Saudi Arabia triples taxes, cuts $ 26B in costs amid pandemic

DUBAI: Saudi Arabia announced on Monday that it would triple taxes on basic goods, raising them to 15% and reducing spending on major projects by around $ 26 billion, as it deals with the shock of the coronavirus pandemic and low prices for the oil in your economy. Saudi citizens will also lose an additional cost-of-living allowance that had been in place since 2018, according to the country’s finance minister.

Despite efforts to diversify the economy, the kingdom continues to rely heavily on oil for income. Brent crude now hovers around $ 30 a barrel, well below the range Saudi Arabia needs to balance its budget. The kingdom has also lost revenue from the suspension of Muslim pilgrimages to the holy cities of Mecca and Medina, which were closed to visitors due to the virus.

The new measures are the most drastic to date by a major Arab Gulf oil producer since oil prices fell more than half in March, indicating that neighboring countries may also seek to impose higher taxes on residents this year.

The International Monetary Fund projects that the six energy-producing Arab Gulf states will be in an economic recession this year.

“We are facing a crisis that the world has never seen in modern history, a crisis marked by uncertainty,” said Saudi Finance Minister and Minister of Economy and Planning Mohammed Al-Jadaan.

“These measures that have been taken today, harsh as they are, are necessary and beneficial to maintain comprehensive financial and economic stability,” he said in a statement published in the Saudi state press agency.

In the first quarter of 2020, state revenue fell 22% from the same period last year, with a deficit of $ 9 billion, or 34 billion rials. Oil revenues specifically fell 24%, compared to the same quarter last year.

To cover the budget deficit, Saudi Arabia raised $ 26.8 billion of its net external assets in March in what economists say marked the fastest monthly contraction in more than two decades.

Moody’s rating agency said it expects Saudi Arabia’s foreign exchange reserves to drop below $ 375 billion in late 2021, down from $ 488 billion in late 2019.

Despite Saudi Arabia’s far-reaching decisions to contain the virus, such as closing mosques for prayers across the country and imposing curfews on major cities, the kingdom, like other countries, has struggled to curb its spread. Saudi Arabia has had some 39,000 confirmed cases of the coronavirus, including 246 deaths.

The decision to cut $ 26 billion in spending, or around 100 billion Saudi riyals, includes canceling, extending, or postponing some capital and operating expenses for government agencies, as well as reducing the costs of major Vision 2030 projects that they are the centerpiece of Crown Prince Mohammed bin Salman’s economic transformation plan.

In addition, the government will suspend the cost of living subsidy from June. Those allocations had cost the state about $ 13.5 billion annually. Saudi Arabia said it would also increase the value added tax from 5% to 15% starting in July.

The tax on most goods and services was first introduced in Saudi Arabia in 2018 as a way to increase revenue.

Al-Jadaan explained that the impact of low oil demand, coupled with the suspension of local economic activity due to curfews and blockades across the kingdom, and unexpected additional spending on medical care created the need for such measures. .

Meanwhile, the poorest Saudis will continue to receive benefits. The government said Sunday that it deposited more than half a trillion dollars, or 2.18 trillion riyals, in the so-called “Citizen Account” for May that helps more than 12 million low-income Saudis.

Since its inception, the program has paid about $ 19.5 billion to citizens with an average monthly support per family of approximately $ 240.