RIYADH, March 23: Saudi Arabia's economy, flush with cash from high oil prices, should record another strong performance this year without triggering an inflationary surge, a senior central bank official said on Tuesday.

Muhammad Al-Jasser, vice governor of the Saudi Arabian Monetary Agency, said the oil revenues, rising foreign reserves and continued economic reform will make 2004 a "very good year".

"There is a lot of liquidity and we have to watch whether that liquidity translates in any way into inflationary pressures," he told Reuters in an interview. "So far we haven't seen any because there is slack in the economy being picked up by productive sectors," he added.

Last year Saudi Arabia registered only its second budget surplus for two decades as high oil prices and high crude output drove up state revenue. Oil prices so far this year have been 10 per cent above last year's average, casting doubt on government predictions of a return to deficit in 2004.

State surpluses have been matched by strong corporate profits, planned expansion of seven out of eight local cement firms and a surging stock market sucking up investor cash.

M3 money supply rose to 416 billion riyals ($110.9 billion) in January, a rise of five per cent in just three months. But Saudi Arabia's cost of living index, measured from a base of 100 five years ago, has actually slipped to 98.8.

Al-Jasser said an openness to foreign goods created fierce price competition and "virtuous deflationary pressures". "So there are no inflation pressures for us to take action. Our foreign reserves are rising and our foreign assets are rising, so the economy is in a very good state to take advantage of this situation".

Saudi Arabia's foreign exchange reserves rose to $19.6 billion last year and total reserves increased to $24.5 billion, levels economists say the kingdom has not seen since the oil boom in the early 1980s.

Al-Jasser said current oil prices were "on the high side" but were having little impact on consumer countries because the proportion of oil cost in production costs had fallen.

"The energy intensity of production, per unit of GDP, has been declining significantly," he said. "It is not affecting global growth because it is not translating into inflationary pressures."

Last year Saudi Arabia, the world's biggest oil exporter, said high oil prices were justified in part to offset a sharp slide in the value of the dollar, since oil sales are priced in dollars and the Saudi riyal is also pegged to the US currency.

Saudi Arabia defended the peg during lean economic years when investors speculated on a riyal devaluation and Al-Jasser said the kingdom would stick to the policy in good years too.

"The predictability of the exchange rate for investors is very important. You want investors to concentrate on the business of investing, not worrying about hedging their money," he said.

Saudi Arabia is trying to diversify its economy away from oil dependence and create jobs for a fast-growing population. Last year, the cabinet approved the formation of a capital markets authority which is expected to make the Arab world's largest bourse more active and pave the way for more foreign investment. -Reuters