Daily Management Review

VAT In Saudi Arabia Tripled As Coronavirus Hits Country’s Economy


VAT In Saudi Arabia Tripled As Coronavirus Hits Country’s Economy
The oil dependent Saudi Arabian economy has been hit hard by the novel coronavirus pandemic as well as a very sharp drop in the global oil prices. As a consequence of the hit, the country has decided to increase value added tax (VAT) by three folds as a part of its austerity measures to support the economy.
In order to save money, the Saudi government has also announced the suspension of its cost of living allowance. VAT was introduced in the country about two years ago as a part of its strategy to reduce the dependence of its economy on the revenues generated from the export of oil only and to create some form of stability to the economy and shield it from the ups and downs of the global oil market demand and prices. .
The Saudi government will be increasing VAT from the current rate of 5 per cent to 15 per cent as of 1 July, said Saudi Arabia's state news agency, while the cost of living allowance will be temporarily scrapped starting June 1 this year.
The government introduced the cost of living allowance given to state employees to help them to meet the increase in expenses of living because of the VAT and an increase in the price of petrol in the country. The allowance is worth 1,000 riyals ($267 or 245 euros) per month.
"These measures are painful but necessary to maintain financial and economic stability over [the] medium to long term... and overcome the unprecedented coronavirus crisis with the least damage possible," the country’s finance minister Mohammed al-Jadaan said in the statement.
These strict austerity and income generation measures were announced after the country’s state spending exceeded income which resulted in a budget deficit of the country to the tune of $9bn just in the first quarter of the current year. The first three months of the current year have been very troublesome for the global oil market as the revenues of the country by almost a quarter compared to the same period a year ago, at $34bn, which resulted in a total reduction of revenues of the country by about 22 per cent. On the other hand, there was a fall in foreign reserves in March at Saudi Arabia's central bank at the fastest rate in about two decades and the lowest since 2011.
It is expected that the pace and scale of economic reforms launched by Crown Price Mohammed bin Salman will slow down because of the measures to fight the impact of the coronavirus pandemic.
A record $25.6bn through the initial public offering of shares of the state-owned oil giant Aramco in Riyadh was generated by the country last year. The sale of the shares of Aramco was the corner stone of the plans of the Saudi Crown Prince Mohammed bin Salman of transforming the country’s economy and reducing the dependence on the export of oil.