As of June 1st the cost of living allowance and VAT ( value added tax ) will be raised from 5% to 15% in the kingdom, these are all part of measures aimed at shoring up state finances, battered by low oil prices and a severe coronavirus-driven slowdown.
The oil exporting giant is feeling the strain from a continuation of slumping prices, while at the same time measures to fight the new coronavirus are likely to curb the pace and scale of economic reforms , these measures come as spending has outstripped income forcing the Saudis deep into a $9 billion budget deficit in its first quarter.
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,”
He added that 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.
“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 went on to add.
In March the central banks foreign reserves fell at their fastest rate in over 20 years down to their lowest since 2011, while oil revenues in the first 3 months of 2020 slid 24% from the previous year to $34 billion , putting total revenues down a sizable 22%.
According to the statement released by the state news agency on Monday, the government has cancelled and put on hold some operating and capital expenditures for some government agencies, and also cut allocations for a number of its Vision 2030 reform programme’s initiatives and mega projects with a total value of 100 billion riyals which comes to around $26.6 billion dollars , while the statement went on to mention that a committee has been formed to study all the financial benefits paid to the public sector, employees and contractors with recommendations submitted within 30 days.
In a country that has no elections and where political legitimacy rests partly on distribution of oil revenue, the ability of citizens to adapt to reforms aimed at reducing oil dependence and improving self-reliance is crucial for stability.
