Saudi Arabia’s 93.3 billion financial package can be supported by strong oil prices, but the hefty financial handouts by the king can accelerate inflation, Banque Saudi Fransi said.
Wage increases always have some inflationary pass-through effect as they can directly impact consumption, John Sfakianakis, the banks chief economist, wrote in an e-mailed report on Friday.
King Abdullah has also ordered civil services to be paid two-month bonuses reaching up to $8.5 billion, Asharq al-Awsat reported Saturday, citing official estimates.
Annual inflation in Saudi, the Arab world’s largest economy, slowed to 5.3 percent in January, compared with 5.4 percent the previous month, according to official data.
Sfakiankis said he believed Saudi authorities are aware that expenditures of this magnitude if carried out over a short period would have significant inflationary pressures.
“We do believe inflationary pressures are on the increase due to global commodity price pressures that will be reflected later this year. Wage benefits and bonuses as well as an increase in the total civil service will add to some inflationary pressures,” he said.
The new package and a $36 billion package announced Feb. 23. amounts to 29.7 percent of the kingdoms GDP in 2010, according to the banks report.
Sfakianakis said high oil revenues could be used to support the announced spending as well as tapping into the country's $444.5 billion in foreign assets.
“The authorities are aware that both measures cannot be carried out in their totality over a year or two. Some are short term and others will take time to unfold. Due to the size of the announcements, we expect some measures to be carried out over some years,” he said.