Saudi Arabia will triple value-added tax (VAT) and suspend a cost of living allowance for state workers, it said on Monday, seeking to shore up finances hit by low oil prices as the coronavirus pandemic pummels global demand for its lifeline export.
“The cost of living allowance will be suspended as of June 1, and the value-added tax will be increased to 15 percent from 5 percent as of July 1,” Finance Minister Mohammed al-Jadaan said in the statement reported by the state news agency.
“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,” he added in a statement.
Historic oil output cuts agreed by Riyadh and other major producers have given only limited support to prices after they sank on oversupply caused by the war for petroleum market share between the kingdom and its fellow oil titan Russia.
Saudi Arabia, the world’s largest oil exporter, is also being hit hard by measures to fight the new coronavirus, which are likely to curb the pace and scale of economic reforms launched by Crown Prince Mohammed bin Salman.
The 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.
In 2018, Saudi Arabia’s King Salman ordered a monthly payment of 1,000 riyals ($267) to every state employee to compensate them for the rising cost of living after the government hiked domestic gas prices and introduced value-added tax.
“The economy of Saudi Arabia has been under a lot of stress. That’s why the government withdrew $23bn from the reserve in March. This is the largest withdrawal from the reserve, ever, in the history of the country,” Ali al-Ahmed, a Saudi scholar and expert on Saudi political affairs at the Institute for Gulf Affairs in Washington DC said.