Saudi Arabia Decided to Increase VAT Threefold Aiming at Restoring State Finances

Saudi Arabia, a Middle-East country and also one of the naturally richest countries in the world, has decided to increase taxes on citizens in an attempt to boost its failing state finances, which was affected due to the global oil price crash and economy slowdown prompted by the coronavirus outbreak.

Meanwhile, a committee has been formed to review all financial benefits received by public sector employees and contractors; and to submit recommendations of the committee within 30 days to the Saudi Government.

Cutting of Public Allowance and Imposing VAT Increase

A Saudi state news agency reported in a statement on Monday, May 11, 2020, “Cost of living allowance will be suspended as of June first, and the value-added tax will be increased to 15% from 5% as of July first.” The news was announced since Saudi, the world’s largest oil exporter, has been suffering from the sharp fall of oil price and was a part of the preventive measures to fight the widespread virus pandemic by the government under the leadership of Crown Prince, Mohammed bin Salman.

The Kingdom has taken such strict measures since the expenses of the country was more than the revenue, which pushed it into a $9 billion budget deficit in the first quarter (Q1). Saudi Finance Minister, Mohammed al-Jadaan said in the statement, “These measures are painful but necessary to maintain financial end economic stability over medium to long term…and overcome the unprecedented coronavirus crisis with the least damage possible.”

Al-Jadaan said the country’s non-oil revenues were hampered due to 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.

Aimed at Reserving State Finances

The Minister, citing the new move of cutting public allowance amid the existing problems, explained, “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 on the medium to long term, what requires more spending cuts and measures to support non-oil revenues stability.”

With the widespread pandemic impact on Saudi’s economy, the foreign reserves of the country’s central bank had fallen deeply in March at its fastest rate in at least 20 years and to its lowest since 2011. Moreover, oil revenues of the Kingdom in the first three months of the year fell 24% from a year earlier to $34 billion that pulled total revenues down 22%.

According to the government’s statement, it has taken steps to control the falling state finances by cutting off some operating and capital expenditures for some government agencies and imposed cutting allocations for a number of its Vision 2030 reform program’s initiatives and mega projects with a total value of 100 billion riyals ($26.6 billion).

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