Editorial: Pressure of Inflation

Author: 
3 October 2007
Publication Date: 
Wed, 2007-10-03 03:00

Custodian of the Two Holy Mosques King Abdullah has highlighted an issue which has become a major concern for virtually everyone in the Kingdom. His asking chambers of commerce and industry why inflation is happening and what can be done about it should not be in vain. Everyone is talking about it. It hits us all — whether we are Saudis facing soaring home rentals and shopping bills or expatriates who have had the added pain over the past few years of a 40 percent drop in the value of money sent home thanks to a slide in the value of the dollar to which the riyal is pegged. Inflation is now almost 4 percent, compared to near zero two years ago. Looking at the causes is one thing; instant fixes are, on the other hand, another matter.

Governments, no matter where, have rarely been able to deal with inflation other than by resorting to draconian measures, such as price fixing, completely at variance with the free market principles at the heart of the Saudi economy. It was less of a problem in the past, when the authorities were more willing to subsidize commodities. But, as everywhere else, there has been a move away from that. Even if that had not been the case, rents, which have seen a major hike because of bottlenecks in the housing market, were never subsidized.

The blame for the present inflation has been attributed by many to the fall in the value of the dollar. Certainly, that has caused a rise in food prices, imports of which are often priced in dollars. There are other imports too that have to be paid for in increasingly expensive euros, pounds, rupees or whatever. There is nothing that the chambers of commerce and industry can do about that. The government’s hands too are tied. The only thing they could do is delink the riyal and the dollar. While there are strong arguments in support of it, it is not a cost-free solution. Moreover, a revaluation of the riyal would hit inbound investment and undermine the competitiveness of the growing nonoil export market.

It is, in fact, folly to imagine that if the link went, inflation would end. Rising rents are not caused by the dollar’s fall. They are a specific response to a specific Saudi problem — not enough accommodation for a growing population; there the government is already responding with the creation of new cities. Ironically, that also fuels inflation. High oil prices have resulted in a surge in construction projects but the boom is itself inflationary. The problem is exacerbated by the relatively limited investment opportunities for repatriated Saudi wealth. Surging money supply also forces up prices.

So what can be done? There is an answer. We need to shop around a great deal more in search of cheaper prices. Shops and businesses have to be competitive. If they are more expensive than their rivals, customers will desert them. That is the market mechanism that can keep prices down. It is up to the customer to work the system and get the best price. We have the power to force prices down. We need to use it.

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