Saudi Arabia announced austerity measures worth $26.6 billion

Saudi Arabia announced austerity measures including increase in VAT

The kingdom of Saudi Arabia announced austerity measures including an increase in Value Added Tax from current 5% to 15%. The 300% increase in VAT will cause high inflation and food items will become more expensive. The kingdom has also abolished monthly handouts to citizens as part of austerity.

The main purpose of austerity measures to end welfare programs and to increase taxes is to collect 100 billion Saudi Riyals (26.6 billion US dollars) to lower the financial impact of oil price crash and deep economic crisis.

 These austerity measures and hike in the taxes are part of efforts made by the government to ease the financial crunch and burden.  Saudi Arabia is facing difficult economic situation as the result of record low oil prices and an economic slump caused by the current coronavirus pandemic.

Saudi Arabia also abolished monthly cost-of-living allowances paid to government workers as well as a reduction in spending on some programmes under Crown Prince Mohammed bin Salman's ‘Vision 2030’ economic transformation plan.

The decision to abolish state subsidies and monthly handouts might not go well with the general public and government employees. The high cost of living and higher inflation will make the life of ordinary people more difficult. The 300% increase in VAT will increase the prices of food, groceries and other products.

The kingdom had also introduced handouts worth billions of dollars to citizens, known as the cost of living allowance, to cushion the impact of rising costs. But the savings from the austerity measures are unlikely to plug the kingdom´s huge budget deficit, which the Saudi Jadwa Investment group said would arise to a record $112 billion this year.

Finance Minister Mohammed al-Jadaan has announced that “It has been decided the cost of living allowance will be halted from June 2020 and VAT will be raised from 5% to 15% from July 1. The government was also "cancelling, extending or postponing" expenditure for some government agencies and cutting spending on projects introduced as part of the ambitious "Vision 2030" reform programme to diversify the oil-reliant economy”, the minister further explained.

The minister insisted that the measures were necessary to shore up state finances amid a "sharp decline" in oil revenue as the coronavirus pandemic saps global demand for crude. The minister warned last week of "painful" and "drastic" steps to deal with the double shock of the coronavirus and record low oil prices.

 Saudi Arabia, the top crude exporter and the Arab world's biggest economy, has shut down cinemas and restaurants, halted flights, and suspended the year-round Umrah pilgrimage in a bid to contain the deadly virus.

                                                       Khalid Bhatti