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VAT Increase to Support Fiscal Imbalance, Preserve Reserves in Saudi Arabia

VAT Increase to Support Fiscal Imbalance, Preserve Reserves in Saudi Arabia

Friday, 3 July, 2020 - 09:30
Saudi Arabia embarked on the implementation of the amended VAT at the beginning of July, Asharq Al-Awsat
Riyadh – Mohammed al-Hamidi

Saudi economists confirmed that Saudi Arabia’s move to increase its value-added tax (VAT) to 15 percent does not primarily aim at increasing state revenues, it is led by a deeper policy where it aims to achieve fiscal balance while maintaining reserves amid a drop in consumerism.

This will enable the Kingdom to provide needed services and sustain jobs.

Former Chief Counselor and Director General of Investment at the Saudi Arabian Monetary Agency Khalid Al-Sweilem said that the recently amended VAT is intended to support the fiscal imbalance between public revenues and expenditures caused by the negative impact of the coronavirus crisis.

“The Kingdom achieved advanced results compared to other countries in maintaining the citizens’ jobs in both public and private sectors, and the strength of its services, in healthcare and other fields,” Al-Sweilem said during a webinar to discuss the economic impact of the pandemic.

Al-Sweilem pointed out that delay in applying the controls does not achieve what is required in such a crisis, but may produce counterproductive results.

Current circumstances, according to the economist, show the importance of controlling financial policy and building adequate reserves to face crises, because it is not possible to develop sectors and diversify the economy without confirming control and sustaining fiscal policy in the long run.

According to Al-Sweilem, the Kingdom’s economy differs from some models in various advanced economies. The Saudi economy depends on oil and government spending, from this stems the importance of sustainability, financial stability and well-being of the citizen.

But Saudi Arabia can no longer base its financial and economic policies only on oil.

“You cannot trust the current prices because it doesn’t mean they will remain the same. We can’t base our future … on oil prices after what we just saw,” Abdullah Alrebdi, board member of Saudi Financial Association (SAFA), said.

Alrebdi was referring to the oil price war earlier this year after Russia walked away from a deal with OPEC and nine other oil exporters to curtail supplies.

In May, the Saudi government announced that it would raise value-added tax (VAT) from 5 percent to 15 percent starting from July 1.

Asked why the government does not lower the VAT again following the stabling of oil prices, Alrebdi said this was a long-term plan.

“The government is looking at 2021, 2022 and 2023 … and how to fund public salaries, maintenance and other services,” he said, adding that the VAT was “part of the solution, but not the solution.”

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