King Abdullah's spending plan to diversify the Saudi Arabian economy and keep at bay the protests that have toppled four leaders is helping to fuel the Gulf's fastest inflation rate.
Inflation in the Arab world's biggest economy was 3.9 per cent in January, up from 3 per cent in September. By comparison, inflation in the United Arab Emirates, the next largest economy, was 0.4 per cent in January, according to the country's statistics bureau. Qatari prices advanced 3.4 per cent in January.
King Abdullah, who turns 89 this year, promised in the first quarter of 2011 to spend US$130 billion on additional subsidies for housing and benefits to avert the unrest that's swept through the Arab world, leading to civil war in Syria, as well as protests in neighbouring Bahrain and in Egypt.
"Inflation is rising because loan growth is finally rising, led by the consumer," said Emad Mostaque, a strategist at Noah Capital Markets in London.
The three-month Saudi Interbank Offered Rate, or so-called Saibor, is the only comparable rate to climb in the six-nation GCC since September. The three-month Saibor was unchanged at 0.98500 per cent today, up from 0.95625 per cent six months ago.
The Saibor's spread over the London Interbank Offered Rate more than tripled since the start of 2012 to 70 basis points, the widest since January 2009, data compiled by Bloomberg show.
"Government spending is also increasing demand for Saudi riyals and local assets," Mr Mostaque said. "This has an inflationary impact."
The king raised spending by almost a fifth this year to $219bn as the government builds schools, paves roads and lays rail lines across the desert country.
The spending is part of a broader plan valued at more than $500bn and is feeding through to economic growth. Saudi Arabia's $657bn economy expanded 6.8 per cent last year, according to the finance ministry, and will outpace growth in the UAE every year until at least 2017, IMF projections show. The economy will grow 4.2 per cent in 2013, according to the IMF.
"Credit growth was directed mainly to projects," said Abdulwahid Al Matar, the head of trading at Saudi Hollandi Bank in Ryadh. "It might contribute to inflation, but the biggest chunk of inflation is for rent and food supplies."
* Bloomberg News