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VAT tripled in Saudi Arabia, preceded by a buying spree

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Ryad (AFP)

The Saudis rushed to consumer goods before the tripling of the VAT, which drops Wednesday to 15%, an unpopular austerity measure imposed in the midst of the economic crisis due to the Covid-19 pandemic and the collapse of prices petrol.

The tripling of VAT comes at the same time as the suspension of certain social benefits and led to a sharp increase in purchases of goods this week, ranging from cars to building materials.

This austerity measure goes badly with the population because it will weigh on the income of households, accustomed to the largesse of a rich state, the world’s largest exporter of crude. It should also have an inflationary effect and reduce consumption in the kingdom, which emerges from three months of confinement.

“Cuts, cuts, everywhere cuts,” laments a teacher from Ryad, deploring the overpressure of subsidies by the government which is trying to reduce its budget deficit.

“Air conditioner, television, household appliances”, he enumerates to AFP, drawing up the list of his purchases in recent days. Goods now “unaffordable”, according to him.

Thanks to its oil wealth, the kingdom has for decades been able to do without taxes. 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.

– “Slow recovery” –

These austerity measures could test a decades-old social contract by which citizens received generous subsidies and help 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 purchase project of the English football club Newcastle United.

This week, businesses took advantage of the shopping spree and multiplied offers and discounts to attract customers.

The manager of a Ryad gold shop told AFP that sales have increased by 70% in recent weeks, while a car dealership has reported a 15% increase in orders.

But everyone expects stagnation in sales in the medium term.

Listed inflation, the British consultancy and research firm Capital Economics forecasts a price increase of 6% in July compared to the same month last year, against + 1.1% in May compared to 2019.

“The government ended containment (in June) and there are signs that economic activity has started to recover,” Capital Economics said in a report.

“Nevertheless, we expect the recovery to be slow as a result of the austerity measures,” he warns.

– “Risks” –

“Saudi Arabia is taking risks with restrictive fiscal policies,” said Tarek Fadlallah, director general of the Middle East department at investment management firm Nomura Asset Management.

But the kingdom has little choice due to the decline in oil revenues and the impact of containment on the economy.

His finances suffered another blow: the authorities had to, after suspending Umrah – a small Muslim pilgrimage – drastically reduce the number of pilgrims to Hajj this year due to the pandemic.

Only a thousand people will be allowed to make the great annual Muslim pilgrimage to Mecca in late July, up from 2.5 million last year.

In 2019, these pilgrimages had generated some 10.6 billion euros 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 the public treasury some 100 billion riyals (23.7 billion euros), according to 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.

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