By Khalil Hanware

Jeddah, Jun 9 (Arab News): Saudi Arabia's economy is likely to grow by around 6 percent this year following a recently unveiled social spending package, up from an estimated 4.3 percent, its central bank governor was quoted by Reuters as saying Wednesday.

The Kingdom has pledged to spend an estimated SR488 billion ($130 billion), or around 30 percent of its annual economic output, on new houses, creating jobs, unemployment benefits and other measures.

"The economic outlook for the Kingdom of Saudi Arabia in 2011 is encouraging and very positive," Saudi Arabian Monetary Agency (SAMA) Gov. Muhammad Al-Jasser said in a speech posted on the central bank's website.

"The Kingdom posted a real gross domestic product growth of 4.1 percent in 2010 and expects an average rate of 4.3 percent in 2011. But the package of decisions taken by Custodian of the Two Holy Mosques King Abdullah recently to enhance the purchasing power of citizens and increase investment in housing and health may lead to higher growth estimates of around 6 percent for the current year," he said.

Al-Jasser said there is cautious optimism about economic growth in most G20 countries. "There is a balanced economic recovery in the US while Japan is still passing through depression. Many European countries are facing financial challenges due to public debts," he said.

Al-Jasser said the rise in prices of foodstuffs and other essential commodities posed a challenge to economic recovery, adding that inflation in advanced countries would reach 2.2 percent and developing countries 6.9 percent this year.

He highlighted the contribution of Saudi Arabia and other developing countries to boosting world economic growth.

John Sfakianakis, chief economist at Banque Saudi Fransi, said there is little doubt that the economy this year will perform better than 2010 given that oil output is on the rise, oil revenues are expected to remain robust and higher than last year and the government is spending large sums to ensure long-term sustainability.

"The increase in 2010 real GDP from 3.8 percent to 4.1 percent is a pleasant surprise which shows the economy’s resilience as well as the strength of the government and private sector. Although we don't have clarity as to the reasons for the 2010 uptick, I won't be surprised if non-private growth showed a small uptick," he said.

"Private sector growth will remain solid but has room to grow more as investment, credit and confidence are helping create strong economic conditions," Sfakianakis said.

Paul Gamble, head of research at Jadwa Investment, said: "The package of royal decrees will make an important contribution to the economy this year. Recent data show that the spending of the two-month's salary bonus for public sector workers is boosting the retail sector. For example, the value of cash withdrawals from ATMs in April was 46 percent higher than in February. The huge new housing construction planned will not have such an immediate impact on the economy, but it will provide a long-lasting stimulus."

The other factor supporting higher economic growth this year is oil production. Oil output is already running well above last year's levels and in light of OPEC's (Organization of the Petroleum Exporting Countries) decision not to formally raise production quotas, which the Kingdom did not support, there could well be further unilateral increases in oil production this year, Gamble added.

Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: “SAMA's projections are very much in line with general market expectations which foresee a significant acceleration in GDP growth this year. While there is still a lack of clarity on the pace of government spending as well as the private sector response, it is clear that the additional spending commitments, supported by the favorable outlook on oil prices and production, will boost aggregate demand and also private sector sentiment.”

Previous central bank estimates showed the Saudi economy had grown by 3.8 percent in 2010 constant 1999 prices.

Saudi inflation reached 4.8 percent year-on-year in April, and analysts say demand will be boosted by the package of government measures.