Business | Economy
Official says Saudi inflation is unlikely to fall this year
Inflation in Saudi Arabia, which hit at least a 27-year high last month, is unlikely to fall this year as a housing shortage spurs rent rises and government spending causes bottlenecks, the central bank deputy chief said.
- Reuters
- Published: 23:29 February 24, 2008
Dubai: Inflation in Saudi Arabia, which hit at least a 27-year high last month, is unlikely to fall this year as a housing shortage spurs rent rises and government spending causes bottlenecks, the central bank deputy chief said.
Revaluing the Saudi riyal, which has been fixed to the dollar at the same rate for 22 years, would not necessarily help reduce inflation because the imported element is limited, Mohammad Al Jasser, vice-governor of the Saudi Arabian Monetary Agency told Reuters in Dubai yesterday.
Annual inflation in the world's largest oil exporter rose to seven per cent in January, its highest since at least 1981. Rents jumped almost 17 per cent.
"Present inflationary pressures will likely continue in 2008 until the supply response in the real estate market catches up with demand," Al Jasser said.
With billions of dollars being poured into construction projects, residential and commercial property supply would start matching demand next year, Al Jasser said.
Saudi policymakers, including Al Jasser, have repeatedly said they have no plans to revalue their currency or drop the peg to the dollar, even though the kingdom tracks US interest rates at a time when the US economy is slowing, and the Saudi economy is surging.
"We are not emotionally or politically committed to the dollar ... it just happens to have been serving our economic interests and continues to do so," he said.
Revaluing the currency would hurt confidence in Saudi Arabia's exchange rate policy, Al Jasser said, at a time when the kingdom is encouraging foreign investment to help create more jobs in the country of 25 million people.
Canada-based Alcan, for instance, said last year it would invest $7 billion with the Saudi government to develop one of the world's largest aluminium smelting operations.
"Revaluing the currency would remove a level of certainty that investors have enjoyed about our monetary and exchange-rate policy without any compensation for them," Al Jasser said.
Any revaluation would "unleash an expectation" of more.
"You cannot have your cake and eat it ... if we want to grow the way we are growing, we have to accept some inflationary pressures until supply meets up with demand," Al Jasser said.
Measures: Salaries to be raised
Inflation in Saudi Arabia started surging in the second half of last year. It rose to a 12-year high of 4.1 per cent in 2007, compared with an average of 0.8 per cent in the previous five years.
Saudi Arabian Monetary Agency vice-governor Mohammad Al Jasser said the government would pay its employees more, and offer additional welfare payments and subsidies to offset the impact of inflation.
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