RIYADH, Sept 26: Saudi Arabia recorded a budget surplus of $77.5 billion in 2006, the Saudi Arabian Monetary Agency said in a report on Wednesday.

The surplus of 290 billion riyals ($77.5 billion), unveiled in the central bank’s annual report, compares with initial forecast of a $14.7 billion surplus and a final figure of $58 billion in 2005.

The year under review, how-

ever, was also marked by record public spending of more than $105 billion, which went largely on development projects in the kingdom and the repayment of some public debt, the official SPA news agency reported.

Saudi Arabia generally bases its budget estimates on oil prices well below market levels, which explains the vast difference between the forecasts and the final figures.

For 2007, Saudi Arabia — the world’s biggest oil producer — has projected a surplus of just $5.3 billion, while oil prices this year have topped $80 a barrel.

The central bank also said the balance of payments was in the black to the tune of more than $99 billion.

The announcement of a record surplus was made amid speculation that Saudi Arabia, like some members of the Gulf Cooperation Council (GCC), mulls leaving the dollar peg although it would be a major political move too.

The speculation had gained currency when Saudi Arabia refused to cut interest rates following the US Federal Reserve’s

decision.

For Saudi Arabia holding on to the dollar peg is fast becoming a serious cause for concern with inflation in the kingdom alone leaping to 4 per cent this year. In other Gulf States the scenario is even worse.

“In my opinion the decision

by the Saudi Arabian Monetary Agency (SAMA) to refuse to

lower interest rates was the

right one,” said Dr John Sfakianakis, chief economist of the Saudi Bank SABB. “The decision comes at a time when the kingdom is under extreme inflationary pressures and one way of compensating for the inflation is by keeping interest rates high,” he said.

Sfakianakis, however underlined that revaluing the currency carried some cost and hence de-pegging at this time may not be done.

Riyad Bank’s chief economist Khan Zahid cited the example of Kuwait where de-pegging four months ago has not helped the country to lower inflation and rates are still hovering in the double digits.

The problem, he said, is what is called “home-grown inflation” which translates into too much liquidity in the economy and not enough distribution of goods and services throughout the region.

Consumers throughout the Gulf have also been feeling the heat of the weakening dollar with consumer prices rising on the back of inflation rates forcing a number of GCC residents to stretch their currencies to the limit in efforts of making ends meet.