By Salman Parviz

Saudis react to economic squeeze

May 15, 2020 - 13:10

Saudi Arabia and the UAE introduced the five percent Value Added Tax (VAT) in January of 2018, a first for the Persian Gulf region which had long prided itself on its tax-free, cradle-to-grave welfare system. On the same day, Saudi Arabia announced a petrol price hike of 127 percent. Measures were taken to boost revenues, cut spending, and lowering the ballooning budget deficits.

The other four Persian Gulf Arab states – Bahrain, Kuwait, Oman, and Qatar – decided to delay the introduction of VAT in 2019. No announcement on the introduction of VAT has been made by any of the above-mentioned yet.

Saudi finance minister on Monday said the Kingdom will triple VAT and halt monthly “cost-of-living allowance” payments for the 1.5 million state employees in new austerity measures amid record low oil prices and a coronavirus-led economic slump. These measures shift the burden of the falling oil prices squarely on the shoulders of the ordinary Saudis.

“It has been decided the cost-of-living allowance will be halted from June 2020 and VAT will be raised from five to 15 percent from July 1,” Mohammed al-Jadaan said in a statement released by the Saudi Press Agency.

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

The government was also “canceling, extending or postponing” expenditures for some government agencies and cutting spending on major state projects introduced as part of an ambitious Vision 2020 reform program to diversify the oil-reliant economy, the minister added.

Crude plunge

Prices of global benchmark Brent crude start the year around $66 a barrel. By the end of February, Brent was trading around $50 a barrel as coronavirus lockdowns severely curtailed oil demand.

The Saudis wanted to counter the crude price plunge by deep supply cuts but failed to convince Russia to play ball.

Riyadh retaliated in March by lowering the price it charges for crude announcing a surge in output -- moves designed to steal a share of higher-cost producers like Russia and U.S. shale oil firms.

Brent subsequently closed out in March around $22 a barrel.

Two U.S. senators introduced legislation to remove U.S. military troops and equipment from Saudi Arabia if the kingdom did not stop pumping so much crude.

Last month OPEC+ agreed to cut output by a record 9.7m barrels a day, but by then the global demand had already fallen around 30m barrels a day due to the measures intended to prevent the coronavirus from spreading.

In March Saudis dig into their savings at the fastest pace in nearly 20 years. The kingdom has gone to the international debt market by issuing $7 billion worth of bonds last month alone. But the kingdom cannot simply borrow its way out. Austerity measures were also needed by ramping up VAT from five to 15 percent. Now Saudis citizens will face inflation caused by tripling of VAT along with a reduction in their disposable income of the breadwinner starting in June.

Pundits believe that the austerity measures can lead to social unrest with the existence of a social contract between the ruler and ruled that pivots on a generous welfare state in exchange for political obedience.

This Tuesday Aramco reported a 25 percent fall ($16.64 billion from $22.17bn last year) in first-quarter net profit as Brent crude prices fell 65 percent despite Russian and Saudi announcement of 9.7m barrels in output cuts starting from May.

Aramco had kept output at 9.7m bpd during the first three months of the year before opening its taps in April after the collapse in earlier supply cut talks with Russia.

Hajj & Umrah cancellation

Apart from the earnings from crude exports, one of the kingdom’s bread earners is tourism in the form of pilgrimage. The kingdom has asked Muslims to postpone their pilgrimage this year because of the health risks but the annual pilgrimage is still officially scheduled for late July.

On March 4, Saudi authorities canceled the umrah, a voluntary meritorious pilgrimage, for its citizen. Foreign citizens were already barred from traveling to the kingdom for umrah.

Official figures from 2019 indicate that more than 7.5 million people performed the minor pilgrimage.

Like many countries, the kingdom has enforced a lockdown and curfew in an attempt to stem the outbreak. If the Hajj pilgrimage cancellation is implemented, it will be added to a list of almost 40 dramatic cancellations since the first pilgrimage in year 629.

In 2012 Saudi Arabia was the epicenter of West of Asia Respiratory Syndrome coronavirus MERS-CoV virus originated from infected camels. Although it had a higher fatality rate of 34 percent its rate of infection was lower than Covid-19 and the disease was contained.
Returning back to this year’s Hajj pilgrimage, the absence of millions of pilgrims in Mecca and Medina this year will have devastating consequences for the tourism industry of the country.

Every year, more than two million perform the five-day religious ceremony of Hajj where pilgrims gather for a set of rituals in Mecca, traveling together to several sites in the outskirts of the city and then visiting the holy city of Medina, 300 miles away, where the Prophet Muhammad (S) is buried.

Saudi National Tourism Committee emphasized the need to restructure the sector to make it major contributor to the national economy as early as 2016 when the tourism sector contributed $22.6 billion to the Saudi GDP with Hajj and Umrah providing $12 billion.

Economist Abdullah Katib estimates the annual revenue from Hajj season at $5.3-6.1 billion about “40 percent of this revenue comes from housing, 15 percent from gifts, 10 percent from food and the remainder from other services.”

The kingdom’s reputation in the broader Muslim world has taken a battering in the past few years, with the tumultuous rise of Crown Prince Mohammed bin Salman, its disastrous war in Yemen, and the gruesome murder of Jamal Khashoggi.

The Hajj stampede of 2015 resulted in the deaths of over 2,400 pilgrims. Through DNA samples from victim’s families, only 11 Iranian bodies out of 389 repatriated were identified. Riyadh’s lack of control and taking sufficient preliminary safety measures was criticized worldwide.

Riyadh needs to be cautious because the implications of neglect this time around can be global.

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