By Andy Sambidge
International Monetary Fund says short-term economic outlook is favourable but inflation set to hit 6%
Saudi Arabia's short-term economic outlook is favourable but the kingdom should monitor inflationary pressures following a recent rise in social spending and soaring food import prices, the International Monetary Fund said on Tuesday.
In its annual consultation with the country, it said oil revenues were likely to be significantly higher than in 2010, reflecting both higher oil prices and increased oil volumes as Saudi Arabia expands production to make up for supply shortfalls from other countries.
It added that fiscal and external balances were expected to strengthen further in the near-term, with overall real GDP growth now expected at 6.5 percent.
"Inflation has been subdued but the combination of continued pressure from imported food prices, rents, increased government spending and high domestic liquidity is likely to result in inflation rising to an average of about six percent for the year as a whole," the IMF said in a statement posted on its website.
The IMF revised down its forecast for Saudi Arabia's fiscal surplus to 9.3 percent of gross domestic product in 2011, from 12.8 percent seen in April.
Executive directors at the IMF said: "The near-term outlook for the economy is favourable. Over the medium term, policy priorities should focus on maintaining fiscal sustainability, securing broad-based growth and fostering job creation."
Directors supported the authorities’ actions to use the higher oil revenues to accelerate initiatives to address important social issues, notably in housing, unemployment, and extending the social safety net.
At the same time, they highlighted the need to "carefully monitor possible inflationary pressures".
The kingdom, which depends on oil for 86 percent of its revenue, announced increases in government spending in March as protests calling for more job opportunities and democracy engulfed the Middle East.
The package included $67 billion on housing and funds for the military and religious groups that backed the government’s ban on domestic protests, and followed a $36 billion handout announced on February 23.