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1 Inflation leaves Saudis feeling poorer on Thu Jul 10, 2008 1:44 am

rosco 357


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Inflation leaves Saudis feeling poorer
By ASSOCIATED PRESS
RIYADH


Sultan al-Mazeen recently stopped at a gas station to fill up his SUV, paying 45 cents a gallon - a price Americans could only dream of as they pay nearly 10 times that at the pump.


CAMELS ARE seen beyond an oil well near an oil facility in an area where operations are being expanded about 100 kilometers southeast of Riyadh. Consuming nations want the world's top oil exporter to boost production capacity and bring down prices.

But cheap gas and the record wealth pouring into Saudi Arabia's coffers from high oil prices are little relief for Mazeen. The 36-year-old Saudi technician and many other Saudis say they're only feeling poorer amid the oil boom because of inflation that has hit 30-year highs in the kingdom.

"I tell the Americans, don't feel envious because gas is cheaper here," Mazeen said. "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 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?"

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 meat has gone up more than a third to about $4.

Moreover, Saudis are grappling with unemployment - estimated at 30% among youths aged 16 to 26 - and a stock market that is down 10% 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 the country's generous welfare system of free education and other benefits for citizens, the public sector employs some 2 million people, and 65% 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, 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% - but if the Saudis did they same, they would have been hit by deficits, Sfakianakis added.

Contrary to their image in the West, Saudis are far from the wealthiest people of the Gulf, where many countries have much smaller populations and so can spread the riches faster. The kingdom's per capita income is $20,700 - compared to Qatar, which has a population of around a half million citizens and a per capita income of $67,000.

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 king was quoted as saying. "The kingdom will also use its financial reserves to combat inflation and bring everything back to normal."

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 recent statement issued by the Economy and Planning Ministry said the rental index, which includes rents, fuel and water, has soared 18.5% while food and beverage costs have increased by 15.1%.

Saudi inflation is also exacerbated by the weak dollar, because the riyal is pegged to the US currency, increasing the cost of imports - and the kingdom imports most of its essential goods.

The influx of oil money itself 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 SABB.

Still, the kingdom is set to make 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 $43b. per year throughout the 1990s, the report said. It forecast that the budget surplus will be $69b. in 2008 compared to 47.6b. 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.

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