World Economy

Saudi Inflation to Rise Above 5 Percent

Saudi Arabia’s economy contracted in the  first three quarters this year.
Saudi Arabia’s economy contracted in the  first three quarters this year.

Saudi consumers are set to benefit from a raft of incoming economic reforms next year—but it may come with a cost as inflation quickens.

Inflation in the kingdom is expected to pick up dramatically in 2018 to more than 5%, as the implementation of VAT and energy price reforms are enacted, according to a note from Jadwa Investment bank in Riyadh, news outlets reported.

The note said inflation would be driven by the introduction of VAT, a hike in electricity tariffs and, soon-to-be introduced tariffs aimed at residential, commercial, agricultural, health care, private education and charitable institutions.

Jadwa said: “Although we expect inflation to rise to 5.2% in 2018, this may be adjusted once the remainder of energy price reform is disclosed in the first quarter of the year.”

Growth in the non-oil sector is forecast to improve as the expansionary budget, with a specific set of stimulus packages, lifts activity, said the bank. The expansionary budget should act as a cushion to the economy from the potentially disruptive effects of forthcoming measures such as rises in dependency fees, expat levies and energy price reforms, added Jadwa.

“The budget statement states that the Saudi economy will grow by 2.7% in 2018, with non-oil GDP growth at 3.7%. This would imply a growth of 1.4% from the oil sector. We see the main bulk of oil sector growth likely coming from the addition of the Jizan refinery, which is expected to come on-line during the year, rather than any major rise in crude oil production.”

Saudi Arabia’s economy contracted in the first three quarters this year, official figures show.

General Authority for Statistics figures show that gross domestic product shrank by 2.3% in the second quarter compared with the first three months of 2017, mainly over low oil prices and less production. GDP in the first quarter contracted by 3.7% compared with the last quarter of 2016. Third quarter was flat, the report said.

Until 2014, oil income made up more than 90% of public revenues. The kingdom has since concentrated on diversification, including plans to introduce value-added tax and privatize part of state-owned oil giant Aramco.

Saudi Arabia recently unveiled the 2018 budget, the largest in the kingdom’s history with 978 billion riyals ($261 billion) public spending. The government expects a budget deficit for the fifth year in a row in 2018 with an estimated shortfall of 195 billion riyals with government revenues projected at 783 billion riyals ($208.8 billion).

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