JEDDAH, 4 March 2008 — Saudi Arabia’s 17-point plan to alleviate the impact of rising prices to cost the government SR13.5 billion in supplemental spending and SR67 billion over the next three years, according to the Riyadh-based Jadwa Investment’s monthly bulletin for February.
However, because of projected budget surplus of SR187 billion in 2008, these costs will not have a material effect on the state of public finances.
“The public sector pay rise is unlikely to prove too inflationary and the reduced fees and charges and other measures will not have a pronounced impact on the overall inflation rate,” Brad Bourland, chief economist and head of research at Jadwa, said, referring to a recent spate of salary increases for most state employees.
In announcing five percent salary rises for 2009 and 2010, the government is clearly indicating that it expects inflation to remain around this level for the next three years, the report deduces. The Jadwa report said that the Saudi government paid about SR170 billion in wages last year. A five-percent rise would increase the total government wage bill by SR8.5 billion for 2008. With further five percent rises pledged for the next two years, the public sector pay package will cost the government a total of SR52 billion by the end of 2010.
With social insurance payments totaling around SR830 million per month, a 10 percent rise in pension payments would increase the annual cost to the government of social insurance by SR1 billion.
The recently announced 50 percent reduction of fees for passports, driver’s licenses, title transfers and renewing the residency permits for foreign guest workers for the next three years will cost the government around SR3 billion per year. The absorption of 50 percent of the cost of port fees for three years will also reduce government revenue by around SR1 billion per year.
But Bourland says the losses of revenue are not likely to adversely impact public finances.
“The new government measures will have a broadly neutral impact on inflation,” he said. “The public-sector pay rise is below the current rate of inflation and is therefore unlikely to have much impact on inflation. Lower charges for government services, port fees and various measures to tackle anti-competitive behavior and increase in consumer awareness may reduce the price of some goods, but will not have a pronounced immediate impact on overall inflation.”
He added that accelerating housing construction should ease the rise in rents over the long term.
Bourland said many people believe that raising public salaries was a simple way for the government to compensate for the impact of inflation. Citizens throughout the Gulf Cooperation Council (GCC) have pushed for much higher wages and in some cases have received them - government wages were increased by up to 43 percent in Oman and federal employees in the UAE received a 70 percent pay rise.
However, pay rises should be driven by adjustments for the current rate of inflation and improvements in worker productivity. Raising them beyond this level will actually stimulate further inflation. This is because much of the pay rise will be spent and this increase in demand will feed through into higher prices. The 15 percent government pay rise in August 2005 probably contributed to the current period of rising inflation, the report added.
The report said it is difficult to judge how the reduction in port fees will affect inflation, as it depends on the actions of the agents that the imported products will pass through before they reach the consumer. Port fees only account for a small proportion of the price of the final product. By volume, 97 percent of imports enter Saudi Arabia through the Kingdom’s ports, but total port fees are only SR2 billion to 2.5 billion, compared with a total import bill of SR306 billion last year. Moreover, imported inflation has only been a small factor to the overall rise in inflation in Saudi Arabia.
“Therefore we think the reduction in port fees will not make much of an impression on the cost of imports,” Bourland said.
Rent has been the main factor pushing up inflation in Saudi Arabia over the last year. The program calls for the urgent approval of the mortgage law, which has been awaiting final ratification for some time. Most Saudis rent their property, so rising rents have eroded spending power. Mortgage laws are expected to help spur home buying.
“The recently announced measures will have some targeted benefits but they will not have a great impact on total inflation within the economy. However, our forecast for average inflation in 2008 remains unchanged at 4.7 percent,” Bourland said.
