11 May 2020
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Saudi Arabia announces new fiscal measures to contain deficit

VAT raised to 15% and cost of living allowance suspended.

By Khatija Haque


Saudi Arabia announced today that it has taken additional measures to contain the budget deficit in response to the sharp decline in oil prices this year.  The measures include

  • Increasing VAT from 5% to 15% from 1 July 2020
  • Suspending the cost of living allowance for public sector workers from 1 June 2020

The statement by the ministry of finance indicates that total savings or revenue raised will reach SAR 100bn, or USD 26.6bn.  To put this into context, the original 2020 budget made provision for SAR 1020bn of total expenditure.  Effectively, this is a 10% cut on total spending this year.  It is unclear whether the SAR100bn includes the initial spending cuts of SAR 50bn announced in March or whether it is in addition to those cuts.

Furthermore, in comments to Bloomberg, Finance Minister Al Jadaan indicated that total 2020 spending would be similar to planned levels, with reallocations to ensure that healthcare and essential services would be prioritized and capital spending curbed or postponed.

The authorities are also reviewing salaries at government organisations outside the traditional civil service, which include those focusing on Vision 2030 projects.

Implications for the budget

The decision to raise the VAT rate to 15% is unlikely to boost non-oil revenues this year as consumption has been hit by the restrictions on business activity and movement due to the measures imposed to contain the spread of the coronavirus.  This was confirmed by the finance minister in his interview with Bloomberg, where he said the higher VAT rate would help to restore government finances in the coming years, with little impact expected in 2020.

If we assume that the total savings on SAR100bn are achieved, it would reduce our 2020 budget deficit estimate from 15% of GDP to 13% of GDP.  We assume most of the cuts are in capital spending with current spending down only 5% y/y in total this year.   

If the total savings achieved this year are SAR 150bn (SAR 50bn announced in March and SAR 100bn announced today), the deficit would narrow to 11% of GDP in our view.  Even this lower estimate is significantly wider than the 4.5% deficit achieved last year and the planned -6.4% deficit for this year. 

Wider implications

Further cuts to capital spending by the government will weigh on non-oil sector activity this year and probably next year as well, as government spending remains a key driver of non-oil activity despite efforts to diversify the economy. 

Raising VAT when many households are already facing job losses and salary cuts is likely to exacerbate the decline in consumption this year and increase pressure on businesses.  It is also likely to delay a recovery in spending next year. 

Saudi Arabia’s VAT rate will also be three times higher than Bahrain’s and the UAE’s from July, making those destinations marginally more competitive.  The big question is whether other GCC states are likely to follow KSA in raising VAT in their domestic markets.

Kuwait, Oman and Qatar have not yet implemented VAT and the increased pressure on government finances may finally push them to introduce this tax, particularly in Oman and Kuwait. Bahrain only introduced VAT at the start of 2019 and is unlikely to raise it in the near term in our view.

The UAE’s budget commitments are not as large as Saudi Arabia’s with total spending in 2019 of AED 430bn, around 40% of Saudi Arabia’s budget last year.  While we do expect the UAE’s budget deficit to register a significant deficit of around 11% of GDP in 2020, this follows two years of budget surpluses.  Raising VAT in the UAE at a time when consumers are already struggling with layoffs and paycuts and businesses have seen demand contract severely would be counterproductive in our view.  It would not raise non-oil revenue significantly this year and further weigh on already weak aggregate demand.


Written By

Khatija Haque Head of Research & Chief Economist

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