S. Arabia triples VAT, suspends handouts in ‘painful’ austerity drive

RIYADH: Saudi Arabia’s finance minister on Monday said the kingdom will triple its Value Added Tax (VAT) and halt monthly handout payments to citizens in new austerity measures amid record low oil prices and a coronavirus-led economic slump.

The measures, which could stir public resentment with the cost of living rising, come as the petro-state steps up emergency plans to slash government spending to deal with the twin economic blow.

“It has been decided the cost of living allowance will be halted from June 2020 and VAT will be raised from 5% to 15% from July 1,” Finance Minister Mohammed al-Jadaan said in a statement released by the official Saudi Press Agency.

Jadaan insisted the measures were necessary to shore up state finances amid a “sharp decline” in oil revenue as the coronavirus pandemic saps global demand for crude.

The government was also “cancelling, extending or postponing” expenditures for some government agencies and cutting spending on major state projects introduced as part of an ambitious reform programme to diversify the oil-reliant economy, the minister added.

Jadaan last week warned of “painful” and “drastic” steps to deal with the double shock of the novel coronavirus and record low oil prices.

Saudi Arabia, the top crude exporter and the Arab world’s biggest economy, has shut down cinemas and restaurants, halted flights, and suspended the year-round umrah pilgrimage in a bid to contain the deadly virus.

Saudi Arabia, along with other Gulf states, imposed a 5% tax on goods and services in 2018 in a bid to generate additional revenue.

The petro-state had also introduced handouts worth billions of dollars to citizens, known as the cost of living allowance, to cushion the impact of rising costs.

Huge budget deficit

Jadaan has said he expected Riyadh could lose half of its oil income, which contributes about 70% of public revenues, as oil prices have fallen two-thirds since the start of the year.

He said the world’s leading crude exporter would borrow close to US$60 billion this year to plug a huge budget deficit.

Riyadh has posted a budget deficit every year since the last oil price rout in 2014.

The International Monetary Fund in April projected that the Saudi economy would contract by 2.3% this year.

Crown Prince Mohammed bin Salman’s multi-billion dollar projects to wean the economy away from oil also remain vulnerable to austerity measures.

But it remains unclear whether the prince’s dream project NEOM – a US$500 billion megacity set to be built from scratch along the kingdom’s picturesque western coast – will be impacted.

The plans hit a new roadblock last month when a member of the local Huwaitat tribe was gunned down by state forces after he refused to give up his land for the project.

Campaigners said many other members of the Bedouin tribe were detained for spreading anti-displacement slogans and refusing to sign relocation documents, in a rare domestic clash with the government that has a reputation for crushing dissent.