Saudi inflation plunge aids government in fight to tame deficit

24/01/2017 07:15 AST

A plunge in Saudi Arabia’s inflation rate, to its lowest level in more than 10 years, is good news for the Kingdom’s efforts to reduce a huge state budget deficit without stifling economic growth.

Annual consumer price inflation slowed to 1.7 percent in December from 2.3 percent in November, the Central Department of Statistics reported on Monday. On a month-on-month basis inflation was negative, with prices dropping 0.5 percent.

Much of the decline was due to lower food prices, which fell 4.3 percent from a year earlier. Saudi Arabia imports many basic foods; its costs were reduced by soft global food prices and the Saudi riyal’s peg to the US dollar, which has been strong globally.

Riyadh hiked domestic fuel and utility prices in December 2015 to cut a $98 billion budget deficit produced by low oil prices. That caused inflation to almost double in the following month to 4.3 percent, its highest level since 2012, squeezing the incomes of Saudi consumers and slowing the economy further.

“In the first half of last year, inflation caused a considerable erosion of household incomes and people’s ability to pay for things — the data shows this has eased,” said Jason Tuvey, Middle East analyst at London-based Capital Economics.

The data is also positive because it shows the economy has been flexible enough to absorb the fuel and utility price hikes of December 2015 without a self-sustaining spiral of higher inflation spreading into other sectors.

That is positive for the government because Riyadh plans another round of fuel and utility price rises around the middle of this year, after it has introduced a program to compensate poorer Saudis for the impact on their living standards.

The Kingdom plans to introduce a 5 percent value-added tax (VAT) next year to shrink its deficit further. While inflation could fall a little further early this year, it is likely to bounce back above 4.0 percent in response to VAT, Tuvey said.

Arab News