The tripling of VAT comes at the same time as the suspension of some social benefits and led to a sharp increase in purchases of goods this week, ranging from cars to construction materials.
This austerity measure is not going down well with the population as it will weigh on the incomes of households, who are used to the largesse of a rich state, the world’s leading exporter of crude oil. It should also have an inflationary effect and reduce consumption in the kingdom, which is emerging from three months of confinement.
“Cuts, cuts, cuts everywhere,” laments a teacher in Riyadh, lamenting the over-pressure of subsidies by the government, which is trying to reduce its budget deficit.
“Air conditioning, television, household appliances,” he told AFP, listing his purchases over the past few days. Goods that are now “unaffordable”, he said.
Thanks to its oil wealth, the kingdom has been able to do without taxes for decades. It did not introduce a 5% VAT until 2018, as part of a plan to reduce its dependence on black gold.
In May, the Covid-19 crisis prompted the government to announce the tripling of VAT and the end of a social allowance.
These austerity measures could put to the test a decades-old social contract whereby citizens received generous subsidies and grants in exchange for their loyalty to the ultra-conservative monarchy.
The rising cost of living also raises questions about the billions of dollars spent on major projects or acquisitions abroad, such as the proposed purchase of English football club Newcastle United.
This week, however, businesses took advantage of the shopping frenzy and increased offers and discounts to attract customers.
The manager of a gold shop in Ryad told AFP that its sales had risen by 70% in recent weeks, while a car dealer reported a 15% increase in orders.
But everyone is expecting sales to stagnate in the medium term.
On the inflation front, the British consultancy and research firm Capital Economics is forecasting a 6% increase in prices in July compared to the same month last year, compared to +1.1% in May compared to 2019.
“The government ended the lockdown (in June) and there are signs that economic activity has begun to recover,” Capital Economics observes in a report.
“Nevertheless, we expect the recovery to be slow under austerity measures,” it warns.
“”Saudi Arabia is taking risks with restrictive tax policies,” says Tarek Fadlallah, managing director of the Middle East department at the investment management firm Nomura Asset Management.
But the kingdom has little choice because of its declining oil revenues and the impact of containment on the economy.
Its finances have suffered another hard blow: after suspending the Umrah – a small Muslim pilgrimage – the authorities have had to drastically reduce the number of pilgrims to the hajj this year because of the pandemic.
Only about 1,000 people will be allowed to make the annual Muslim pilgrimage to Mecca at the end of July, compared to 2.5 million last year.
By 2019, these pilgrimages had generated some €10.6 billion in revenue.
The International Monetary Fund (IMF) has warned that the kingdom’s GDP will contract by 6.8% this year, its worst performance since the 1980s.
The austerity campaign could bring in some 100 billion riyals (23.7 billion euros) for the treasury, according to the state media. Far from the record budget deficit of 112 billion dollars (99.7 billion euros) expected this year, according to the Saudi group Jadwa Investment.