Riyadh has rolled out major austerity measures to keep its economy afloat after the coronavirus outbreak resulted in a steep decline in oil revenues which the nation vastly relies on
The kingdom will suspend a cost-of-living allowance for government workers starting in June and hike VAT from the current rate of five percent to 15 percent as of July 1, the Ministry of Finance announced on Monday. The expenditure reduction is set to save Riyadh 100 billion riyals ($26.6 billion) in total, according to the state-run Saudi Press Agency (SPA).
“These measures that have been undertaken today, as tough as they are, are necessary and beneficial to maintain comprehensive financial and economic stability on the medium and long-term for the interest of the country and its citizens,” Finance Minister Mohammed Al-Jadaan said, as cited by the agency.
The VAT rate increase may further hit consumer spending – which has already been crippled by the coronavirus outbreak – and impede recovery after the crisis, analysts believe.
“Raising VAT when many households are already facing job losses and salary cuts is likely to exacerbate the decline in consumption this year and increase pressure on businesses,” wrote Khatija Haque, head of MENA research at Emirates NBD.
Saudi Arabia’s budget revenue mostly comes from crude imports and this year’s oil market rout resulted in massive financial losses for the kingdom. While the coronavirus was the final straw that slashed global demand for the commodity and sent prices into a tailspin, Riyadh’s decision to flood the market with cheap oil after the OPEC deal fell apart also contributed to it.
Saudi Arabia’s tax hike announcement immediately weighed on markets and investor sentiment in the Gulf, as neighboring states were feared to follow suit. The main stock index of Saudi bourse, Tadawul, was down over one percent on Monday. Stock markets in other countries in the region, including the United Arab Emirates (UAE), Qatar, Jordan and Bahrain, also tumbled around one percent.
The UAE’s finance minister told Al Arabiya TV that Abu Dhabi has no plans to hike tax. However, the ongoing coronavirus crisis may still force other regional players to roll out austerity measures.
“Kuwait, Oman and Qatar have not yet implemented VAT and the increased pressure on government finances may finally push them to introduce this tax, particularly in Oman and Kuwait,” Haque noted.
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