all types of rice, including basmati. Saudi traders expect government intervention would force Indian rice exporters to honor the deals they had signed with them.

Saudi traders have conveyed their fears that India would stop exporting rice to the Kingdom, causing a big crisis in the country. The price of rice in the Kingdom has already increased three times, sending shockwaves among Saudis and expatriates.

The Saudis have complained that Indian traders were delaying supply of rice in accordance with deals they had signed before at lower prices. They have expressed their readiness to pay the price difference if supplies are made on time.

Khaled Al-Mahrous, a trader, said an agreement between Saudi Arabia and India in this respect was essential to protect Saudi rice reserves and keep prices at reasonable levels. He hoped that rice prices would come down in coming months with beginning of new harvest season in India.

Yousuf Nurwali, a rice importer, said he feared rice prices including that of basmati would shoot up further within three months as a result of rice export tax planned by major producers. He said rice importers were suffering losses worth SR7 million due to a delay in subsidy payments.