Jul 9, 2008

World - Amid oil boom,inflation makes saudis feel poorer

(RIYADH, Saudi Arabia) Sultan al-Mazeen recently stopped at a gas station to fill up his SUV, paying 45 cents a gallon — about one-tenth what Americans pay these days.
But the Saudi technician says Americans shouldn't be jealous. Inflation that has hit 30-year highs on everything else in the kingdom is making Saudis feel poorer despite the flush of oil money.
"I tell the Americans, don't feel envious because gas is cheaper here," said al-Mazeen, 36. "We're worse off than before."
While Saudis don't feel the pain at the pump, they feel it everywhere else, paying more at grocery stores and restaurants and for rent and construction material. While the country is getting richer selling oil at prices that climbed to a record $145 per barrel last week, inflation has reached almost 11 percent, breaking double-digits for the first time since the late 1970s.
"Gas prices are low here, so what?" said Muhammad Abdullah, a 60-year-old retiree. "What can I do with gas? Drink it? Take it with me to the supermarket?"

Al-Mazeen says his monthly grocery bill has doubled — to $215 — compared to last year, when oil was at around $70 a barrel. During that time period, the price of rice has doubled to about 72 cents a pound, and a pound of beef has gone up more than a third to about $4.

Moreover, Saudis are grappling with unemployment — estimated at 30 percent among young people aged 16 to 26 — and a stock market that is down 10 percent since the beginning of the year.
Many Saudis are realizing that this oil boom will not have the same impact as the one in the 1970s, which raised Saudis from rags to riches. This time, the wealth isn't trickling down as fast or in the same quantities.
One reason is the kingdom's growing population, says
John Sfakianakis, chief economist at the Saudi British Bank. In the 1970s, the population of Saudi Arabia was 9.5 million. Today, it's 27.6 million, including 22 million Saudi citizens.
That means the state, which controls nearly all oil income, has to spread the wealth among more people. Besides a generous social welfare system that includes free education from pre-school through university and other benefits for citizens, the public sector employs some 2 million people and 65 percent of the budget goes to salaries.
"The state, yes, is wealthier, but the state has close to three times the amount of people it has to cater for," said Sfakianakis. "Even if Saudi Arabia had lower inflation (in the 1970s), the country and the needs of the country are bigger than what they used to be."
So the government has less room to raise wages to help people deal with higher prices. The
United Arab Emirates recently hiked public sector wages by 70 percent — but if the Saudis did the same, they would have been hit by budget deficits, Sfakianakis added.

Other Gulf nations have been hit even worse by inflation. In the UAE, inflation is expected to reach 12 percent this year, and in Qatar it's at 14 percent, according to a Merrill Lynch report earlier this year.
But those nations have much smaller populations and so can spread their oil, gas and financial riches faster and in bigger quantities to ease the pain. As a result — contrary to their image in the West — Saudis are far from the wealthiest people in the Gulf. The kingdom's per capita income is $20,700 — compared with $67,000 for Qatar, which has a population of around a half million citizens.
In a recent interview with Kuwait's Al-Siyassah newspaper,
King Abdullah said "officials have suitable solutions" and plans to fight inflation.
"The government can use its money to offset the soaring prices of basic commodities. The kingdom will also use its financial reserves to combat inflation and bring everything back to normal," the king asserted, without elaborating on how.
Economists say the main source of inflation is higher domestic demand for apartments, office space and food — at a time when world prices for food and raw materials is rising. A statement issued last week by the Economy and Planning Ministry said the rental index, which includes rents, fuel and water, has soared 18.5 percent, while food and beverage costs have increased by 15 percent.
Saudi inflation is also exacerbated by the weak dollar, because the riyal is pegged to the U.S. currency, increasing the cost of imports — and the kingdom imports most of its essential goods.

The influx of oil money into the economy also is a factor, but it is not as major a cause of inflation as the other issues, said Sfakianakis and other economists.
In a sign that inflation will not dissipate any time soon, the Saudi Cabinet decided on March 31 to reduce customs duties on 180 major foodstuffs, consumer goods and construction materials for at least three years, according to a report Sfakianakis wrote for the Saudi British Bank.
Still, the kingdom is set to enjoy a large budget surplus because of high oil prices this year. Oil export revenue is expected to reach $260 billion this year, according to a report last month by Jadwa Investment, a private Saudi firm. This compares with an average of just $43 billion per year throughout the 1990s, the report said. It forecast the budget surplus will be $69 billion in 2008 compared to $47.6 billion in 2007.
But Saudi Arabia puts much of its oil income into investments and assets abroad, in part as a hedge in case oil prices drop in the future, squeezing the budget.
Sheik Abdul-Aziz Al Sheikh, the kingdom's grand mufti and top religious authority, has urged the government to fix prices on essential commodities.
"Every effort should be made to contain rising prices of goods all over the kingdom," the mufti said during a sermon in Riyadh in February, according to the Arab News daily.

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