Saudi inflation falls to two-year low in July

Saudi Arabia's inflation is expected to keep falling after it reached a two-year low of 4.2 percent in July, official media quoted the central bank governor as saying.

The sharp fluctuations during the first half of 2009 in the price of oil, the kingdom's economic mainstay, must prompt the it to diversify its revenue sources further, the official SPA news agency quoted Muhammad al-Jasser, Governor of the Saudi Arabian Monetary Agency (SAMA), as saying.

"It is a must to continue diversifying the sources of revenue and reduce reliance on oil ... by further granting the private sector a bigger role in the national economy," Jasser said, citing the fluctuations in the price of oil, now trading at about half its record $147 price per barrel of July 2008.

He made the remarks as he presented SAMA's annual report to King Abdullah late on Sunday, SPA reported.

Annual inflation in Saudi Arabia fell to 4.2 percent in July from a record 11.1 percent a year earlier due mainly to a slowdown in the rise of home rents and food prices.

"It is expected that this (inflation) decline will continue, which would create better chances for growth and financial stability," Jasser said, according to SPA.

The drop has coincided with a dramatic slowdown in lending, especially to the private sector amid the global economic slowdown and concerns over the solvency of two major private conglomerates.

Jasser told the monarch that lending to the private sector rose 27.1 percent in 2008. At the end of July, the rate fell to 3.6 percent.

The global financial crisis has had a "limited impact on the Saudi economy and Saudi banks have not been tangibly affected by it thanks to SAMA's conservative policy in supervising and controlling financial institutions," Jasser said.

The remarks, as reported by SPA, made no reference to the two conglomerates, the Ahmad Hamad Algosaibi and Bros Group (AHAB) and Saad Group, whose financial troubles pose one of SAMA's toughest tests yet.

Saad and Algosaibi are embroiled in a legal battle in the United States after defaulting on debts, with some bankers warning the total cost of writedowns may hit $22 billion and affect around 120 banks.

SAMA has not made any statement on the issue since the two groups' problems came to light in late May when bankers said it froze the accounts of Saad's Chairman Maan Al-Sanea, a move it has never confirmed or commented upon.

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