Saudi faces rise in inflation on VAT and fiscal reforms

DUBAI: Saudi Arabia has reported a sharp rise in inflation on value-added tax (VAT) and subsidy reforms with inflation accelerating to 3 per cent in January.

Consumer price inflation in Saudi Arabia strengthened to 3 per cent year on year in January, after seeing deflation of -1.1 per cent in December and -0.8 per cent over 2017.

Saudi introduced a new inflation index including different weightings of components. “We estimate that under the old CPI index, headline inflation would likely have strengthened to over 6 per cent year on year in January. CPI rose to 4 per cent month on month in January (new data) from just 0.3 per cent in December. The sharp pick-up in inflation reflected key fiscal reforms, namely the introduction of VAT and reductions in fuel and electricity subsidies implemented on 1 January 2018,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.


Economists expect inflation to reach 4 per cent this year, up from -0.3 per cent in 2017. “For businesses, levies on expat labour and rising input costs pose additional challenges. While on the monetary policy side, the expected three rate hikes in the US this year will translate into higher interest rates in Saudi given the US dollar peg — this would raise the cost of borrowing for businesses and consumers alike,” said Oxford Economics in a recent report.

The increases in fuel prices in 2018 were much greater than those seen in the previous round in January 2016. The price of diesel for transport purposes only saw a 5 per cent rise in January, reflecting the cost of VAT. Electricity users with average consumption also saw a much greater price rise in 2018 than in 2016, and a more marked increase than heavy users. On the back of the increases in administered prices, inflation for the electricity, gas and other fuels sub-component jumped by 24 per cent year on year in January, while transportation rose by 10.5 per cent.