Trying to cap the COVID-19 outbreak has come at a heavy cost for Gulf governments. Oil prices too have not helped. Image Credit: Reuters

Riyadh: Saudi Arabia has tripled its VAT (value added tax) rate and suspended a cost of living allowance for state employees, thus seeking to shore up finances hit hard by low oil prices and a coronavirus-driven slowdown.

"The cost of living allowance will be suspended as of June 1 and the value added tax will be increased to 15 per cent, from 5 per cent, as of July 1," Finance Minister Mohammed al-Jadaan said in a statement. "These measures are painful, but necessary to maintain financial and economic stability over the medium to long term ... and to overcome the unprecedented coronavirus crisis with the least damage possible."

In 2018, Saudi Arabia's King Salman had ordered a monthly payment of 1,000 riyals (Dh979) to every state employee to compensate them the rising cost of living after the government hiked domestic gas prices and introduced value-added tax. About 1.5 million Saudis are employed in the government sector.

Deficit worries

The austerity measures being introduced come after the kingdom posted a $9 billion budget deficit in the first quarter. The finance minister said non-oil revenues were affected by the suspension and decline in economic activity, while spending had risen due to unplanned strains on the healthcare sector and the initiatives taken to support the economy.

Saudi Arabia's finance minister Mohammed Al Jadaan
Saudi Finance Minister Mohammed al-Jadaan has given a stark reality check of what's in store for Gulf economies. Image Credit: Gulf News Archive

"All these challenges have cut state revenues, pressured public finances to a level that is hard to deal with going forward without affecting the overall economy in the medium to long term, which requires more spending cuts and measures to support non-oil revenues' stability," he added.

Dwindling revenues

The central bank's foreign reserves fell in March at their fastest rate in at least 20 years and to their lowest since 2011. Oil revenues in the first three months of the year fell 24 per cent, from a year earlier, to $34 billion (Dh125 billion), pulling total revenues down 22 per cent.

The government has cancelled and put on hold some operating and capital expenditures for some government agencies and cut allocations for a number of its Vision 2030 reform programme's initiatives and mega projects with a total value of 100 billion riyals ($26.6 billion), according to the statement.

Create a new action plan
A committee has been formed to study all financial benefits paid to public sector employees and contractors, and will submit recommendations within 30 days.

In late 2015, when oil prices collapsed from record highs, the kingdom took a number of strict austerity measures, including slashing lavish bonuses, overtime payments and other benefits that were once considered routine perks in the public sector.