Saudi Arabia halts cost of living allowance, ups VAT to 15% to counter COVID-19 economic fallout

Saudi Arabia is undertaking important measures to protect the economy and overcome the unprecedented financial and economic ramifications of the global COVID-19 pandemic in the best way possible, Saudi Press Agency reported, citing Mohammed Al-Jadaan, Minister of Finance and Acting Minister of Economy and Planning.

The measures include cancelling, extending, or postponing some operational and capital expenditures for some government agencies, as well reducing provisions for initiatives of a number of Vision Realization Programs and major projects for the fiscal year 2020.

In addition, the cost-of-living allowance will be discontinued as of June 2020 and value-added tax (VAT) to increase from 5% to 15% as of July 2020.

“The impact of the approved measures is around SAR 100 billion,” Al-Jadaan said.

He also stressed that the measures complement previously made decisions to mitigate the negative effects of the crisis from a health perspective, as well as economically and socially.

The minister added that the government is committed to taking necessary and timely measures to protect citizens and residents, as well as the economy to mitigate the effects of the crisis and its ramifications.

He emphasized that the crisis caused by the global pandemic resulted in 3 economic shocks, each of which could in itself have an extremely negative effect on the performance and stability of public finance “had the government not intervened by taking measures to absorb them”.

Al-Jadaan explained that due to the precautionary measures undertaken worldwide to combat the pandemic, the first economic shock was the decline in oil demand, which led to lower oil prices and a sharp fall in oil revenue that represents a main source of public revenue for the state budget.

“The necessary COVID-19 precautionary measures led to the suspension or reduction of many local economic activities, which had a negative impact on non-oil revenue and economic growth,” he stated.

The third economic shock was the unplanned expenses that required government intervention by increasing provisions for the healthcare sector to support the preventative and treatment capacity of health services, in addition to adopting a number of initiatives to support the economy, mitigate the economic effects of the pandemic and maintain jobs for citizens, he continued.

Al-Jadaan further stated that these combined challenges led to a decline in public revenue and exerted pressure on finances in a way that could not be dealt without causing harm to the overall economy in the mid- to long-term.

“Therefore, further reduction in expenditures is needed, as well as undertaking measures that support the stabilization of non-oil revenues,” he noted.

Also, to improve spending efficiency, a ministerial committee has been established to study the financial benefits paid to all employees, contractors and those of similar status that are not subject to Civil Service Law in government ministries, institutions, authorities, centers, and programs, and present its recommendations within 30 days.

“These measures undertaken today, as tough as they are, are necessary and beneficial to maintain comprehensive financial and economic stability in the medium- and long-term for the interest of the country and its citizens,” Al-Jadaan concluded.