Saudi social plan adds price fears

16/05/2011 00:00 AST

Saudi Arabian policymakers are facing a challenge as a US$129 billion (Dh473.81bn) social spending plan begins to stoke inflation.

Consumer prices last month rose for the first time in eight months, by 4.8 per cent compared with April last year, official data showed.

Surging government and consumer spending, a result of official measures to improve living standards in the kingdom, are expected to result in further price rises in the second half of the year.

Cash withdrawals, the value of cheques cleared and point of sales transactions all rose in March as public-sector workers began to spend their bonuses, which were equal to two months' salary.

But the spending spree has yet to significantly show up in inflation data, economists say.

"The combination of a supplementary budget, which boils down to extra cash in the hands of consumers, and higher commodity prices leads to inflation," said Motashar al Murshed, a member of the Riyadh Chamber of Commerce and Industry's finance committee.

"I'm sure that it will be something the government will be closely watching and will take any action needed to control inflation."

Increasing subsidies on goods such as food and medicine was one way Saudi policymakers could ease the pain of higher inflation on lower-income consumers, Mr al Murshed said.

Prices of some goods are already tightly regulated by the government. It last increased food subsidies in 2007, to give more assistance for rice and baby milk.

Food prices, which have the largest weight in the consumer basket, increased 0.9 per cent last month compared with March, data from the country's statistics bureau showed.

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The National