JEDDAH, 24 April 2008 — Inflation in Saudi Arabia could cross 10 percent this year. Consumer price rises could then ease in the second half as anti-inflationary government measures take hold and lower global demand for commodities feeds into prices, Saudi Arabian Monetary Agency (SAMA) Gov. Hamad Al-Sayari said.
Inflation in the Kingdom almost doubled in the six months to February to at least a 27-year high of 8.7 percent as rents surged 18 percent and food prices jumped 13 percent.
“If inflation continues to grow at the same pace of the previous months, then it will rise to and can exceed 10 percent,” Al-Sayari told reporters in Riyadh, late on Tuesday. “But as a result of both expectations of a decline in global demand for commodities because of the US economic slowdown and the effectiveness of the government measures, it might decrease in the second half. However, these remain forecasts.”
Echoing Al-Sayari’s views, John Sfakianakis, chief economist at SABB, said: “Inflation will continue to rise this year and any possibility of abating will depend on several broad-based price pressures diminishing. One of them is rent, which continues its steep rise and it has less to do with global inflationary events than domestic ones. Food, which is the largest component in the cost of living index in Saudi Arabia, will continue to witness a hike in prices as reliance on food imports is considerable.”
Like most states in the region, Saudi Arabia is restrained in its inflation fight by a currency peg to the ailing US dollar, which forces it to track US interest rate cuts and makes imports more expensive.
The Saudis have repeatedly ruled out any change to the riyal, which has been fixed at 3.75 to the dollar since 1986.
Professor Mohamed Ramady of King Fahd University of Petroleum and Minerals said the best hope for a reduction in current inflation levels in the region might come from a strengthening of the dollar to give respite from growing pressure to either revalue local currencies or move to a peg of currencies.
“Despite some modest gains over the past few days for the dollar, due to a perception that the worst of the credit crunch might be over after concerted central bank asset swaps with financial institutions, the US economy is definitely in a weak situation. Pinning hope on a sharp rally might be wishful thinking for this year at least, and the only way to contain inflation is either through increased supply of the basic commodities fueling inflation in the Kingdom — food and construction material — or curbing government spending,” Ramady said.
He added that the latter might not be feasible in the short run with all the mega projects under way, but that, “a slowdown in project implementation might be coming due to input shortages anyway as being evidenced in some neighboring GCC countries.”
Ramady said: “Unfortunately, consumers will have to live with a higher level of inflation for the foreseeable future but one has to put this in perspective as 10 percent inflation level under the current boom levels is far better than the 30-percent-plus inflation levels of the 1970s’ boom era.”
Uncertainty about global commodity prices, particularly food items, has made forecasting inflation more difficult.
— With input from agencies
