Inflation in Saudi Arabia may be allowed to reach six percent this year as the government prioritizes growth-oriented spending measures, the National Bank of Kuwait (NBK) said in its latest “GCC Economic Outlook” report. It expected inflation to “remain steady in the five-six percent range” after averaging five percent in 2011, and “may be tolerant of six percent inflation.” The report noted that housing is the main contributor to inflationary pressures, saying that food price inflation halved from eight to four percent last year. However, the report forecast that inflation will begin to moderate by late 2012-13 in light of the government's aggressive house building program. Moreover, the report said government spending may have jumped by 23 percent in 2011 on the back of an estimated $27 billion in early year supplementary spending. However, this should have been more than covered by a 50 percent increase in hydrocarbon revenues, largely due to rising oil prices. The budget surplus may have risen to 14 percent of GDP, from five percent in 2010. Because of the multi-year nature of the commitments, spending may not decline much in 2012. With oil prices more or less unchanged, we see the budget registering a similar 14 percent of GDP surplus next year. High oil prices are also filtering through into continued accumulation of official reserves which will provide a cushion to support government spending, which will in turn support the banking system through 2012, the NBK report said. “Monetary conditions have improved smartly since the first quarter of 2011, with liquidity, bank lending and deposit growth all picking up,” it said. Money supply measures saw a major boost. Both M1 and M3 leapt by around SR80 billion ($21 billion) between February and April, as new government cash entered the system, ending up as demand deposits. Growth in bank credit to the private sector has also continued to climb steadily.
