Saudi Arabia Faces Financial Crisis Amid Oil Price Plunge, Triples Value-Added Tax

[Asia Economy Reporter Naju-seok] Saudi Arabia, hit by the spread of the novel coronavirus infection (COVID-19) and the sharp drop in oil prices, has decided to raise value-added tax and reduce government subsidies.

[Image source=Reuters Yonhap News]

The Saudi Ministry of Finance announced on the 11th (local time) that the value-added tax rate will be tripled from 5% to 15% starting in July. Subsidies that had been provided to public officials and others as a form of living expenses will be cut from next month. Saudi Arabia expects to reduce fiscal expenditures by 100 billion riyals (32.4057 trillion won) through this measure.

Among other measures announced by the Saudi Ministry of Finance are reductions in government-related project expenditures. This includes projects related to the Vision 2030 plan, which Saudi Arabia's de facto ruler Crown Prince Muhammad bin Salman had enthusiastically expressed intentions to promote.

Vision 2030 contains plans to transform the Saudi economy, which has relied on crude oil exports, into industries such as tourism. Saudi Arabia had announced plans to invest massive funds to develop new cities and establish tourism infrastructure, but these plans have been hit by COVID-19.

Saudi Arabia's recent measures were largely influenced by economic difficulties caused by the sharp drop in oil prices and COVID-19. International oil prices have fallen to less than half of what they were in early March, causing Saudi Arabia's foreign assets to plummet.

Saudi Finance Minister Muhammad Al-Jadaan explained, "Although the measures announced this time may be painful, they were indispensable to maintain short- and long-term fiscal and economic stability."

However, despite Saudi Arabia's efforts to cut fiscal expenditures, concerns remain that economic difficulties may intensify. As fiscal revenues decrease due to the plunge in oil prices, Saudi Arabia's foreign exchange reserves are shrinking daily. In March alone, the Saudi central bank's foreign exchange reserves decreased by $27 billion within a month. Experts warn that if Saudi Arabia's foreign exchange reserves, currently around $470 billion, fall below $300 billion, pressure for the devaluation of the Saudi riyal could increase.

This content was produced with the assistance of AI translation services.