COVID-19: Saudi Arabia raises VAT to 15%, suspends cost of living allowance

Abu Dhabi: Saudi Arabia said it will be taking additional “painful” but “necessary” measures to cope with the financial and economic impact of the coronavirus, the most prominent of which is suspending the cost of living allowance starting from June and raising the value-added tax (VAT) rate to 15 per cent from July 1st, according to the Saudi Press Agency.

Saudi Minister of Finance, Mohammad Al Jadaan, said the measures were prompted to protect the Kingdom’s economy and overcome the unprecedented global coronavirus pandemic crisis and its financial and economic repercussions with the least possible damage.

Al Jadaan, also Acting Minister of Economy and Planning, said the government continues to take the necessary decisions to protect citizens, residents and the economy early on and to reduce the aggravation of the crisis and its consequences.

The minister stressed that the global pandemic crisis has caused three shocks to the Kingdom’s economy, each of which is capable of bringing about a change affecting the performance and stability of public finances unless the government intervenes with measures to absorb these shocks.

Sharp drop in oil revenues

He pointed out the first shock was an unprecedented decline in oil demand, which negatively affected the prices and led to a sharp drop in oil revenues, the main source of public revenues for the state budget. “The second shock was a decrease in many local economic activities, which negatively affected the volume of non-oil revenues and economic growth, “ he said.

The minister added the third shock was the urgent, unplanned expenditures that required government intervention by continuously increasing funds for the health sector to support the quality of health services. All this in addition to adopting a number of initiatives to support the economy, reduce the impact of the pandemic, and preserve the jobs of citizens.

Al Jadaan pointed out that these combined challenges led to a decline in government revenues, and pressure on public finances to levels that are difficult to deal with later without harming the Kingdom’s macroeconomics and public finances in the medium and long term, and therefore, a further reduction in expenditures must be achieved, and measures to support stable non-oil revenues.

Postponement

The minister said the impact of these measures reached nearly 100 billion riyals, which included: the cancellation, extension or postponement of some items of operating and capital expenditures for a number of government agencies, and the reduction of the funds from a number of initiatives to achieve vision and major projects for the fiscal year 2020.

“In addition, it was decided to suspend the cost of living allowance starting from June, and also to raise the value-added tax rate from 5% to 15% starting from July 1, 2020,” he said.

Al Jadaan added to increase the efficiency of exchange, a ministerial committee was set up to study the financial benefits for all civil employees, contractors, and similar persons who are not subject to the civil service system in ministries, departments, institutions, bodies, centres, and government programmes, and to raise recommendations within a month.

“We are facing a crisis that the world has never seen before in modern history. One of its most important features is uncertainty, difficulty in knowing and anticipating its extent and repercussions in light of daily developments that require governments to deal with them with vigilance and the ability to take appropriate decisions at appropriate times and quickly respond and adapt to conditions in a way that achieves the public interest and protects citizens and residents, providing the basic needs and necessary medical services. The measures that were taken today were painful, but they are necessary,” he said.

However, these measures will be useful, God willing, to maintain financial and economic stability from a comprehensive perspective and in the medium and long term, in the interest of the country and citizens, Al Jadaan concluded.