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Sat 12 Oct 2019 07:11 PM

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Saudi deflation likely to continue until end-2019, says KPMG

New research by KPMG Al Fozan & Partners says deflationary pressure to remain for the remainder of the year

Saudi deflation likely to continue until end-2019, says KPMG
Deflation is likely to continue to the end of 2019 before rates normalise next year, according to new research.

Deflation is likely to continue to the end of 2019 before rates normalise next year, according to new research by KPMG Al Fozan & Partners.

The audit, tax and advisory services firm said the launch of VAT in January 2018 put upward pressures on prices as inflation reached 2.5 percent in 2018 from -0.8 percent in 2017.

But the start of this year saw deflationary pressure on prices which is expected to remain for the remainder of the year, said Dr Hussain Abusaaq, chief economist and head of research, KPMG Al Fozan & Partners.

“Although the introduction of VAT was essential to achieve some of the Vision 2030 goals, such as increasing non-oil revenue, other economic indicators need to be looked at such as GDP growth, especially considering total real GDP slowed by 0.9 percent in 2017. However, the economy experienced prices deflationary period at the beginning of 2019, where it is expected to remain for the rest of the year, before normalizing in 2020,” he said.

He added: “In the short run, VAT is expected to cause minimal one-off price rise. In the long term, it is not likely to cause a significant or sustainable increase in underlying inflation.”

He said small and medium-sized enterprises (SMEs) experienced a moderate impact from VAT due to high compliance costs and in response, the government introduced the Private Sector Stimulus Plan to stimulate growth, remove any potential obstacles and enhance private sector confidence.

“As the government gradually moves towards accomplishing its goal of fiscal balance by 2023, increasing capital expenditure, a greater focus on its fiscal policy, Vision 2030 programs and Citizen’s Account Program could help to pull out the kingdom from the current state of prices deflation and into the usual and healthy levels of inflation,” Abusaaq added.

Consumer prices in Saudi Arabia dropped by 1.4 percent in June compared to figures for the same month last year, but month-on-month the consumer price index (CPI) showed a slight increase of 0.2 percent.