Saudi Arabian citizens entered stores after coronavirus blockade restrictions were lifted in June, hoping to save money on non-perishable goods, from food and clothing to electronics and cars, before the kingdom triples your value added tax or VAT.
Riyadh announced the levy, which increased from 5% to 15% on July 1, in May as a means of increasing state revenues as oil prices plummeted as pandemic attacks hit the economy. But it could hurt consumer recovery, some experts say, warning that the jump in spending last month could stop for the rest of the summer and into the fall.
“People attacked the malls and shopping malls. They looked like Black Friday sales,” Ali Almarri, a business owner who lives in the eastern city of Khobar, told CNBC. Almarri wanted to buy a new car before the tax increase began, only to find that the cars were sold entirely at each dealership he visited.
“A dealer salesperson told me they sold more cars in the last month than in the previous five months. People want to save money and they don’t want to have to pay VAT.”
An economic ‘triple whammy’
VAT is not the only new policy that the kingdom has implemented in the wake of the virus and crushed demand for oil. Saudi Arabia also suspended its cost-of-living allowance for public sector workers and announced cuts and delays in projects that were part of Vision 2030. Fiscal austerity measures come as the entire Gulf region falters from the double whammy. from global blockades and the lowest oil prices in two decades.
Tarek Fadlallah, CEO of Nomura Asset Management Middle East, described the kingdom as a “triple whammy”.
“This is going to have a big impact on the Saudi economy … it’s a triple whammy because in addition to lower oil prices and also the pandemic, we have an exodus of expatriates taking place right now as people they lose their jobs, “Capital Connection told CNBC on Wednesday.
“So we are already in a very, very difficult situation. And the increase is not just high for those regional standards. We are fairly new to VAT experiments across the region. But a 10% increase is virtually unprecedented in any part of the world”. so this will have a massive impact on disposable income and a big impact on consumer-related industries. ”
Almarri believes that after June “people are going to spend less, definitely. People will be discouraged when they see that they have to pay 10% more than usual.”
Fadlallah agrees. The VAT increase “has a tremendous impact on the spending capacity of households,” he said. “Therefore, it remains to be seen if it will be easily absorbed, but I suppose August, July, September and October will be particularly difficult months for the consumer sectors, given that we have had an accumulation in purchases in recent weeks.”
Other financial analysts have made similar warnings. Khatija Haque, head of MENA research at Dubai-based Emirates NBD, told CNBC in May that “raising VAT when many households already face job losses and wage cuts will likely exacerbate declining consumption this year and increase pressure about companies. ”
Still, others see it as a much-needed measure. Ehsan Khoman, MENA chief of research at MUFG, told CNBC that “bold, decisive and necessary austerity measures are paramount to prevent a rapid deterioration of wealth reserves.”
The Saudi economy contracted 1% in the first quarter of the year, but the numbers are expected to be much worse for the second quarter, hit by most of the coronavirus blockades. Christopher Payne, chief economist at Dubai-based Peninsula Real Estate, expects a deficit of up to 15% of GDP for the kingdom this year. Consumer spending metrics, such as ATM withdrawals and point-of-sale transactions, fell more than 30% year-on-year in April and May, according to London-based firm Capital Economics.
The company’s Covid Recovery Tracker found economic activity 30% below pre-virus levels in June, compared to 65% below its lowest point in mid-April, revealing signs of recovery as blocking restrictions were lifted. “Nevertheless,” analysts said this week, “we expect the recovery to be relatively slow as fiscal austerity measures bite.”
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