Saudi Arabia to raise VAT threefold amid "painful" austerity measures

Saudi Arabia is suspending the cost of living allowance and raising the value added tax threefold, as part of measures aimed at shoring up state finances, battered by low oil prices and a severe coronavirus-driven slowdown.

"Cost of living allowance will be suspended as of June first, and the value added tax will be increased to 15% from 5% as of July first," the state news agency reported in a statement on Monday. The world's largest oil exporter is suffering from slumping prices, while at the same time measures to fight the new coronavirus are likely to curb the pace and scale of economic reforms launched by Crown Price Mohammed bin Salman.

The austerity measures introduced on Monday comes as spending outstripped income, pushing the kingdom into a $9 billion budget deficit in the first quarter. "These measures are painful but necessary to maintain financial end economic stability over medium to long term...and overcome the unprecedented coronavirus crisis with the least damage possible," finance minister Mohammed al-Jadaan said in the statement.

He 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. "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 on the medium to long term, what requires more spending cuts and measures to support non-oil revenues stability," he added.

The central bank's foreign reserves fell in March at their fastest rate in at least 20 years and to their lowest since 2011. Oil revenues in the first three months of the year fell 24% from a year earlier to $34 billion, pulling total revenues down 22%.

The government has canceled and put on hold some operating and capital expenditures for some government agencies, and cut allocations for a number of its Vision 2030 reform programme's initiatives and mega projects with a total value of 100 billion riyals ($26.6 billion), according to the statement. A committee has been formed to study all financial benefits paid to public sector employees and contractors and submit recommendations within 30 days, the statement said.

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