Economic Impact of VAT Increase
Overview
Saudi Arabia’s dual shock of the coronavirus pandemic and a crash in oil prices has led to more than SAR270 billion ($72 billion) in stimulus spending and a significant deficit in the first quarter. Oil exports fell more than 65 percent in the month of April while the Kingdom’s flagship crude grade Arab light hit a low of $14 per barrel as global oil demand collapsed. Saudi Arabia’s decision to raise the value-added tax (VAT) to 15 percent is a bold, long-term decision that demonstrates the Kingdom’s commitment towards its economic reform agenda. The pandemic has accelerated the need for increased non-oil income and raising the VAT is one of the avenues that will help achieve diversification. In the short term, there will be fiscal and economic challenges as citizens face increased consumer prices and businesses face lower demand amid a global recession in 2020. In the long term, the Kingdom’s decision is geared towards retaining its fiscal strength in a post-COVID world and reaffirming a commitment to its Vision 2030 non-oil programs.
