Largest Saudi lender predicts 7% inflation in '08

National Commercial Bank (NCB), Saudi Arabia's largest lender, said inflation in the kingdom is likely to accelerate this year to as much as 7% as government spending and immigration strain capacity.

Inflation could average between 5% and 7%, compared with 4.1% last year, NCB chief economist Said Al-Shaikh told newswire Reuters in Jeddah on Tuesday, on the sidelines of an investment conference.

"The higher import of labour will add demand on goods and services, and the increased government expenditure will add pressure," Shaikh said.

Reaping a windfall from rising oil prices, the world's largest oil exporter has paid back a total 680 billion riyals ($181.3 billion) of debt in the five years to 2007, lowering debt's share of gross domestic product to 19% from 92%, Shaikh said.

"When you retire public debt, you indirectly inject more money into the system," Shaikh said.

Lower interbank interest rates, because of Saudi Arabia's peg to the dollar, are spurring bank lending and inflation, Shaikh said.

Government spending grew by an average 14% per year in the four years to 2007, Shaikh said. Consumer price rises are "very challenging for the government", Shaikh said.

Saudi inflation, which hit an at least 27-year high in January, will stay "high" in the first six months of the year before falling in the second half, the country's central bank governor, Hamad Al-Sayyari, said on Monday.

Saudi annual inflation hit 7% in January on higher rent and food costs. The central bank has raised reserve requirements twice in two months to force lenders to keep more money in their vaults in a bid to slow down credit growth. (Reuters)

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