Oil boom? Don’t tell it to the Saudi on the street

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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