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Oil Price Crash Forces Saudi Arabia To Implement Tough Austerity Measures

Saudi Arabia is tripling its value-added tax (VAT) and suspending cost-of-living allowances as part of a new round of painful austerity measures to save the Kingdom’s finances after oil prices collapsed in the pandemic.

Saudi Arabia, which had already cut government expenditures shortly after the price of oil crashed in March, is now tripling VAT to 15 percent from 5 percent beginning in July 2020, the Saudi Ministry of Finance said on Monday, as carried by the official Saudi Press Agency.

In order to reduce government expenditures while the oil price crash cripples the main budgetary income—oil revenues—the Kingdom is also discontinuing the cost-of-living allowances for state workers as of July.

As a whole, Saudi Arabia is saving US$26.6 billion (100 billion Saudi riyals) from the measures announced on Monday, which also include canceling, extending, or postponing some operational and capital expenditures for some government agencies, as well reducing provisions for a number of programs and major projects this year.  

“These measures that have been undertaken today, as tough as they are, are necessary and beneficial to maintain comprehensive financial and economic stability on the medium and long-term for the interest of the country and its citizens,” Minister of Finance and Acting Minister of Economy and Planning, Mohammad Aljadaan, said in a statement carried by the Saudi agency.

“The Minister explained that due to the precautionary measures undertaken worldwide to combat the pandemic, the first economic shock was the unprecedented decline in oil demand, which led to lower oil prices and a sharp decline in oil revenue that represents a main source of public revenue for the state budget,” the Saudi Press Agency said.  

Saudi Arabia, OPEC’s top producer and the world’s top oil exporter, is preparing to borrow dozens of billions of US dollars this year to plug the widening budget gap due to the oil price crash.

Last week, the Saudi Finance Minister had already warned that the government was preparing to implement “painful” measures for propping up the oil-dependent economy.

By Tsvetana Paraskova for Oilprice.com

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