Inflation may average six percent this year, according to the IMF. A Saudi-based analyst, however, said the IMF’s estimate for inflation “appears a little high”.

Paul Gamble, head of research at the Riyadh-based Jadwa Investment, added: “Inflation averaged 4.8 percent in the first half of the year and while it may reach six percent by the end of the year we do not see it getting much beyond this.”

Gamble said commodity prices are falling and international price pressures are subdued. While the house-building program may generate some inflation, this will be primarily in raw material prices rather than in the prices of goods and services that consumers buy,” he pointed out.

Saudi Arabia plans to spend an estimated SR487.5 billion ($130 billion) — nearly 30 percent of its annual economic output — on projects including building new homes and hospitals.

The IMF said that in view of that spending Saudi authorities should “carefully monitor possible inflationary pressures,” and it encouraged “the proactive use of fiscal policy, supported by available monetary policy instruments, if needed.”

“Over the medium term, policy priorities should focus on maintaining fiscal sustainability, securing broad-based growth and fostering job creation,” it added after concluding its annual consultation with the Kingdom on July 18.

The IMF left its Saudi gross domestic product growth and inflation forecasts for 2011 unchanged at 6.5 percent and 6.0 percent, respectively, Reuters reported.

“There is little in the IMF’s assessment to challenge the views of local Saudi and GCC-based analysts,” said Jarmo T. Kotilaine, chief economist at the National Commercial Bank.

“Indeed, as storm clouds once again gather on the horizon, Saudi Arabia is likely to prove one of the few genuine strong points of the global economy. This is in part due to the Kingdom enviable macroeconomic fundamentals and the likely continued resilience of the global oil markets. But Saudi growth prospects have naturally received an additional fillip from the royal decrees that substantially further boosted government spending.”

He said few would disagree with the view that inflation remains the primary macroeconomic challenge in the near term.

He said pressures in the area of housing, while easing somewhat, are entrenched and Saudi Arabia’s import profile leaves the Kingdom vulnerable to food and broader commodity price pressures.

“While these have eased somewhat lately, pressures are fueled by structural factors, notably the strong emerging market demand,” said Kotilaine.

He said the increased Saudi government spending and dollar weakness are further contributing to the price pressures as will any additional quantitative easing in the US and elsewhere if and when it materializes.

“The enhanced role of government spending during the global crisis has been a source of resilience but will indeed have to be modified in the longer term in the interests of fiscal sustainability,” Kotilaine added.

“Encouragingly, the key decisions in this regard were made years ago and underpin the government’s strategic vision. Fostering the development of the private sector and driving economic diversification are essential for ensuring the continued prosperity and stability of the economy into the post-war era,” he said.

“Accelerating these efforts further has the potential to lend an important impetus to Saudi growth in the post-crisis years,” Kotilaine pointed out.

Gamble from Jadwa Investment stressed that the forecasts in the IMF report are broadly in line with our own, though their estimate for inflation appears a little high.

He said the IMF report highlights the key economic challenges faced by the Kingdom. Gamble said high oil revenues have allowed Saudi Arabia to build vast foreign reserves that can be used to tackle these challenges and the fund noted the importance of adopting solutions that would not create distortions in the economy.

Finance Minister Ibrahim Al-Assaf said in May that Saudi Arabia was likely to overspend its budget by up to 15 percent this year due to spending on construction and job-creation measures.

The Saudi economy may grow 6 percent this year, up from an initial estimate of 4.3 percent, SAMA (Saudi Arabian Monetary Agency) Gov. Muhammad Al-Jasser said recently.

SAMA said last week it expects inflationary pressures in the Kingdom to continue at a moderate level in the third-quarter of this year.

The IMF cut its forecast for Saudi Arabia’s fiscal surplus to 9.3 percent of gross domestic product in 2011, from 12.8 percent seen in April, it also said on Tuesday.

The forecast for the 2011 current account surplus of the Kingdom was revised up to 20.1 percent of GDP, from a previous 19.8 percent.