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Thu 31 Jan 2008 02:04 AM

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Saudi wage hikes to cost $16bn

Increases in public sector salaries, pensions and benefits to drive up public wage bill by almost 16%.

Increases in public sector wages, pensions and benefits announced by Saudi Arabia in response to rising prices will cost the government 60 billion riyals ($16 billion) by end-2010, the finance minister said on Wednesday.

Wages and pensions for public sector employees would be increased by 5% per year for the next three years, Ibrahim Al-Assaf told reporters. This would result in an overall 15.76% increase in the kingdom's public wage bill.

The original announcement had said the increases would take place over the next three years without giving details.

"The cumulative raises are expected to total at least 60 billion riyals at the end of the three years", Assaf said.

"The decision was designed in a way that would avoid ... creating additional pressures on prices”.

He said the government will also pay 12 billion riyals in subsidising food prices in 2008 alone. "This (figure) excludes indirect subsidies paid for instance for water and electricity", he said.

Saudi Arabia has also raised social insurance benefits by 10% over a three-year period, which Assaf said would also be effective this month.

The move was aimed to counter rising disaffection over inflation, which has surged to a 16-year high as the central bank cuts interest rates to defend its currency peg to the dollar.

However, GCC governments were this week warned they risk triggering an inflationary spiral as they ramp up public expenditure, leading to an impact on future ratings.

Moody’s Investor Services cautioned that attempts to offset the effects of inflation by raising salaries and subsidies would provide short-term relief to citizens, but could exacerbate price growth by stimulating demand, which would in turn generate further calls for spending hikes.

“Such an inflationary spiral would be difficult to control in the absence of other policy
options: Gulf states’ fixed exchange rate pegs and open capital accounts rule out a significant tightening of monetary policy. In fact, monetary policy has had to be loosened in response to recent interest rate cuts in the US”, said analyst Tristan Cooper.

Annual inflation is expected to stabilise in 2008 at the 4.1% level it reached in 2007, central bank governor Hamad Saud al-Sayyari said earlier on Wednesday. Annual inflation hit 6.5% in December.

Resentment over the cost of the living has led the advisory Shura Council - Saudi Arabia's unelected "parliament" - to summon the central bank governor and finance minister next month to discuss the peg, which has forced the central bank to slash rates by 150 basis points since September.

Assaf confirmed he would meet members of the Shura council. "There is no pressure from the Shura Council ... This meeting is important will be an opportunity to debate the policies of the ministry and listen to their suggestions", he said.

"But for the issue of foreign exchange, this was settled and final", Assaf added without elaborating.

Saudi Arabia remains committed to the peg. It would take a "precipitous" decline in the dollar for the kingdom to change the value of its riyal against the US dollar, which has been fixed since 1986, deputy central bank governor Mohammed Al-Jasser said in Davos last week. (Reuters)

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