SAUDIS - WHIP INFLATION NOW

C O N F I D E N T I A L RIYADH 000373 SIPDIS SIPDIS E.O. 12958: DECL: 03/08/2013 TAGS: ECON EFIN PGOV PREL PTER SA SUBJECT: SAUDIS - WHIP INFLATION NOW REF: 07 RIYADH 2529 Classified By: Chief of Mission Michael Gfoeller for reasons 1.4 (b) an d (d) ¶1. (C) SUMMARY. The recent replacement of the Saudi Minister of Commerce and Industry highlights growing dissatisfaction by many Saudis with the rising costs of living. The steep rise in the cost of living has led to public calls for price controls and depegging the Saudi Riyal from the U.S. dollar. There is a strong belief that something must be done. The new Commerce Minister, Abdullah Alireza, a highly successful businessman, has a solid reputation for achieving economic results. The Saudis are looking to him to rein in inflation. END SUMMARY. -------------- NEW FACE TO FIGHT INFLATION -------------- ¶2. (SBU) On March 3, Saudi King Abdullah bin Abdulaziz al-Saud replaced Hashim Abdullah Yamani with Abdullah ibn Amhed Zainal Alireza as the Minister of Commerce and Industry (Septel). Yamani has been viewed by much of the Saudi public as inefficient and ineffective, and blamed him for currently high housing and food costs in Saudi Arabia. ¶3. (SBU) Alireza comes from a pre-eminent Jeddah merchant family closely allied to the Al Saud since the 1920s. He is U.S.-educated, well-known to the Embassy and well disposed the U.S. Alireza was previously a Minister of State Without Portfolio who co-led the WTO negotiations for the Kingdom, was the chairman of the Jeddah Chamber of Commerce and Industry, and is known for advocating strong economic reform. He has been called the "Minister from the business/merchant community." -------------- PUBLIC DISSATISFACTION -------------- ¶4. (C) There is a clear undercurrent of dissatisfaction in the Kingdom predicated on the steep rise in the cost of living. In the past year, Saudi Arabia averaged 7% inflation, although certain popular foods, such as chicken, have gone up 30%, while housing rents have increased on average 15%. Wages and individual incomes has not been able to keep pace. Considering that inflation over the past 15 years averaged less than 1% in the Gulf countries, the recent rise in basic living costs has been an economic shock to Saudis. While the Kingdom has raked in huge windfalls with record high oil prices, these big revenues have not translated into more real wealth for average Saudi citizens. As the kingdom's population continually grows, much of these oil revenues go to satisfy increased demand for public services such as schools, scholarships to study abroad, new infrastructure construction, and health care as well as subsidies to certain commodities. To date, there has been mostly only public grumbling about inflation. Although last December several imams criticized rising prices in their mosque sermons that led to public protests (Reftel). ¶5. (C) The SAG in January gave a 5% cost-of-living wage raise to public sector employees. However, this was viewed as insufficient as it was the first pay raise in a decade, too small to meet current inflation, and was below the COLA other Gulf countries gave to public sector employees (Kuwait gave a 15% raise, UAE gave a 70% raise). There have been public calls for price controls. The popular premise is that because the Saudi Arabian Riyal (SAR) is pegged to the U.S. dollar (3.75 SAR = 1 USD),and the dollar is falling, then that has caused recent high inflation. This does not bear close examination as the Kuwaiti Dinar is a floating currency, but Kuwait's 2007 inflation rate was 7.3%. Still, the emotional conclusion by many Saudis is to not remain "tied" to the Americans, and depeg the SAR from the USD. This was aggravated further by Alan Greenspan's comment in last month's Jeddah Economic Forum which appeared to recommend the SAR be depegged from the dollar. ¶6. (SBU) Should the SAG depeg its currency from the dollar it would lead to a harmful contraction in their wealth, not an easing of inflationary pressure. Most of their assets are in U.S. banks, their oil revenues are in dollars, many of their products are American or Chinese produced (where the yuan is also tied to the dollar),and many wage payments to Saudis are made in dollars ,then converted to riyals. A devaluing of the dollar against the riyal would result in the Saudi's accumulated wealth being worth less, many products costing more, and inflation still not being quelled. -------------- WHIP INFLATION NOW! -------------- ¶7. (C) COMMENT. The SAG is under real pressure to stem the rising cost of living. There is true public disgruntlement caused by the inflationary pinch. These strong emotions are fueling calls for less than sound remedies on the part of the SAG. Economists conclude that higher prices will continue in Saudi Arabia due to strong government expenditures (which Saudis want) backed by rising oil revenues exacerbated by the excessive growth in domestic liquidity. Higher inflation will be a price Saudi consumers will pay to enjoy the current boom in economic conditions. Counter-cyclical fiscal policy would be more effective to dampen inflationary pressures than monetary or exchange rate policies. With a new Commerce Minister, there are now high expectations that Alireza, as one of the most successful private sector leaders in the Arab world, will be able to apply his business acumen to bring down the rising cost of living in Saudi Arabia. Until the incomes of Saudis catch up to rising prices, there will be dissatisfaction in the Kingdom. END COMMENT. FRAKER