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Wed 24 Nov 2010 04:11 PM

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Saudi extends government workers' inflation allowance

Allowance extension will cost the Kingdom's government more than $8.8bn a year

Saudi extends government workers' inflation allowance
ALLOWANCE EXTENSION: Saudi Arabias extension of government workers inflation allowance will cost it more than $8.8bn a year

Saudi Arabia is extending a 15 percent inflation supplement for government workers to cushion the impact of fast rising prices, the Finance Ministry said.

Government employees saw their paychecks rise by 15 percent in the past three years due to an inflation aid program that paid an additional 5 percent on top of salaries each year.

Inflation in Saudi Arabia, the biggest Arab economy and the world's top oil exporter, has shot up faster than expected this year, driven by soaring food and housing costs.

Saudi Arabia's toolbox for tackling inflation is limited as its riyal currency is pegged to the dollar, with fiscal policy the main instrument for steering the economy.

"The Custodian of the Two Holy Mosques ordered the Finance Ministry to continue issuing a 15 percent inflation allowance, relative to the salary grade of the employee," a statement issued late on Tuesday said, referring to the king's title in Saudi Arabia.

It did not say how long the extra payout would last.

Extending the allowance would cost the government more than 33bn riyals ($8.8bn) a year but would not create additional inflationary pressures, John Sfakianakis, chief economist at Banque Saudi Fransi, said.

Saudi inflation has eased since touching an 18 month high of 6.1 percent in August, but at 5.8 percent in October it remains the highest among Gulf Arab oil producers.

On Monday the Saudi Central Bank said that it expected the rate of inflation to ease in the final quarter of 2010.

Analysts polled by Reuters expect average inflation of 5.3 percent this year and 5.1 percent in 2011, still well below a record high of 11.1 percent seen in July 2008.

Saudi Arabia's economy is seen growing by 3.8 percent this year following a mere 0.6 percent expansion in 2009, helped by higher oil prices and strong fiscal spending.

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