Saudi Arabia to triple VAT rate to 15% from July amid pandemic

SINGAPORE (ICIS)–Saudi Arabia will hike its value-added tax (VAT) rate to 15% from 5% starting July to shore up revenues hit by the recent plunge in crude oil prices, while rationalizing expenditures amid the coronavirus pandemic.

The country, which is the world’s biggest exporter of crude oil, will also discontinue granting cost-of-living allowance from June, according to state-owned Saudi Press Agency (SPA).

All the measures being undertaken by the Saudi government are valued at around Saudi riyal (SR) 100bn ($26.7bn), it said.

Expenditure cuts will be done via “cancelling, extending, or postponing some operational and capital expenditures for some government agencies, as well reducing provisions for initiative of a number of Vision Realization Programs and major projects” in 2020.

Saudi finance minister and acting minister of economic and planning Mohammad Aljadaan said the “tough” measures were deemed “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”, SPA reported on Monday.

Aljadaan cited that the world is facing an unprecedented crisis, whose enormous ramifications have yet to ascertained.

The coronavirus outbreak – which started in China in late 2019 and has so far infected nearly 4m people and claimed over a quarter-million of lives globally – has plunged the world into a recession worse than the Great Depression in the 1930s.

As of 10 May, Saudi Arabia has more than 39,000 confirmed coronavirus cases with 246 deaths, according to data from the World Health Organisation (WHO).

The Saudi Arabian economy is projected to contract by 2.3% this year, reversing a 0.3% growth posted in 2019, according to the International Monetary Fund (IMF).

Its non-oil GDP is forecast to contract 4% in 2020, the global financial stability watchdog stated in its April World Economic Outlook.

Saudi Arabia posted a first-quarter budget deficit of Saudi riyal (SR) 34.1bn ($9bn) as oil revenues declined by 24% year on year to SR128.8bn, which had a 67% of the government’s total revenues for the period, official data showed.

Its non-oil revenues for the March quarter were also down, declining 17% year on year to SR63.3bn, data from the Ministry of Finance showed.

“We see the deficit widening to around 13% of GDP this year, requiring more than $80bn in financing,” Oxford Economics lead economist David Schockenhoff said in a research note on 7 May.

“Meanwhile, the government has pledged additional funds worth $32bn (4% of GDP) to help the non-oil sector weather the fallout from the coronavirus pandemic,” he said.

“The planned fiscal consolidation and reallocation of funds will leave a substantial dent in spending on infrastructure and Vision 2030-related projects this year,” Schockenhoff said.

As the economy is heavily reliant on oil, government revenues have shrunk since the oil price crash in 2014. Oil prices have remained largely depressed since due to a supply glut.

Its month-long price war with Russia in March 2020 saw crude prices plunging further, as global demand collapsed amid the coronavirus pandemic, which is aggravating the surplus supply condition in the market despite recent output cuts.

On Friday, Brent crude was trading at above $30/bbl, while US crude was at above $24/bbl.

Focus article by Pearl Bantillo

($1 = SR3.75)

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