Call to Saudis to curb spending

Call to Saudis to curb spending

By Roula Khalaf in Riyadh

Published: May 6 2008 17:57 | Last updated: May 6 2008 17:57

Saudi Arabia’s central bank governor on Tuesday called on the government to fight inflation by curbing public expenditure, warning that economic policies in the kingdom faced “a critical situation”.

The call by Hamad al-Sayari followed a government announcement that it would invest in agricultural and livestock projects in foreign countries to ensure food security and control commodity prices.

Saudi Arabia’s oil-fuelled boom is producing massive investment in infrastructure projects but is also leading to growing social pressure as inflation spirals, reaching 9.6 per cent in March year on year. Although lower than in Qatar and the United Arab Emirates, the inflation rate is tormenting a country accustomed to near zero inflation.

Insisting that inflation is driven by domestic factors – mainly housing and foodstuffs – the central bank has resisted calls to drop the riyal’s peg to the dollar, thus limiting its ability to use monetary policy.

“Powerful and contradictory factors put economic policymakers before difficult choices,” said Mr Sayari at a Euromoney conference, pointing to the need to promote economic growth but also the burden inflation was putting on low-income families.

“The Saudi Arabian Monetary Agency [the central bank] has taken steps to reduce domestic liquidity by raising the statutory reserve requirement several times. Given the dominance of fiscal policies on the economy, it is necessary to reprioritise spending and programme it to fit the absorptive capacity of the national economy,” Mr Sayari added.

John Sfakianakis, chief economist at Riyadh’s SABB Bank, said the governor’s message was “alarming” and showed that “the level of concern has increased many-folds over the past year”.

But whether the regime will heed the governor’s call is far from certain, given the kingdom’s urgent need for infrastructure development and economic diversification to reduce an unemployment rate that is estimated to be as high as 15 per cent.

Ibrahim al-Assaf, the finance minister, told the Financial Times that decision-makers were attempting to curtail cur-rent spending but not investment.

The government, however, faces domestic pressure for more increases in salaries – which dominate the budget – and it was forced last year to raise social spending. Samba, the Saudi bank, forecasts that overall spending will accelerate this year to about 16 per cent, up from 14 per cent last year.

Mr Assaf said the government was looking at agricultural investments outside the kingdom but it was too early to say where they might be. Analysts in Riyadh say the attempt to achieve food security would involve government backing for private sector agricultural investments in Asia, the US and Latin America. This policy, they note, was also attempted in the late 1970s, when Saudi Arabia invested in agricultural projects in Sudan.

Some economists in the kingdom say the authorities may eventually have to revalue the riyal.

Brad Bourland, chief economist at Saudi-based Jadwa Investment, said in a recent report that a revaluation of the riyal by 15 per cent or more would have a “clear and immediate” impact on inflation.