Saudi Arabia will triple its VAT rate to help compensate for the sharp decline in the price of oil, which makes up 50 percent of the kingdom’s GDP and around 70 percent of its exports.
The state news agency reported May 11 that Minister of Finance Mohammed Al-Jadaan said a monthly cost-of-living allowance for government employees introduced in 2018 will also be suspended, effective June 1. The allowance was intended, in part, to help compensate for the implementation of the country's VAT, which went into effect in 2018 at a rate of 5 percent. The increase, to 15 percent, will go into effect July 1.
Al-Jadaan said his country has been buffeted by three economic shocks resulting from the COVID-19 pandemic, “each of which could, in itself, have [had] an extremely negative effect on the performance and stability of public finance, had the government not intervened by taking measures to absorb them.”
First came what Al-Jadaan described as an unprecedented decline in oil demand. The price of West Texas Intermediate crude, an industry benchmark, was $24.99 a barrel at midday May 8, down 59 percent from a year earlier.
The second shock was the suspension or reduction of local economic activity, which Al-Jadaan said has adversely affected non-oil revenue and growth. The third came from unplanned expenses incurred by the government to support the economy, particularly the healthcare sector.
Al-Jadaan said those challenges led to a decline in public revenues and exerted pressure on public finances in a way that could not be dealt with later without causing both short- and long-term harm to the overall economy.
The Ministry of Finance estimated the impact of the relief measures at around SAR 100 billion (around $26.6 billion). The cutbacks include the cancellation, extension, or postponement of some operational and capital expenditures, as well as reductions for several “vision realization” programs. Saudi Vision 2030 is a wide-ranging government plan to diversify the economy, reduce its dependence on oil, and increase the role of the private sector from 45 percent of economic output to 60 percent by the end of the decade.
“These measures that have been undertaken today, as tough as they are, are necessary and beneficial to maintain comprehensive financial and economic stability in the medium and long term for the interest of the country and its citizens,” the MOF said.