JEDDAH, 29 March 2007 — After over a decade in which overall prices barely moved, inflation has begun to emerge in Saudi Arabia. Annual consumer inflation climbed to 2.9 percent in December 2006, up from 1.2 percent in December 2005 and 0.6 percent at the end of 2004, lifting the average for the year to 2.3 percent, the highest since 1995. Excluding a one-time gasoline price cut, annual inflation was running at 4.3 percent in December, according to a report released by Samba Financial Group on Inflation in Saudi Arabia: How High will It go and What Can Be Done? written by Paul Gamble, assistant general manager and senior economist at Samba.
The Samba report said inflation was concentrated in three main areas:
• Poor domestic growing conditions and higher charges for some imported products increased food prices.
• Sharply high gold prices lifted the cost of jewelry.
• Rents had begun to rise by the end of the year.
Samba General Manager and Chief Economist Brad Bourland said: “We expect rising rents to be the leading source of inflation in 2007, as internal migration to the Kingdom’s major cities and an influx of expatriate workers compound existing accommodation shortages.”
He added “Residential rents will grow at an average of around 5 percent this year and expand at a similar pace over the next few years. The rate of increase will vary among housing types and between provinces, with higher rates likely in the Eastern Province, Riyadh, Jeddah and those around major infrastructure projects.” Higher raw materials and labor costs stemming from other supply bottlenecks in the economy will also push up prices. Prices of imported goods will add to inflationary pressure owing to the fall in the riyal last year.
Bourland said, “The fall in the riyal against the currencies of most of Saudi Arabia’s main sources of imports will add to inflation this year by raising the domestic price of goods from these countries. Since the end of 2005 the riyal has slipped against currencies of seven of the Kingdom’s eight largest sources of imports (which account for around 75 percent of the total). It has fallen by 11 percent against euro, the currency of Saudi Arabia’s largest supplier of imports. As the riyal is pegged to the dollar, exchange rate movements will not have an impact on the prices of the 15 percent of goods imported from the US.”
The Samba report said “An open international trading system, a limited domestic production base and high demand for foreign consumer goods make Saudi Arabia vulnerable to imported inflation.”
Inflation has historically been very low in Saudi Arabia. Since the end of the first oil boom in the 1970s, annual inflation has exceeded 1 percent in only three years: 1990, 1991 and 1995. For the first two of these years, prices were pushed up by the first Gulf war. Inflation jumped in 1995 as concerns about a widening budget deficit stemming from low oil prices led the government to sharply increase the domestic retail price of fuel, electricity and various related products.
The Samba report said there are various tools that can be used to lower inflation such as:
• Interest rates. Raising interest rates dampens inflation by slowing an economy through making borrowing more expensive, encouraging saving and increasing debt service costs.
• Commercial bank lending. Reducing the amount banks have available to lend inhibits credit growth and limits the expansion of money supply. This can be done by the central bank in several ways, such as by tightening the loan-to-deposit ratio.
• Fiscal policy. A reduction in government spending or an increase in tax rates will restrain economic activity, reducing demand and allowing bottlenecks to ease.
• Supply-side measures. If shortages are generating the rise in inflation, steps can be taken to increase the supply of these goods and services.
• Price controls. Prices of good or services can be frozen at a set level or a constraint can be placed on the amount by which the price of an item can rise.
Bourland said “Samba forecasts an inflation rate of below 3 percent in the Kingdom. It is in line with inflation in the world’s leading economies, which also constitute Saudi Arabia’s main trading partners, and is expected to be among the lowest in the Gulf Cooperation Council.
