Coronavirus: Saudi Arabia’s $26 bln spending cuts scale back Vision 2030, triples VAT

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Saudi Arabia announced on Monday new measures to mitigate the economic impact of the coronavirus, through reducing expenditure by 100 billion riyals ($26.6 billion).

This will be achieved through the cancellation and postponement of some items of operational and capital expenditure, as well as the reduction of some allocations for the realization of Vision 2030 and other major projects.

The government also decided to raise value added tax (VAT) from 5 percent to 15 percent starting from July 1 and suspend giving out cost of living allowance starting from June 1, state news agency SPA reported on Monday.

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In addition, a ministerial committee has been formed to study the financial benefits of all civil servants and come up with a decision in 30 days.

Saudi Finance Minister Mohammed al-Jadaan said that the coronavirus global pandemic resulted in three economic shocks. The first was the unprecedented decline in oil demand, which led to lower oil prices and a sharp decline in the government’s oil revenues – a main source of public revenue for the state budget.

Oil prices have plummeted by approximately 60 percent this year as coronavirus lockdowns caused a massive demand shock.

The second was the precautionary measures taken by the government to reduce the spread of the coronavirus, which led to the suspension and reduction of many local economic activities, and in turn led to lower non-oil revenues.

And the third was the unplanned expenses the government incurred due to its efforts to support the healthcare sector in combating the COVID-19 crisis, in addition to the stimulus packages to support the economy and maintain jobs for citizens.

“Those challenges combined have led to a decline in government revenues and exerted pressure on public finances in a way that could not be dealt with at a later time without causing harm to the overall economy of the Kingdom in the medium- and long-term. Therefore, further reduction in expenditures is needed, as well as undertaking measures that support the stabilization of non-oil revenues,” al-Jadaan said.

Saudi Arabia’s revenues dropped due to historically low oil prices and reduced economic activity amid lockdowns and curfews implemented to curb the spread of the coronavirus.

The Kingdom's oil revenues fell 24 percent in the first quarter of this year to 128.771 billion riyals, while non-oil revenues fell 17 percent to 63.3 billion riyals.

The Kingdom slipped into a $9 billion budget deficit in the first quarter, and its central bank foreign exchange reserves fell in March at their fastest rate in at least 20 years and to their lowest since 2011.

Al-Jadaan added: “The measures taken today, as painful as they are, are necessary to maintain comprehensive financial and economic stability in the medium- and long-term.”

The minister had said on May 2 in an interview with Al Arabiya that the Kingdom was prepared to take whatever "painful" measures necessary to mitigate the impact of the crisis and that the impact of the coronavirus pandemic and collapsed oil prices on Saudi Arabia’s economy and finances will show in the results of the second quarter of the year.

However, al-Jadaan stressed that Saudi Arabia is “committed to the task of sustaining public financing and is committed to having enough financial strength to face this crisis even if it is prolonged.”

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