Saudi 2008 inflation unlikely to fall

By Daliah Merzaban

DUBAI (Reuters) - Inflation in Saudi Arabia, which hit at least a 27-year high last month, is unlikely to fall this year as a housing shortage spurs rent rises and government spending causes bottlenecks, the central bank deputy chief said.

Revaluing the Saudi riyal, which has been fixed to the dollar at the same rate for 22 years, would not necessarily help reduce inflation because the imported element in limited, Muhammad Al Jasser, Vice Governor of the Saudi Arabian Monetary Agency told Reuters in Dubai on Sunday.

Annual inflation in the world's largest oil exporter rose to 7 percent in January, its highest since at least 1981. Rents jumped almost 17 percent.

"Present inflationary pressures will likely continue in 2008 until the supply response in the real estate market catches up with demand," Al Jasser said.

With billions of dollars being poured into construction projects, residential and commercial property supply would start matching demand next year, Al Jasser said.

DOLLAR PEG SOLID

Saudi policymakers, including Al Jasser, have repeatedly said they have no plans to revalue their currency or drop the peg to the dollar, even though the kingdom tracks U.S. interest rates at a time when the U.S. economy is slowing, and the Saudi economy is surging.

"We are not emotionally or politically committed to the dollar ... it just happens to have been serving our economic interests and continues to do so," he said.

Revaluing the currency would hurt confidence in Saudi Arabia's exchange rate policy, Al Jasser said, at a time when the kingdom is encouraging foreign investment to help create more jobs in the country of 25 million people.

Canada-based Alcan Inc AL.TO, for instance, said last year it would invest $7 billion with the Saudi government to develop one of the world's largest aluminum smelting operations.

"Revaluing the currency would remove a level of certainty that investors have enjoyed about our monetary and exchange-rate policy without any compensation for them," Al Jasser said. Any revaluation would "unleash an expectation" of more.

"You cannot have your cake and eat it ... if we want to grow the way we are growing, we have to accept some inflationary pressures until supply meets up with demand," Al Jasser said.

The Saudi government, which generates about 80 percent its revenue from oil sales -- which are priced in dollars -- plans to spend about 7 percent more this year than last, it said in December.

Revaluing would not necessarily control rising food costs, the second-biggest driver of inflation, as the kingdom only imports about 35 percent of its needs, Al Jasser said.

"The exchange rate is not a panacea for inflationary pressures building up in our economy," Al Jasser said. "They are primarily due to domestic factors, such as rents and wages, which cannot be addressed through exchange rate."

Inflation in Saudi Arabia started surging in the second half of last year. On average, it rose to 12-year high of 4.1 percent in 2007, compared with an average of 0.8 percent in the previous five years.

"From 2001 to 2006, there was still a lot of slack in our economy, which explains why inflationary pressures did not build up," Al Jasser said.

"When capacity utilization rose, especially in housing and commercial real estate markets, inflationary pressures started to build up in 2007," he said.

Though public spending will be higher this year than last, the government is not spending as much as it could, Al Jasser said.

"During an economic upswing, we are spending less than we are getting," Al Jasser said. "Revaluing the currency would be fuelling the economy further."

The government said it would pay its employees more, and offer additional welfare payments and subsidies to offset the impact of inflation to "ease the pain of adjustment" until supply catches up with demand, Al Jasser said.