Saudi inflation plan to cost $21bn

by Talal Malik on Wednesday, 05 March 2008
SAUDI FINANCE: Jadwa Investment has said Saudi Arabia's plan to control inflation will cost the kingdom's treasury $21 billion over the next 3 years. (Getty Images)Saudi Arabia's plan to control inflation will cost the kingdom's treasury 80 billion Saudi riyals ($21 billion) over the next three years, Jadwa Investment said on Tuesday.

Riyadh-based Jadwa said in its monthly bulletin that the kingdom's Saudi Arabia's 17-point plan to alleviate the impact of rising prices will cost the government 13.5 billion riyals in supplemental spending and 67 billion riyals over the next three years, Saudi daily Arab News reported.

The cost will not affect public finances because the kingdom's budget surplus this year is expected to reach 187 billion riyals, it added.

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"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 in reference to a recent series of salary hikes for state employees.

In announcing 5% salary rises for 2009 and 2010, the Saudi government is demonstrating clearly it expects inflation to remain around this level for the next three years, the report said.

Though the government paid about 170 billion riyals in wages last year, a 5% rise would increase the total government wage bill by 8.5 billion riyals for 2008. Further increases of 5% are pledged over the next two years, costing the kingdom 52 billion riyals by the end of 2010, the report said.

Bourland said many people believe that raising public salaries were a simple way for the government to compensate for the impact of inflation.

Citizens throughout the GCC have pushed for much higher wages and in some cases have received them - government wages were increased by up to 43% in Oman and federal employees in the UAE have received a 70% pay rise.

However, Jadwa said that pay rises should be driven by adjustments for the current rate of inflation and improvements in worker productivity, and that by 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, it said.

The 15% government pay rise in August 2005 probably contributed to the current period of rising inflation, the report added.

Rent has been the main factor pushing up inflation in Saudi Arabia over the last year, Jadwa said.

The programme calls for the urgent approval of the Saudi mortgage law, which has been awaiting final ratification for some time. Most Saudis rent their property, so rising rents have eroded spending power, and 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," Bourland said. "However, our forecast for average inflation in 2008 remains unchanged at 4.7%."