Food, drink and VAT prices push inflation to 5.3% in April

RIYADH: The increase in value added tax (VAT) last summer and the resulting rise in food and drink prices saw Saudi Arabia’s inflation rate soar to 5.3 % in April, against 4.9% in March and 1.3% in April 2020, according to official data.

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

The inflation rate fell from 0.5% in June to 6.1% in July, peaking at 6.2% in August, before stabilizing at 4.9% in March.

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

Overall, GASTAT said food and beverage spending accounts for around 17% of consumer spending.

In the transport sector, the report indicates that the rise in inflation is mainly due to an increase in the price of new vehicles. Other sectors that will see price increases in April include telecommunications (+ 13.5%), tobacco (13.1%), restaurants and hotels (8.3%), furniture, household equipment and maintenance (7.4%), clothing and footwear (5.8%) and health care. (3.3 percent).

Meanwhile, the education sector saw prices drop by 9.1%, as tuition fees fell, while the price of utilities – such as housing, water, electricity. , gas and other fuels – fell 2.6%.

“Looking ahead, we believe the headline inflation rate will continue to climb higher for the remainder of this quarter, peaking at around 6.5% year-over-year in June, largely due to due to higher inflation in energy prices. But inflation will drop sharply from July as the effects of the VAT hike fade from the annual price comparison and remain around 1-2% year-on-year over that year and the next. ‘next year,’ James Swanston, an economist at London-based Capital Economics, said in a report Thursday.

The issue of the VAT increase was addressed by Crown Prince Mohammed bin Salman in his TV interview at the end of April, where he said the increase would only be short-lived. “It’s a temporary decision. It will last a year, maximum five years, and then things will go back to what they were … years. So depending on the economic situation or what may happen, but at most five, at least one year, “he said.

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

Earlier this month, business activity in the Saudi non-oil private sector in April accelerated at the fastest rate in three months, due to a significant increase in new sales as companies recovered from the impact of the COVID-19 pandemic, according to the latest IHS Markit Purchasing Managers’ Index (PMI) survey. Kingdom businesses also increased their workforce for the first time in five months, according to the index.

David Owen, economist at IHS Markit, said: “Saudi Arabia’s PMI rebounded in April to indicate stronger growth in the non-oil economy. New orders have picked up at the fastest pace for three months, as business conditions continue to recover after COVID-19. This increase has contributed to a recovery in employment, the pace of growth being the fastest since November 2019. ”

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