Saudi Arabia government triples the rate of VAT in austerity drive against oil slump and corona virus outbreak

Saudi Arabia has decided to triple its Value Added Tax rate and suspend an allowance given for cost of living to state workers. This statement was issued on Monday, 11th, 2020. It is to seek to shield hits to the country’s finances by low oil price and a slump in demand for its lifeline export that has been worsened by the new global corona virus outbreak.

Saudi Arabia government triples the rate

Riyadh: the historic cut announced on oil output that has been agreed by Riyadh and other major oil producers have given only a limited support to oil prices. It was after they sank on over supply caused by a war for the share in the petroleum market between the Kingdom and its fellow oil titan, Russia.

Saudi Arabia, the largest oil exporter in the world, has also been hit hard by the measures adopted by all countries in the world to fight corona virus outbreak. These measures adopted by Saudi Arabia also are expected to curb the pace of spread of this deadly corona virus and economy of the country. The economic reforms have also being launched by the Crown Prince Mohammad Bin Salman of Saudi Arabia.

“The cost of living allowance will be suspended as of June 1, and the value added tax will be increased to 15% from 5% as of July 1,” Finance Minister Mohammed al-Jadaan said in a statement reported by the state news agency.

“These measures are painful but necessary to maintain financial and economic stability over the medium to long terms, and to overcome the unprecedented coronavirus crisis with the least damage possible.”

These austerity measures were adopted after this kingdom posted a $ 9 billion budget deficit in the first quarter.

The minister said that non-oil revenues were affected by this suspension. It showed a decline in economic activities. Meanwhile expenses have risen due to sudden unplanned stress on healthcare sector and the initiatives taken to support the economy.

“All these challenges have cut state revenues, pressured public finances to a level that is hard to deal with going forward without affecting the overall economy in the medium to long term, which requires more spending cuts and measures to support non-oil revenues stability,” he added.

The government of Saudi Arabia has cancelled and put on hold some operating and capital expenditure. It is for some government agencies. There are some cuts on allocations for some reform initiatives and projects. These projects are worth a 100 billion Riyals or $ 26.6 billion. It is as per the issued statement.

The foreign reserves in the Central Bank of Saudi Arabia fell in March. It fell at their fastest rates in the last 20 years. It was also to their lowest since the year 2011. The oil revenues in the first quarter of the year fell 24% from a year earlier. It fell to $ 34 billion that pulled the total revenue down by 22%.

“The reforms are positive from a fiscal side as greater adjustment is essential. However, the tripling of VAT is unlikely to help that much in 2020 revenue wise with the expected fall in consumption,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

She said that she kept her deficit forecast unchanged. It was of 16.3% of GDP for this year of 2020. It already factors in a greater than previously announced cut in expenses.

About 1.5 million Saudi people are employed in Saudi Arabia government sector. It was declared in an official figure that was released in December last year.

Saudi Arabia’s King Salman ordered a monthly payment of 1,000 Riyals or $ 267 to every state employee to compensate them for the rising living costs after the government hiked the price for gas and introduced Value Added tax. This order was issued in the year 2018.

A committee has been appointed to study all financial benefits paid to the public sector employees in the country. It includes the contractors. This committee will submit its recommendations within 30 days, as per the statement.

The oil prices also fell from record highs in the late 2015. That time the kingdom slashed lavish bonuses, overtime payments and other benefits that was once considered routine perks in the Saudi Arabia public sector industries.

Saudi Arabia is a country where no elections are held. Its political legitimacy rests partly on distribution of oil revenue. The ability of Saudi Arabia citizens to adapt to such financial reforms is crucial for the country’s economic stability.

“Tripling the VAT will test the limits of the balance between revenues and consumption as the economy dives into a deep recession. The move will impact consumption and could also lower the expected revenues,” said John Sfakianakis, a Gulf expert at the University of Cambridge.

“These are pro-austerity and pro-revenue moves rather than pro-growth ones,” he said.

Hasnain Malik, who is the Head of Equity Strategy at Tellimer said that the VAT rise could bring in about $ 24 to $ 26.5 billion in additional non-oil fiscal revenue. This rise will hit the consumers to spend further. But it was a necessary step to sustain finances in the country. He further added.