Saudi Arabia to introduce austerity measures

Saudi Arabia to introduce austerity measures

Saudi Arabia to introduce austerity measures

Amid a decline in oil prices and a COVID-19 induced slowdown in economic activity, Saudi Arabia has chose to suspend cost of living allowance and increase its value-added tax (VAT) three-fold, to shore up its state finances.

Saudi Arabia said it would also increase value-added tax from five percent to 15 percent as of July.

But the finance minister insisted the measures were necessary to shore up state finances in the age of coronavirus that has sapped the global economy and has resulted in "sharp decline" in oil revenue.

Tredoblingen of the Value-Added Tax must be to counteract the negative effects of lower prices of crude oil, which is Saudi Arabia's largest source of income.

The austerity measures being introduced come after the kingdom posted a $9bn budget deficit in the first quarter.

That's as oil revenues in the period fell by nearly a quarter from a year earlier to $34 billion, pulling down total revenues by 22 per cent.

"The combination of record-low oil prices and mounting demographic pressures poses significant challenges to Prince Mohammed's (MBS) future plans in Saudi Arabia", according to The Soufan Center think tank.

Admission to the Treasury of Saudi Arabia has declined sharply with the fall in energy prices and the cessation of air flights against the backdrop of a pandemic coronavirus.

The conflict between government forces and the Iran-backed Huthis escalated in March 2015, when a Saudi-led military coalition intervened against the rebels after they overran much of the country.

With the plummeting prices of oil, a trade which the kingdom heavily relies on, the government has been forced to seek other sources of cost-cutting measures.

‏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 whom are not subject to Civil Service Law in government ministries, institutions, authorities, centres, and programmes.

In a country without elections and with political legitimacy resting partly on distribution of oil revenue, the ability of citizens to adapt to such reforms is crucial for stability.

Saudi Arabia also slashed fuel prices on Monday, cutting the price of 91-octane gasoline from 1.31 riyals to 0.67 riyals (Rs 26 to Rs 13.53) and of 95-octane gasoline from 1.47 riyals to 0.82 riyals (Rs 29.68 to Rs 16.56).

On Twitter, a social media platform favoured by government supporters, many Saudis appeared prepared to accept austerity measures, posting pictures of MBS and pledging their support.

‏Al-Jadaan said: "We are facing a crisis the likes of which the world has not seen in modern history".

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