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Recently released statistics suggest that inflationary pressures are becoming an everyday problem in Saudi Arabia. Worse, there seems to be no end in sight to this phenomenon, not least due to the kingdom's determination to continue its economic policies. A case in point is the policy linking the Saudi riyal to the dollar, which in turn necessitates importing the prevailing interest rates in the American economy.
The interest rates are at historically low levels, partly designed to help the US economy overcome recession. However, low interest rates only add to inflationary pressures in Saudi Arabia. The mismatch between demand and supply is partly blamed for causing a rise in cost of living.
According to the Central Department of Statistics (a governmental agency), cost of living in Saudi Arabia accelerated by 9.6 per cent in March. This is the highest rate in 27 years. The latest figure points to a sustained rise in cost of living in Saudi Arabia in 2008. In contrast, inflation rates rose by 8.7 per cent and 7 per cent in February and January, respectively.
More specifically, rents, fuel and water charges grew 15.8 per cent. Yet, goods and services index increased by 14.5 per cent, only followed by rising costs of food and beverages by 14.2 per cent. Still, healthcare costs rose by 7.5 per cent.
Altogether, the cost of living index grew to 114.2 points by end-March compared to 104.2 points in February.
The rise in housing costs is also blamed for the spike in inflation. The rise in rental index is likely to continue unabated, supported by some fundamentals such as stronger governmental spending and speculative practices. For example, the total state expenditures were estimated to have reached $166 billion in fiscal 2007, some $59 billion more than the budgeted figure. Stronger government spending on infrastructure projects is at least partly responsible for the rising costs of building materials.
Low interest rates together with limited investment alternatives are serving the cause of speculators on property prices. Aside from institutional investors, it has emerged that small investors are pooling together and buying properties, and in turn looking for reasonable appreciation of value.
Several other factors account for the worsening of inflationary pressures in the kingdom. One such factor relates to the consequences of growing oil prices. Saudi Arabia is the largest oil exporter in the world. It produces around nine million barrels per day, making it the largest oil producer within the Opec.
Rise in oil prices adds to the cost of production in importing countries. In turn, Saudi Arabia imports products from countries such as Japan, China, India and numerous European Union members. As such, stronger oil prices are a mixed blessing for Saudi Arabia.
Likewise, decisions undertaken by some exporting countries are adding to inflationary pressures. For instance, not long ago, India placed restrictions on exports of rice.
Saudi authorities have reverted to increasing financial transfers, namely raising salaries and welfare payments, as a means to helping their citizens cope with rising inflation. Yet, foreign nationals working and living in the kingdom benefit from subsidies extended to basic food items.
To be sure, inflation rate has nearly doubled within the last six months. It is feared that the average inflation could cross 10 per cent in 2008 versus 6.5 per cent in 2007. If the pace continues, chances are that the situation could get worse than the rates sustained during the oil boom of the 1970s.
- The writer is a Member of Parliament in Bahrain.
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