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Abu Dhabi, UAEWednesday 26 September 2018

Saudi handouts will boost consumption, non-oil economy, economists say

The measures will offset the impact of VAT and fuel price increases

The kingdom is overhauling its economy under Vision 2030, a roadmap unveiled in 2016 to help wean the kingdom off oil income Saul Loeb / AFP
The kingdom is overhauling its economy under Vision 2030, a roadmap unveiled in 2016 to help wean the kingdom off oil income Saul Loeb / AFP

The disbursement of bonuses from the Saudi government and a raft of state-run companies, including Saudi Aramco, will help to offset the high cost of living and alleviate the effect of VAT as well as fuel price increases, but may widen the fiscal deficit, economists said.

Last week Saudi Arabia approved a series of bonuses for public sector employees, military personnel, pensioners, students and beneficiaries of social services for a year starting from January 1.

Under the royal decree, soldiers on duty in Yemen will receive a bonus of 5,000 Saudi riyals (Dh4,896), while state employees will receive 1,000 riyals for one year. King Salman also ordered an allowance of 500 riyals for pensioners and another 500 riyal payment for social security beneficiaries. The state has raised student allowances by 10 per cent for a year, it will bear the cost of VAT for citizens using private health and education services and will also pay the VAT – not exceeding 850,000 riyals – for the purchase of a first home by Saudi citizens.

State-controlled companies such as Aramco, the world’s biggest oil producer; NCB, the country’s biggest lender and Saudi Telecom Company, the region’s biggest telco, also announced their own bonus schemes for their employees.

The new government stimulus measure will cost 50 billion riyals, culture and information minister Awwad bin Saleh Alawwad told Saudi-owned daily Al Sharq Al Awsat. That is equivalent to about 1.9 per cent of the country’s GDP, according to estimates from Oxford Economics and Capital Economics. The stimulus excludes 30bn riyals going to the Citizen’s Account that will allow for cash transfers to low- and medium-income households affected by energy price increases.

The measures “will be an offsetting gain from VAT receipts thanks to the boost to consumption,” said James Reeve, deputy chief economist in London at Samba Fin­ancial Group, the kingdom’s third-largest lender by assets.

“If all the money [of the new handouts] was spent then it would mean a larger budget deficit this year than last, all else being equal.”

In the 2018 budget revealed last month, the kingdom forecast the fiscal deficit to fall to 195bn riyals, or 7.3 per cent of GDP, compared with a shortfall of 230bn riyals, or 8.9 per cent of GDP, in 2017.

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Saudi Arabia, the world’s biggest oil exporter, has introduced levies including 5 per cent VAT and excise tax on energy and fizzy drinks and tobacco in June 2017 to lift government revenues dented by lower oil income. The kingdom expects to generate 23bn riyals from VAT and more tha 9bn riyals from excise tax this year.

The Arab world’s largest economy is overhauling under Vision 2030, a roadmap unveiled in 2016 to help wean the kingdom off oil income by creating new revenue streams and selling state assets, including a 5 per cent stake in Aramco.

However, Saudi reforms and austerity measures affected growth last year, amid a slowdown in the non-oil economy and the country’s adherence to a global oil output cut.

The country, which forecasts 2.7 per cent growth for 2018 and 2019, has taken a series of measures to boost its GDP. In 2017, Saudi Arabia announced a 200bn riyal four-year programme and revealed its biggest-ever budget for 2018, where spending will rise 5.6 per cent to 978bn riyals from 2017.

The bonus announcement “is quite significant…more so from the perspective that policymakers are trying to balance the somewhat conflicting objectives of fiscal consolidation and reviving growth,” said Bilal Khan, senior economist for Mena and Pakistan at Standard Chartered.

Saudi Arabia’s three-planked approach to lift growth through handouts, stimulus and an expansionary budget falls in line with calls from the IMF to slow down the pace of fiscal consolidation to help nudge the economy into growth model.

Saudi Arabia began tightening its purse strings in 2016 to help bring down its fiscal deficit, which reached a record 367bn riyals in 2015 as oil prices plunged.

“We don’t see it [the handouts] as a sign of reform slowdown,” said Mohamed Bardastani, senior Middle East economist at Oxford Economics. “It is intended to soften the impact of VAT and price hikes on the Saudi households and allow them some time to adjust to the new economic realities.”

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