Saudi Arabia Triples VAT Rate To Increase State Revenue

Amid a decline in oil prices and a COVID-19 induced slowdown in economic activity, Saudi Arabia has decided to suspend cost of living allowance and increase its value-added tax (VAT) three-fold, to shore up its state finances.

"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," its state news agency said on Monday.

A slump in demand for oil and measures taken to curb the spread of coronavirus pandemic in the kingdom has affected the revenues of the world's largest oil exporter. For the first three months of 2020, Saudi Arabi reported a budget deficit of $9 billion and its central bank's foreign reserves fell at their fastest rate in at least 20 years in March.

Oil revenues fell 24 percent in the Jan-Mar quarter to $34 billion when compared to the same period a year ago, pulling total revenues down 22 percent.

The kingdom's finance minister Mohammed al-Jadaan said in the statement that the measures announced on Monday "are painful but necessary to maintain financial end economic stability over medium to long term."

He said that while Saudi Arabia's non-oil revenues were affected by the suspension and decline in economic activity, its spending had risen due to unplanned strains on the healthcare sector and 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.