The Hidden Threat in Saudi Economy

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saudi high rise
The Kingdom Tower stands in the night above the Saudi capital Riyadh. Photo – Ali Jarekji/Reuters

There seems to be an overheating going on in the Saudi economy as the country is primarily depending on a limited sources of income. The dependence on oil primarily does mean that the rising commodity prices can lead to unwanted and uncontrollable inflation. The spending plans underway is based on diversifying the economy and expanding the revenue base but these measures seem small and inconsequential for now. There are already fears of protests in the streets and seeing the domino effect of the Arab Spring, it might spill into this region as well.

The GCC is experiencing high inflation rates throughout the region and measures are required to be put into place in order to proactively deal with the situation. The economy has seen increased inflation of 3.9 percent in January compared to 3 percent in September. Compared to UAE, which only had inflation of 0.3 percent does ring some alarm bells. King Abdullah had set a plan to spend and infuse subsidies into the country to void off protests and unrest in the region that was seen in neighbouring countries of Egypt, Syria, and Tunisia etc.

Now it seems that the chickens are coming home to roost as the consumer spending is increasing and the consumer finance and loans are increasing. This is overheating the economy which can lead to higher inflation compared to the region. It seems economic growth was set as the priority with the lending rate SIBOR (Saudi Interbank Offer Rate) being kept stable in order to liquidate the credit markets. Inflation is resulting from this prioritization by Saudi Interbank.

Government spending is aiding the local economy as there is fresh demand for Saudi riyals and local assets being bought before the inflationary bubble gets too big. Spending carried out in 2011 saw government funding schools, road and railway lines being put into place which altogether led to an unprecedented growth of 6.8 percent for the country compared to the whole GCC region which should lag behind till at least 2017. The good was met with the bad as inflation was feared and that is rearing its ugly head now.

Analysts feel that the inflation is not due to credit related industries and that the major portion is made of food induced inflation being caused by disruption in food supply due to the Syria conflict. Real estate is relatively stable, the inflation in other sectors is tolerable and the riyal is mostly flat compared to other countries which does prove that this inflation will be short lived and will not weigh on the economy in a substantial manner.

Experts in the area still feel that the inflation is transitionary and that there are more benefits still in store for the country as consumer loans are still growing which will translate into more growth in the future. Saudi King’s plan does seem to be on track as economic growth is still the key concern and once the problematic inflation is controlled to an extent, there can be further gains. The expansion into multiple sources of revenue and economic growth will also prove to be an additional plus for the state in the coming years.

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