RIYADH — Saudi Arabia, which pegs its currency to the dollar, said it will act with prudence when considering what measures to take to tackle inflation that surged to a record in December on higher rent and food costs.
The world’s largest oil exporter, which has not altered the value of its riyal to the dollar in 22 years, will “deal with the matter with wisdom and prudence, and not surrender to superficially easy solutions,” Saudi Central Bank Gov. Hamad Al-Sayyari said, in video aired on state television yesterday.
“Easy solutions can be catastrophic in the long term,” Sayyari told members of Saudi Arabia’s Shoura Council. He met them on Sunday.
“The measures that have been taken by the government to tackle inflation hotspots directly ... are the best solution at the current time,” he said.
“At the same time, economic policies, including monetary and exchange rate policies, should not be inflexible,” Sayyari said, without being more specific.
Saudi Arabia has held back from revaluing its currency or dropping the dollar peg that forces it to track the United States in lowering interest rates to maintain the relative value of its riyal.
Whilst the US economy is slowing, Saudi Arabia’s is surging on a five-fold increase in oil prices during the last six years, causing bottlenecks and accelerated price rises. “Many commentators blame the exchange rate and speak as if the matter is simple, as if de-pegging the riyal’s link to the dollar would solve the problem of inflation,” Sayyari said. “The truth is that the subject is far more complicated than that ... the impact of the exchange on local prices is limited.”
On average, food costs in the desert kingdom of 25 million people rose 7 percent last year, while housing and related costs, including rents, climbed 8.1 percent, according to government data. “The government is steadfast not to revalue,” John Sfakianakis, chief economist at HSBC Holding PLC’s Saudi affiliate, SABB bank, said. “The governor’s comments were clear and his statement that ‘easy solutions can be catastrophic in the long term’ is basically saying that it is easy to revalue but that will not be done,” Sfakianakis said.
The Kingdom last year imported almost 25 percent of its goods from Europe and 8.4 percent from Japan, the data showed. Another 13.4 percent came from the United States. The dollar declined almost 11 percent against the euro in 2007.
To offset the impact of inflation, Saudi Arabia’s Cabinet last month approved plans to increase public sector wages by 5 percent per year for the next three years to offset the eroding effect on salaries of rising inflation. It also cut port-handling charges on imports by 50 percent for three years.
