Riyadh, Saudi Arabia:
The Saudis prepared for a value-added tax tripling on Wednesday, another unpopular austerity measure after the two coronavirus shocks and falling oil prices triggered the kingdom’s worst economic decline in decades.
Retailers across the country reported a strong increase in sales this week of everything from gold and electronics to cars and building materials, with buyers looking to source before VAT is raised to 15%. .
The rise could arouse public resentment as it weighs on household incomes, driving up inflation and depressing consumer spending as the kingdom emerges from a three-month deadlock against coronaviruses.
“Cuts, cuts, cuts everywhere,” a Saudi teacher in Riyadh told AFP, lamenting the disappearance of subsidies as wages stagnated.
“Air conditioner, television, electronic items,” he said, listing a list of items he bought last week before the VAT hike.
“I can’t afford these things from Wednesday.”
With its vast oil wealth funding the largest economy in the Arab world, the kingdom has been able for decades to finance massive spending without any taxes.
It only introduced VAT in 2018, as part of a campaign to reduce its dependence on gross income.
Then, seeking to consolidate the public finances hit by the fall in oil prices and the coronavirus crisis, she announced in May that she would triple the VAT and end a monthly allowance for the cost of living for citizens.
The surge in austerity underscores how formerly lavish spending by Saudi Arabia has become a thing of the past, with the erosion of the social protection system that leaves a predominantly young population to face reduced incomes and a deterioration of the mode of life.
This could strain a decades-old social contract that gave citizens generous grants and scholarships in exchange for their loyalty to the absolute monarchy.
Rising cost of living may prompt many to wonder why public funds are invested in multi-billion dollar projects and assets abroad, including the proposed purchase of the English football club Newcastle United.
“Austerity measures bite”
Kingdom’s malls have drawn large crowds in recent days, with retailers offering “sales before VAT” and discounts before the hike begins.
A gold store in Riyadh told AFP that it had seen sales increase by 70% in recent weeks, while a car dealership had seen them increase by 15%.
With the new rate in place, businesses predict sales of everything from cars to cosmetics and appliances will drop.
Capital Economics forecasts that inflation will climb to 6% year-on-year in July, up from 1.1% in May.
“The government ended the country’s foreclosure (in June) and there are signs that economic activity has started to recover,” Capital Economics said in a report.
“Nevertheless, we expect the recovery to be slow as the fiscal austerity measures bite.”
The kingdom is also likely to lose its advantage vis-à-vis the other Gulf States, including its main ally the United Arab Emirates, which introduced the VAT at the same time but have so far refrained from raising it above 5% .
“Saudi Arabia is taking huge risks with restrictive fiscal policies,” said Tarek Fadlallah, managing director of the Middle East unit at Nomura Asset Management.
But the kingdom has little choice as oil revenues decline.
Its finances took another hit as authorities massively reduced this year’s hajj pilgrimage from 2.5 million pilgrims last year to around a thousand already in the interior of the country, and suspended the small umbrella because of the coronavirus.
Together, the rites bring in some $ 12 billion a year.
The International Monetary Fund has warned that the kingdom’s GDP will drop 6.8% this year – its worst performance since the oil glut of the 1980s.
The austerity campaign would increase state coffers by 100 billion riyals ($ 26.6 billion), according to state media.
But the measures are unlikely to fill the kingdom’s huge budget deficit.
The Saudi Jadwa Investment Group predicts that the deficit will reach a record $ 112 billion this year.
(With the exception of the title, this story was not edited by GalacticGaming staff and is published from a syndicated feed.)