DAMMAM: Internal and external factors have combined to push inflation in Saudi Arabia to an unprecedented level of 10.5 percent, a study here suggested, speculating that the surplus in the budget, which the government expected to be SR40 billion, might be as much as SR205 billion due to the steady rise in oil prices.

The study, conducted by Arbah Financial Company, attributed the local factors to the increase in demand due to lavish government spending and to the large size of credit extended to the private sector while the foreign factors are caused by what it called “imported inflation” for which the fixed exchange rate of the riyal against the dollar was responsible in addition to the rising costs of commodities in the countries of origin.

CEO of the company, Saad Al-Hasousa, said the study, conducted by a group of in-house experts, indicated that disassociating the riyal from the dollar and pegging it to a basket of the other currencies was not under consideration at present. “Increasing the exchange rate of the riyal against the dollar will harm the Saudi economy and will not combat inflation,” the study said seeing the solution in the unified GCC currency in 2010.

The study called for keeping the exchange rate of the riyal at it current levels, so as to preserve the stability of the economy, and said in order to curb inflation the financial and monetary polices should play their roles effectively and that the structures of foreign reserves and import sources were diversified.

It said the rise of inflation came at the time the oil prices were skyrocketing. “This caused steady increase of local liquidity coupled with a rise of public and private demand which led to a rise in the local inflation,” it said.

According to the study, the fixed exchange rate of the riyal against the dollar for more than 22 years decreased its purchasing power and hence led to the increase of the bill of imports. “This in turn increased the contribution of the imported inflation to the overall inflation,” it explained. The study expected the surplus in the budget to entice the government to continue spending extensively on basic infrastructure and social projects the thing which will further escalate the levels of inflation.

The study expected the GDP to grow by 23.5 percent during the current year compared to 7.7 percent and 10.6 percent in 2007 and 2006 respectively and said the government used the high oil revenues to bring its foreign debts down by 27 percent to SR267 billion by the end of 2007 compared to SR366 billion in 2006. The government is intent on taking down this ratio to 12 percent during this year, the study said adding that such an inclination may mean pumping of more liquidity which may develop later into inflation.

The study recommended to cut down the current high rates of inflation by improving the financial policy through decreasing expenditure and through issuing of bonds that will dwindle the liquidity.” The Saudi Arabian Monetary Agency (SAMA) may issue bonds of various maturities to absorb the current high liquidity. This may cut down inflation,” the study said.

Citing the problems of the world economy arising from the high prices of energy, the rising prices of food, the crisis of real estate credit in the US, the study recalled that inflation has become a world-wide problem not only limited to the third world countries but has hit the industrial countries as well. “Though the Saudi economy is strong and stable,” it said.