RIYADH,(Reuters) – Saudi Arabia’s massive social spending packages will have a positive impact in the long term as an increase in supply will help reduce rents, one of the main drivers behind inflation, the finance minister said.
“If there is a large size of spending that exceeds the power of the economy, then according to economic theories there will be inflationary pressures,” Ibrahim al-Aassaf told al-Arabiya television in an interview on Saturday.
“But in the long term it will have a positive impact on inflation because the major reason for inflation is high rents.”
Saudi Arabia’s king Abdullah in March announced $93 billion in social handouts, on top of another $37 billion announced less than a month earlier.
The $93 billion included 250 billion riyals to ($66.67 billion) be spent on 500,000 new homes, as the top oil exporter seeks to address vast undersupply.
Economists and experts have estimated that these new homes could take around five years to build.
A report last month by Banque Saudi Fransi said private and public developers needed to build about 275,000 units a year through 2015 to meet demand.
The average price of a small villa in the kingdom’s capital Riyadh rose 19 percent in the second half of 2010, while prices in Jeddah rose 17 percent, it said in the report.
Saudi annual inflation slowed to a 10-month low of 4.9 percent in February with growth in housing and transport costs subsiding, though analysts said the slowdown was temporary due to robust global food prices and crude above $100 per barrel.
Economists and experts say between 30-50 percent of Saudis own homes, but the majority of young Saudis do not because the mimimum salary required to obtain a mortgage is out of reach for most.
The kingdom has only a 2 percent mortgage penetration in its real estate market, experts say.