Saudi social plan adds price fears

Saudi Arabian policymakers are facing a challenge as a US$129 billion (Dh473.81bn) social spending plan begins to stoke inflation.

Saudi Arabian policymakers are facing a challenge as a US$129 billion (Dh473.81bn) social spending plan begins to stoke inflation.

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Consumer prices last month rose for the first time in eight months, by 4.8 per cent compared with April last year, official data showed.

Surging government and consumer spending, a result of official measures to improve living standards in the kingdom, are expected to result in further price rises in the second half of the year.

Cash withdrawals, the value of cheques cleared and point of sales transactions all rose in March as public-sector workers began to spend their bonuses, which were equal to two months' salary.

But the spending spree has yet to significantly show up in inflation data, economists say.

"The combination of a supplementary budget, which boils down to extra cash in the hands of consumers, and higher commodity prices leads to inflation," said Motashar al Murshed, a member of the Riyadh Chamber of Commerce and Industry's finance committee.

"I'm sure that it will be something the government will be closely watching and will take any action needed to control inflation."

Increasing subsidies on goods such as food and medicine was one way Saudi policymakers could ease the pain of higher inflation on lower-income consumers, Mr al Murshed said.

Prices of some goods are already tightly regulated by the government. It last increased food subsidies in 2007, to give more assistance for rice and baby milk.

Food prices, which have the largest weight in the consumer basket, increased 0.9 per cent last month compared with March, data from the country's statistics bureau showed.

Housing and energy costs, which have the second-largest weighting, rose by 0.5 per cent over the same period.

"The outlook is for prices to continue to rise due to food price pressure in the build-up to Ramadan and housing rental pressures," said John Sfakianakis, the chief economist at Banque Saudi Fransi, who forecasts annual inflation of 5.6 per cent this year.

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With as much as 75 per cent of the kingdom's goods coming from overseas, the economy is vulnerable to imported inflation.

Rising global food prices this year have been aggravated by a weak US dollar, making the cost of imports from Europe and Asia more expensive. The Saudi riyal is pegged to the dollar.

Under the social spending plan, nearly 30 per cent of the country's annual economic output will be spent to create jobs and defuse social tensions.

The extra expenditure and higher oil prices will help the economy grow by 5.3 per cent this year, the Saudi lender National Commercial Bank forecast yesterday.

The unwelcome side-effect of more money sloshing around the economy can be higher consumer prices.

Policymakers are keen to avoid a repeat of 2008 when inflation peaked at 9.9 per cent before the global downturn.

But the stimulus package could also help to keep a lid on other areas of the consumer basket, said Paul Gamble, the head of research at Jadwa Investment.

"The commitment to build 500,000 new housing units should help contain rental inflation pretty soon," Mr Gamble said.