JEDDAH: A massive financial initiative unveiled recently by King Abdullah, Custodian of the Two Holy Mosques, would ease inflation in the medium term. "Over the medium term, the increased provision of housing will reduce inflationary pressures markedly," the Riyadh-based Jadwa Investments said in a study released this week, although in the short tem, "we think that inflation will be slightly higher than we had previously anticipated owing to much greater consumer spending." "The additional two month's salary given to public sector employees will trigger similar awards to the private sector and combined will cause a significant increase in spending in 2011," it said. Jadwa said while it will take some time for the first properties to be available for people to move into, the anticipation of a large new supply of housing is likely to discourage those on lower incomes from entering the property market and encourage others currently looking for property to postpone their search. "It could therefore have a quick impact on rents, though the additional funds awarded could put some prices pressures to other segments of the rental market," the report said. "Once the new housing becomes available in large quantities, likely to be 2013 or 2014, there will be a notable fall in rental inflation. We have nudged up our inflation forecast for 2011 to 5.5 percent from 5.3 percent and cut our 2012 prediction to 4 percent from 4.4 percent." The report noted that while there were other factors involved, the 15 percent government pay rise for civil servants in August 2005 probably contributed to the subsequent period of increasing inflation, with the consumer price index rising in 28 of the following 34 months. "Higher consumer spending is likely to put upward pressure on the price of consumer goods, many of which are imported. Elevated oil prices are adding to transport costs, which will probably also be passed on to consumers in the form of higher prices for imported goods," it said. "However, we do not foresee exchange rate moves adding to imported inflation and unlike on previous occasions the rising oil price is not being accompanied by a period of dollar weakness. Offsetting this, the much greater provision of housing by the government will lower rental inflation, the main source of inflation in the Kingdom." Moreover, the report said the surge in oil revenues because of higher prices and output would result in a much larger current account surplus than it had previously anticipated in 2011. It projected oil export earnings to reach around $243 billion this year, the second highest on record, lifting the trade surplus to $181 billion and the current account surplus to $93 billion.
