Austerity measures announced in Saudi Arabia will depress infrastructure activity

Following the news that the Saudi Government decided to raise value-added tax (VAT) from 5% to 15%, effective July 1st, and to suspend cost of living allowance paid to state workers starting from June 1st;

Yasmine Ghozzi, Economist at GlobalData, a leading data and analytics company, offers her view on the worsening situation in the Kingdom with regards to the COVID-19 outbreak and the decline in oil prices:

“The Kingdom posted a US$9bn budget deficit in the first quarter of 2020. The central bank’s foreign reserves fell in March to their lowest since 2011. Oil revenues in the quarter of 2020 fell 24% from a year earlier to US$34 billion, dragging total revenues down 22%.

“The Saudi Government’s revenues will suffer from the low oil prices and this will likely impact the government’s economic spending program and mega infrastructure projects in the pipeline. In the short-to-medium term, the government’s diversification drive will be severely disrupted. Saudi Arabia will cut some allocations for Vision 2030, with a total cost of SAR100bn (US$26.6bn).

“Delays in awarding contracts among other tough measures could push back the execution of high-ticket projects under Vision 2030. The construction of both the tourism hub on the Red Sea and the entertainment city outside of Riyadh will have their timelines extended as announced by the finance ministry.

“Social infrastructure and oil and gas projects now have the highest priority in terms of investments but the pace of spending will slow. To further improve spending efficiency, a ministerial committee has been established to study the financial benefits paid to all employees, contractors, and entities that include the Vision 2030 programs, and present its recommendations within 30 days.

“Religious tourism suffered a setback when the Kingdom took the decision to close off the holy cities of Mecca and Medina to everyone, thus barring Umrah during the holy month of Ramadan and the high likelihood of cancelling the annual Hajj pilgrimage. The third phase of the Grand Mosque in Mecca has been paused.”

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