Saudi Arabia triples VAT, suspends handouts
RIYADH: Saudi Arabia will triple its value added tax rate and suspend a cost of living allowance for state employees, seeking to shore up finances hit hard by low oil prices and a corona virus driven slowdown.
“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 the statement reported by the state news agency.
“These measures are painful but necessary to maintain financial and economic stability over the medium to long term ... and to overcome the unprecedented coronavirus crisis with the least damage possible.”
In 2018, Saudi Arabia’s King Salman ordered a monthly payment of 1,000 riyals ($267) to every state employee to compensate them the rising cost of living after the government hiked domestic gas prices and introduced value-added tax.
About 1.5 million Saudis are employed in the government sector, according to official figures released in December.
The world’s largest oil exporter is suffering from slumping prices, while at the same time measures to fight the new coronavirus are likely to curb the pace and scale of economic reforms launched by Crown Price Mohammed bin Salman.
The austerity measures being introduced come after the kingdom posted a $9 billion budget deficit in the first quarter.
The finance minister said non-oil revenues were affected by the suspension and decline in economic activity, while spending had risen due to unplanned strains on the 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.
Oil revenues in the first three months of the year fell 24% from a year earlier to $34 billion, pulling total revenues down 22%.
In late 2015, when oil prices collapsed from record highs, the kingdom took a number of strict austerity measures, including slashing lavish bonuses, overtime payments and other benefits that were once considered routine perks in the public sector.
In a country that has no elections and where political legitimacy rests partly on distribution of oil revenue, the ability of citizens to adapt to reforms aimed at reducing oil dependence and improving self-reliance is crucial for stability.
“This crisis will pass soon, and we must stand with our leaders in these difficult days, we trust you,” said a Saudi with a twitter handle Abdullah Althaqafi.