Saudi Arabia’s inflation rate has started to slowly decline as the impact of value-added tax (VAT) and subsidy cuts introduced at the start of the year begin to lessen.
Consumer prices rose by 2.8 percent year on year in March, according to official statistics released on April 24, compared to a rate of 2.9 percent in February.
Inflation leapt to 3 percent year-on-year in the immediate aftermath of the introduction of a 5 percent VAT charge in January.
The new tax was introduced by the Kingdom in an effort to boost its non-oil revenues as well as narrow its fiscal deficit caused by lower oil revenues. The UAE also introduced VAT in January.
While Saudi households initially struggled with the higher rate of inflation and started cutting back on spending, analysts say public sector bonuses, pledged by the government, will help boost consumer purchasing power.
In January, a royal order outlined a range of bonuses and benefits to be paid out to public sector workers, pension holders, students and members of the military.
“The drag on household consumption should start to ease over the coming months,” said Jason Tuvey, Middle East economist at Capital Economics in a research note. “That said, consumer spending is likely to be a relative weak spot in the overall economic recovery this year,” he said. While inflation is edging downwards, it remains higher than rates recorded last year, with Tuvey saying it was likely that inflation will stay “elevated” until the end of 2018.
The fall in inflation in March was mainly driven by weaker food inflation, according to Capital Economics analysis. Its measure of food inflation fell from 6.4 percent in February to 6 percent in March.
Inflation in housing and utilities declined to 1 percent in March compared to 1.3 percent in the previous month, according to official government statistics. Transport inflation rose in March to 10.4 percent year-on-year from 10.1 percent in February.
The introduction of VAT has also been partly blamed for signs of a deterioration in Saudi Arabia’s business conditions.
The Kingdom’s PMI rate — a measure of operating conditions in the non-oil private sector — fell to a record low in March, dropping to 52.8 compared to 53.2 in the previous month, according to data published on April 3.
A reading above 50 indicates an improvement in the business environment, with a lower reading implying worsening conditions.
By Rebecca Spong
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