Saudi Arabia will triple its value added tax rate and suspend a cost of living allowance for state employees to support the coronavirus-hit economy
Historic oil output cuts agreed by Riyadh and other major producers have given only limited support to prices after they sank on oversupply caused by a war for petroleum market share between the kingdom and its fellow oil titan Russia.
“These measures are painful but necessary to maintain financial and economic stability over the medium to long term...and to overcome the unprecedented coronavirus crisis with the least damage possible,” he added in a statement. The government has cancelled and put on hold some operating and capital expenditures for some government agencies, and cut allocations for some reform initiatives and projects worth a total 100 billion riyals , the statement said.
“The reforms are positive from a fiscal side as greater adjustment is essential. However, the tripling of VAT is unlikely to help that much in 2020 revenue wise with the expected fall in consumption,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. In 2018, Saudi Arabia’s King Salman ordered a monthly payment of 1,000 riyals to every state employee to compensate them for rising living costs.A committee has been formed to study all financial benefits paid to public sector employees and contractors, and will submit recommendations within 30 days, the statement said.
“Tripling the VAT will test the limits of the balance between revenues and consumption as the economy dives into a deep recession. The move will impact consumption and could also lower the expected revenues,” said John Sfakianakis, a Gulf expert at the University of Cambridge.
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