Saudi Arabia announces austerity measures to cope with Covid-19 impact

Kingdom triples its VAT rate to 15% and cuts allowance for government workers

Saudi Arabia announced a slew of austerity measures to cope with the impact of the coronavirus pandemic and an oil-price rout, tripling its VAT and cutting a cost-of-living allowance for government workers.

The steps taken to shore up revenue and rationalise spending are valued at about 100 billion riyals (€24.6 billion) in total, according to the official Saudi Press Agency. Overall spending for 2020 will remain close to what was planned as money saved gets re-allocated to healthcare and aid for businesses, minister for finance Mohammed Al-Jadaan said in a telephone interview on Monday.

Saudi shares fell the most in the Gulf while sovereign bonds rose following the announcement, with the security due 2060 leading the advance.

“These are the priorities: the healthcare of people and the livelihood of people,” Al-Jadaan said. “We want to make sure that we maintain our fiscal strength so that as the economy gets out of the lockdown, we are able to support the economy.”


Already under a strict curfew to contain the spread of coronavirus, the world’s largest oil exporter is facing a second crisis caused by the meltdown in global oil markets. The turmoil has slashed state revenue – most of which comes from crude – and is set to derail the kingdom’s fragile economic recovery since the last oil price rout in 2014.

The price of Brent crude crashed by more than 50 per cent in March, contributing to a record $27 billion monthly drop in the Saudi central bank’s net foreign assets.

Also on Monday, the kingdom announced a surprise move to slash its oil output to the lowest level in 18 years as it tries to spur a recovery from the energy market crisis that has hit its finances.

On track for the deepest economic contraction in two decades, Saudi Arabia is keeping the focus on fiscal adjustments to contain a deficit that could approach levels last seen after the previous oil crash. The total savings announced are equivalent to about 10 per cent of expenditure initially planned in this year’s budget.

Government aid to the neediest Saudis would remain, Al-Jadaan said. Shortly before the measures were announced, King Salman ordered a payment of 1.85 billion riyals to be distributed to state welfare recipients to mark the Islamic holy month of Ramadan. The payments will include 1,000 riyals for each family and 500 riyals for each dependent.

The kingdom has announced other stimulus programmes over the past two months, including interest-free loans, a discount on electricity bills, deferments of fees and a government guarantee to cover 60 per cent of salaries for some Saudi workers in the private sector.

Oil shock

The meltdown in global oil markets has had wide-ranging implications for Saudi Arabia. State oil giant Saudi Aramco is in early talks about further staggering payments for the acquisition of a controlling stake in Saudi Basic Industries Corp as the collapse in oil prices puts pressure on its finances, according to people with knowledge of the matter. It's also weighing the possibility of reducing the $69 billion price tag on the deal, one of the people said.

The government announced the new austerity measures overnight, shortly after the dawn call to prayer that marks the beginning of the daily fast for Ramadan.

Among the biggest moves, the country’s VAT will be increased to 15 per cent from 5 per cent starting July 1st. The measure is likely to be controversial among citizens who were just getting used to the new tax, rolled out in 2018. It also comes at a time when many people are grappling with reduced incomes from furloughs and pay cuts as businesses struggle to survive.

Al-Jadaan said the tax increase won’t have much impact on revenue this year because people were spending less under the curfew, but it “will help more next year and the year after as we get out of the Covid-19 crisis”.

Beginning in June, the Saudi government will also end a cost-of-living allowance paid to state workers. The 1000-riyal monthly allowance was granted in 2018 after complaints from citizens about the financial impact of austerity measures taken during the last oil price rout. However, the allowance was supposed to be temporary, so the government decided to cancel it, Al-Jadaan said, calling the effect “very limited”.

“What we have seen from the announced measures are the ones that the team – both economists and other experts – thought would be the least damaging to the economy and the fiscal strength of the country,” he said. – Bloomberg