Food, drinks prices and VAT pushes inflation to 5.3% in April

RIYADH: The increase in value-added tax (VAT) last summer and the resultant rise in food and drink prices has seen Saudi Arabia’s inflation rate jump to 5.3 percent in April, up from 4.9 percent in March and 1.3 percent in April 2020, according to official data.

In the wake of the economic impact of the coronavirus (COVID-19) pandemic, the Kingdom increased VAT from 5 percent to 15 percent in July 2020.

The inflation rate rose from 0.5 percent in June to 6.1 percent in July, hitting a peak of 6.2 percent in August, before steadying back to 4.9 percent in March.

The General Authority for Statistics (GASTAT) said in its latest Consumer Price Index report that prices “still reflect” the VAT increase and the increased inflation rate was mainly due to the 8.4 percent rise in food and beverages and 14.9 percent increase in transport prices. The food and drinks changes were mainly due to rising meat prices, which increased by 9.7 percent in April, and vegetable prices, which rose 6.1 percent.

Overall, the GASTAT said food and beverage expenses account for around 17 percent of consumer expenditure.

In the transport sector, the report said rising inflation was mainly due to an increase in the price of new vehicles. Other sectors to see price increases in April include telecommunications (up 13.5 percent), tobacco (13.1 percent), restaurants and hotels (8.3 percent), furnishings, household equipment and maintenance (7.4 percent), clothes and footwear (5.8 percent) and healthcare (3.3 percent).

Meanwhile, the education sector saw prices drop 9.1 percent, as school fees dipped, while the price of utilities — such as housing, water, electricity, gas and other fuels — declined by 2.6 percent.

“Looking ahead, we think that the headline inflation rate will continue to drift higher over the rest of this quarter, peaking at around 6.5 percent year-on-year in June, largely due to stronger energy price inflation. But inflation will drop sharply from July as the effects of the VAT hike drop out of the annual price comparison and stay at around 1-2 percent year-on-year over the course of this year and next,” James Swanston, an economist at London-based Capital Economics, said in a report on Thursday.

The issue of the increase in VAT was addressed by Crown Prince Mohammed bin Salman in his televised interview at the end of April, where he said the increase would only be short-term. “It’s a temporary decision. It will continue for a year, maximum five years, and then things will go back to what they were ... We’re targeting it to be between 5 to 10 percent only until we reinstate our balance after the pandemic, so maybe after a year. So, depending on the economic situation or what may transpire but maximum five, minimum one year,” he said.

While the Saudi economy contracted 3.3 percent in the first quarter of this year, it is expected to grow 2.1 percent overall in 2021, according to the International Monetary Fund.

Earlier this month, business activity in the Saudi Arabian non-oil private sector in April accelerated at the fastest pace in three months, owing to a significant rise in new sales as businesses recovered from the impact of the COVID-19 pandemic, according to the latest IHS Markit Purchasing Managers’ Index (PMI) survey. Firms in the Kingdom also expanded staff numbers for the first time in five months, the index showed.

David Owen, an economist at IHS Markit, said: “The Saudi Arabia PMI rebounded in April to indicate a strengthening of growth across the non-oil economy. New orders picked up at the quickest rate for three months as business conditions continued to recover from COVID-19. The rise helped lead to a renewed uplift in employment, with the pace of increase the fastest since November 2019.”