Saudi markets reel after government announces dramatic tripling of VAT

Saudi shares plummeted early on Monday after the government rolled out a series of drastic measures to control the devastating economic impact of coronavirus and a drop in oil prices.

The kingdom's Finance Minister Mohammed Al-Jadaan announce VAT would be trippled to 15 percent and a cost of living allowance for government workers would be suspended, due to grave economic difficulties.

In a statement he said the "painful" moves were "necessary and beneficial to protect fiscal and economic stability in the short and long term".

Immediate shock waves swept through Saudi markets, the Tadawul all share index - the largest capital market in the MENA region - fell as much 3.5 percent in Riyadh.

Key culprits in the fall were Al-Rajhi Bank, Saudi Aramco and Riyad Banks, which dipped between 2.3 percent and 3.1 percent.

Monday's austerity measures - valued at around 100 billion royals ($26.6 billion) - will see the temporary suspension or cancellation of the operating and capital expenditure of several government departments, according to Reuters.

Significant cuts will also be made to the programmes and projects which form part of Crown Prince Mohammed bin Salman's 2030 reform initiative to reduce the kingdom's dependency on oil - known as Vision 2030.

In 2018, state employees were granted monthly handout payments equalling 1,000 riyals ($267) from after the government raised domestic petrol prices and introduced VAT, causing living costs to surge. Around 1.5 million Saudis work in the government sector, according to Reuters, citing figures released in December.

"These measures are painful but necessary to maintain financial and economic stability over [the] medium to long term... and overcome the unprecedented coronavirus crisis with the least damage possible," Monday's statement added.

Al-Jadaan's announcement came as Saudi government spending outstripped its revenues, running a $9 billion budget deficit in the first quarter of 2020.

With that time frame, oil revenues plunged a staggering 24 percent compared to last year, to $34 billion, bringing down total government revenues down 22 percent. The dip has been compounded by a drop in demand for oil, with the price of a barrel falling two-thirds since the start of the year.

In March, the central bank also recorded the fastest drop in the rate of its foreign reserves in at least 20 years.

In 2015, the country implemented a range of strict austerity measures which hit the public sector hard in an attempt to cushion the impact of the-then collapsing price of oil.

Lavish bonuses were cut, along with overtime payments - seen as indispensable in a country where political legitimacy is intimately tied to the distribution of oil revenue.

Monday's development to fight the impact of coronavirus will now slow the pace and scale of the economic reforms launched by MbS.

But it remains unclear whether the prince's dream project NEOM - a $500 billion mega-city set to be built from scratch along the kingdom's picturesque western coast - will be impacted.

Agencies contributed to this report.

Read also: Rare Saudi resistance threatens to upend Crown Prince MbS's plans for futuristic megacity project 

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