The health care and livelihood of the Saudi Arabian people are the main priorities for authorities, said Finance Minister Mohammed al-Jadaan in an interview with Bloomberg, following the announcement of enormous spending cuts to combat the economic fallout of the coronavirus.
The Kingdom announced on Monday that it would cut spending by 100 billion riyals ($26.6 billion), triple value added tax to 15 percent from July 1, and suspend distribution of the cost of living allowance from June 1. The enormous cut to spending will be achieved through cancelling and postponing some projects, while also reducing spending on major projects and Vision 2030 goals.
“These are the priorities: the health care of people and the livelihood of people, and we want to make sure that we maintain our fiscal strength so that as the economy gets out of the lockdown, we are able to support the economy,” al-Jadaan told Bloomberg in a telephone interview.
Saudi Arabia remains in widespread lockdown as it aims to curb the spread of the COVID-19 coronavirus. Lockdown measures aimed at reducing the infection rates are having a detrimental effect on the economy, as businesses shutter and consumers are told to stay at home.
The minister stressed Saudi Arabia’s commitment to reform and to retaining its fiscal strength and reserves so authorities will be able to support the economy once the lockdown has ended.
Al-Jadaan said that the spending cuts would come from reallocations, rather than wholesale budget cuts.
“What we would end up with as we are now, we would end up with spending almost as budgeted because of the increase in spending that we have allocated both to support the economy and the private sector and the jobs of Saudi employees in the private sector,” the minister said.
Tripling of VAT
VAT, a tax that is added onto the cost of goods in shops, will be raised from 5 percent to 15 percent from July 1.
Al-Jadaan said that the increase “is something that will help this year, but will help more next year and the year after as we get out of the COVID-19 crisis.”
The increased revenue heading to state coffers as a result of VAT will likely not be significant this year, the minister continued, as consumers are not spending as much as normal while in lockdown.
The Minister said that the cost of living allowance which was suspended was always "temporary" and that its impact "is very limited."
As for gasoline prices, al-Jadaan said that its benchmark price is linked to the international price and will be adjusted on a monthly basis.
Employee salaries and benefits
A ministerial committee has been formed to study the financial benefits of all civil servants and come up with a reccomendation within 30 days.
Al-Jadaan told Bloomberg: "This committee is going to look at the salary scales and the benefits of these new (government) entities and bring about more rationalization and ensure that we don’t have excess wages or unnecessary benefits that are distorting the labor market."
"Civil servant and military salary scales are actually very reasonable, we are looking at those who are working for the government, but not under the civil service salary scale," he added.
Low oil price punch
Oil prices have witnessed a historic fall since the year began, with prices down around 60 percent. This has resulted in significant revenue drops for Saudi Arabia, which still relies on oil revenue for a significant portion of its budget.
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.
As a result, Saudi Arabia 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 level since 2011.
In response, authorities indicated that borrowing could increase by 100 billion riyals this year, to reach 220 billion riyals.
Al-Jadaan indicated that there would be no need to increase borrowing beyond this.
“I think between that and cutting spending now and a few weeks ago, I think we will manage with 220 billion riyals,” said the minister.
Al-Jadaan told Bloomberg that the Kingdom wasn't planning to increase its borrowing beyond the 220 billion riyals ($58.6 billion) previously announced.
He said the government should be able to manage, given the reduction in spending, the savings its making due to the lockdown as people are not traveling, staff members aren't being sent abroad for training, and there's no spending on sports, entertainment or tourism events and activities.
Impact on Vision 2030
The coronavirus pandemic will result in many projects slowing down, with supply chain issues and work restrictions both causing a significant impact.
“Some of the Vision programs, we have been working on with the strategic committee over the past few months and weeks to re-prioritize the initiatives under the Vision Realization programs. They have been revamped,” al-Jadaan said.
Spending on housing projects and in hospitality will continue, although “some of them will be postponed and extended to next year and the year after,” the minister said.
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, adding that we will see the impact of the pandemic and collapsed oil prices in the second quarter figures.
“Despite all that is taking place around the world, we are committed to continue our reform, we are committed to ensuring that we have the fiscal strength and maintain our reserves, maintain our fiscal buffers, so that as we get out of COVID-19 we have the tools to support the economy,” al-Jadaan told Bloomberg.
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