Saudi Arabia's economy may expand 4.2 per cent next year as government-financed projects help spur growth in the Arab world's biggest economy, Jadwa Investment Co said.

"High government spending will remain the main driver of the non-oil economy, supported by greater bank lending," Riyadh-based Jadwa said in an e-mailed report yesterday. "Growth in both the oil and non-oil sectors will pick up."

Reduce unemployment

Saudi Arabia, the world's largest oil supplier, plans to spend 256 billion riyals (Dh250 billion) next year on projects to reduce unemployment and spur growth. The Finance Ministry announced the 2011 budget on December 20 with spending of 580 billion riyals and a deficit of 40 billion riyals.

Economic growth is expected to accelerate to 3.8 per cent this year, according to the Finance Ministry, from 0.6 per cent in 2009. The country had a fiscal surplus of 108.5 billion riyals this year, the ministry said. That compared with a 70 billion-riyal deficit foreseen in the budget announced a year ago.

"High spending will not prevent the government from running a budget surplus of around 6 per cent of GDP, though it will require an oil price of about $70 per barrel to balance the budget," Jadwa said. "Any shortfall would be covered by drawing down foreign assets."

Crude has risen more than 15 per cent this year to $91.51 a barrel on Dec. 23.

Credit Growth

Bank lending to the private sector should pick up in 2011 as the economy improves and after Saudi banks increased provisions for bad loans, Jadwa said. Lending to the private sector increased about 6 per cent in the first ten months of 2010, compared with average annual growth of 27 per cent between 2004 and 2008, Jadwa said.

Inflation will average 5.3 per cent in 2011 with rents the "leading source" of higher prices, Jadwa said. "Other inflationary pressures will be external, mainly in the form of commodity prices."

Inflation was 5.8 per cent in November, according to the Central Department of Statistics.

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