Saudi Arabia, which is grappling with near-record inflation, said it is having some success with efforts to curb public sending but acceleration in rents and food costs continue to pose risks.

Inflation in dollar-pegged Saudi Arabia, the world's largest oil exporter, hit 9.6 percent in March, the highest since at least the oil boom of the 1970s, as rents surged 19 percent and food prices jumped 14.2 percent.

'We have been working for some time to curb public spending,' Saudi Finance Minister, Ibrahim al-Assaf, told reporters on the sidelines of a Euromoney conference in the Saudi capital, Riyadh.

'We are succeeding in reducing public spending in some areas,' Assaf said, without elaborating.

The largest Arab economy has been pouring windfall oil revenues from a six-fold rise in oil prices since 2002 into developing infrastructure, to diversify its economy away from oil and create jobs as unemployment hovers around 12 percent.

'What causes further concern is that the two sources that feed inflation in the kingdom ... housing and foodstuffs ... are still active,' Saudi Central Bank Governor Hamad Saud al-Sayyari told delegates at the same conference.

He said Saudi policymakers were facing 'powerful and contradictory factors' as they strive to spend oil revenues to diversify the economy and create jobs and inflation spirals due to state spending and high global commodity prices.

'Given the dominance of fiscal policies on the economy, it is necessary to re-prioritise spending and programme it to fit the absorptive capacity of the national economy,' Sayyari said.

In its 2008 budget, Saudi Arabia forecast expenditure rising 7 percent to 410 billion riyals ($109.3 billion), including spending of 105 billion riyals on education and 44.4 billion on health and social development.

Saudi Arabia, constrained in its inflation battle by its dollar peg, has introduced cost-of-living allowances for state employees, boosted subsidies on some food items and tightened bank lending curbs this year to offset inflation's impact on its 25 million people.

Inflation in the kingdom could average 9 percent this year, more than double its 2007 levels, and hit 9.9 percent in December, a Reuters poll of 17 economists and analysts showed this week.

'Policymakers are making bolder statements about their grave concern regarding inflation's surge,' said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate.

'The economy is not creating enough jobs, so this puts them in a tight spot,' he said.

The kingdom could see oil revenues grow to around $235 billion this year, up nearly 12 percent from about $210 billion last year, according to SABB estimates. Oil set a new record high above $120 a barrel on Tuesday.

Sayyari said last month inflation could cross 10 percent this year before possibly easing in the second half of the year as anti-inflationary government measures take hold and lower global demand for commodities feeds into prices. - Reuters