Saudi Arabia announced on Monday it was tripling taxes on basic goods, raising them to 15%, and cutting spending on major projects by about $26 billion as it battles the coronavirus pandemic and its economy. But is struggling with low oil prices. According to the country’s finance minister, Saudi citizens will also lose the bonus cost-of-living allowance from 2018 onwards. Despite efforts to diversify the economy, the state remains heavily dependent on oil for revenue. Brent crude is now hovering around $30 a barrel, far below the threshold Saudi Arabia needs to balance its budget.
The kingdom has also suffered a loss of revenue from the suspension of Muslim pilgrims to the holy cities of Mecca and Medina, which were closed to visitors due to the virus. The new measures are the harshest by a major Gulf Arab oil producer since oil prices fell by more than half in March, signaling that neighboring countries may also seek higher taxes on residents this year. The International Monetary Fund estimates that all six of the Gulf Arab energy-producing countries will be in economic recession this year. We are facing a crisis the world has never seen in modern history, a crisis marked by uncertainty, said Saudi Minister of Finance and Acting Minister of Economy and Planning, Mohammed al-Jadaan.
These measures, as difficult as they are today, are necessary and beneficial to maintain broader financial and economic stability,” he said in a statement published on the kingdom-run Saudi Press Agency. Losses reached $9 billion, or 34 billion riyals, down 22% from the same period of the year. Oil revenues in particular were down 24% compared to the same quarter last year.
To cover the budget deficit, Saudi Arabia pulled out $26.8 billion from its net foreign assets in March, which economists say is the sharpest monthly contraction in more than two decades. Moody’s rating agency said it expects Saudi Arabia’s foreign exchange reserves to fall below $375 billion at the end of 2021, from $488 billion at the end of 2019. With curfews imposed nationwide and on major cities, the state ‘like other countries’ has struggled to contain its spread.
Some 39,000 confirmed cases of coronavirus have been reported in Saudi Arabia, including 246 deaths. The decision to cut $26 billion, or about 100 billion Saudi riyals, in spending includes canceling, expanding or postponing some operating and capital spending for government agencies, as well as reducing costs for key Vision 2030 projects Crown Prince is the centerpiece of Mohammed bin. Salman’s economic transformation plan.
Additionally, the government will discontinue living allowances starting in June. Those allowances cost the state about $13.5 billion annually. Saudi Arabia said it would increase the value-added tax from 5% to 15% by July. Taxes on most goods and services were first introduced in Saudi Arabia in 2018 as a way to increase revenue. Al-Jadaan explained that shocks to low oil demand, the suspension of local economic activity due to curfews and lockdowns across the state, and unexpected additional spending on healthcare created the need for such steps.
Meanwhile, the poorest Saudis will continue to benefit. The government said on Sunday it had deposited more than half a billion dollars, or 2.18 billion riyals, into the so-called ‘citizen’s account’ for May, helping low-income Saudis with more than 12 million. Since its inception, the program has paid out nearly $240 billion to citizens with an average monthly support per household.
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