Riyadh, May 11 (efe-epa).- Saudi Arabia on Monday announced a series of austerity measures aimed at bolstering its finances amid the coronavirus crisis, including cutting investments and subsidies, tripling the value-added tax and further dialing back oil production.
In a statement, Saudi Finance Minister Mohamed al-Jadaan said the VATwill be increased three-fold from 5 percent to 15 percent, while the capital and operating expenses of some government agencies will be suspended, extended or postponed.
These measures will provide savings of 100 billion Saudi riyals ($26.6 billion), al-Jadaan was cited as saying by the state-run SPA news agency.
He also said the Saudi government will eliminate a cost-of-living allowance that King Salman bin Abdelaziz ordered two years ago for public servants and military personnel.
The austerity program also includes reduced allocations for some projects included in Vision 2030, a plan introduced by Saudi Crown Prince Mohamed bin Salman to attract foreign investment and diversify the oil-dependent economy.
“These measures are painful but necessary and will be beneficial to maintain financial and economic stability from a comprehensive perspective over the medium and long term,” al-Jadaan said.
The Saudi government on Monday also announced further cuts to oil production, a move that comes a month after a historic April 12 agreement by OPEC members and their allies, including Russia, to cut output by a combined 9.7 million barrels per day in May and June.
The kingdom will reduce production by an additional voluntary amount of 1 million bpd starting in June to 7.49 million bpd, an Energy Ministry official said.
That will bring the total crude output cut by Saudi Arabia to 4.8 million bpd compared with April’s production.
In approving its 2020 budget last year, the Saudi government projected $222 billion in revenue (with 62 percent coming from its hydrocarbons industry) and a budget deficit equivalent to 6.4 percent of gross domestic product.
The crisis, however, has made those targets unattainable and forced the government to make unexpected additional expenditures on health care and suspend other programs.
In recent weeks, the government moved to protect employment by earmarking $3.2 billion to help cover the salaries of private-sector workers.
Last month, concerns were raised as the Saudi Arabian Monetary Authority ended March with its biggest monthly decline in foreign reserves in at least two decades.
Those reserves still stood at a robust $465 billion in March, although that was a steep drop from $492 billion in February and prompted the central bank to confirm its commitment to maintaining the official exchange rate of 3.75 riyals to the dollar “as an anchor of monetary and financial stability.”
The measures announced by Saudi Arabia will help to partly compensate for the loss in revenue triggered by the steep drop in oil prices, rating agency Moody’s said Monday.
The fresh spending cuts, alongside those announced in March and those approved in the 2020 budget, amount to around 8 percent of GDP, said Alex Perjessy, vice president-senior analyst at Moody’s Investors Service’s Sovereign Risk Group.
He projected that the VAT increase could generate an increase in annual tax revenues equivalent to 5 percent of GDP.
Moody’s, however, noted that because the tax hike will curtail consumer spending in the short term it could be an additional adverse economic factor.
Saudi Arabia has recorded 39,048 confirmed coronavirus cases, the highest in the Arab world, with a death toll standing at 246.
The country has taken restrictive steps since March to fend off the spread of the respiratory illness, including total lockdowns on several cities, the halting of religious pilgrimage trips and the suspension of international and domestic flights. EFE-EPA