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Saudi Arabia announced a slew of austerity measures to cope with the fiscal impact of the coronavirus pandemic and oil price rout, tripling its value-added tax (VAT) and cutting allowances for government workers.

The steps taken to shore up revenue and rationalize spending are valued at about 100 billion riyals ($26.6 billion) in total, according to the official Saudi Press Agency.

“While the measures that were taken today may be painful, they are necessary and beneficial to protect fiscal and economic stability in the short and long term,” Finance minister Mohammed Al-Jadaan said in a statement on Saudi Press Agency.

He said non-oil revenues were affected by the suspension and decline in economic activity, while spending had risen due to unplanned strains on the healthcare sector and the 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 in the medium to long term, which requires more spending cuts and measures to support non-oil revenues stability,” he added.

Already under a strict curfew to contain the spread of the coronavirus pandemic, the world’s largest oil exporter is facing a simultaneous crisis caused by the oil price rout and global crude production cuts to help balance the market. The price of Brent crude crashed by more than 50% in March, contributing to a record $27 billion monthly drop in the Saudi central bank’s net foreign assets.

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

The VAT, introduced in 2018, will be increased to 15% from 5% starting July 1.

Beginning in June, the government will end a monthly cost-of-living allowance paid to government workers.

The allowance was granted in 2018 after complaints from citizens about the financial impact of austerity measures taken during the last oil price rout.

A committee will study the salaries and benefits given by government entities outside the civil service umbrella – where employees are often paid significantly more than typical state employees – and give its recommendations within 30 days

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 occasion of Ramadan. The payments will include 1,000 riyals for each family and 500 riyals for each dependent.

The austerity measures introduced on Monday comes as spending outstripped income, pushing the kingdom into a $9 billion budget deficit in the first quarter.

The central bank’s foreign reserves fell in March at their fastest rate in at least 20 years and to their lowest since 2011.

Oil revenues in the first three months of the year fell 24% from a year earlier to $34 billion, pulling total revenues down 22%.

Some operational and capital spending will be canceled or delayed.

Spending will be reduced on some programs under Crown Prince Mohammed bin Salman’s “Vision 2030” economic transformation plan.

In a country that has no elections and where political legitimacy rests partly on distribution of oil revenue, the ability of citizens to adapt to reforms aimed at reducing oil dependence and improving self-reliance is crucial for stability.

On social media, some Saudis appeared prepared to accept austerity measures, posting pictures of, and pledging support to, Crown Prince Mohammed bin Salman who said in 2017 that the kingdom may go back to austerity measures if it passes through another critical stage.

When the kingdom last stared down the crash in crude, it wielded reserves that peaked at over $735 billion in 2014. The stockpile was down by over a third just three years later, channeled almost entirely toward deficit spending.

Saudi Arabia may now be blowing through its reserves at the fastest pace in at least two decades, but the government is barely using the holdings to cover fiscal needs. Following its debut in international bond markets in 2016, borrowing covered most of the budget deficit in the first quarter.

With its buffers already fragile and the economy waylaid by the coronavirus, Saudi Arabia is looking to scale back spending and rely more on debt.

March’s drop of over 5% in the central bank’s net foreign assets still brought the stockpile to just $464 billion, the lowest since 2011.

“It’s a very critical situation for Saudi Arabia,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Pressure will increase in the second quarter with lower oil prices and production.”

Now, as crude prices collapse again, the political implications are far-reaching: officials will need to find a way to contain the fiscal damage while still supporting the economy and jobs for Saudis. That’s increasingly urgent as a demographic bulge of young people enters the workforce.

In a recent presentation for Saudi officials, Harvard economist Ricardo Hausmann suggested that the government cut the public sector wage bill as well as “major planned investments” to help cope.

With a large portion of Saudis employed by the state, public sector salaries are the biggest chunk of government spending – 55% last quarter. That’s a 2% increase compared with the same period last year, while spending on health and social development fell 13% over the same period.

Yet slashing government salaries or firing workers are unlikely choices in the current crisis, as officials insist that supporting citizens is their top priority and roll out stimulus packages for businesses.

Meanwhile, military outlays were up 6% last quarter compared with the same period in 2019, highlighting how an end to the kingdom’s five-year war in Yemen, if it were to be negotiated, could give a small boost to the budget.

But despite the looming declines in Saudi oil revenue, Goldman Sachs says reserves may be depleted at a slower rate already this quarter, pointing to factors such as external borrowing and a likely drop in imports as a result of measures taken to contain the pandemic.

Saudi Arabia has already tapped international bond markets twice this year and has borrowed a total of $19 billion from local and international investors.



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