Saudis, UAE introduce VAT; Oman projects budget deficit

DUBAI/MUSCAT: Saudi Arabia and the United Arab Emirates introduced value-added tax from yesterday, a first for the Gulf which has long prided itself on its tax-free, cradle-to-grave welfare system. Saudi Arabia compounded the New Year blow for motorists with an unannounced hike of up to 127 percent in petrol prices with immediate effect from midnight.
They are the latest in a series of measures introduced by Gulf oil producers over the past two years to boost revenues and cut spending as a persistent slump in world prices has led to ballooning budget deficits. The five percent sales tax applies to most goods and services and analysts project that the two governments could raise as much as $21 billion in 2018, equivalent to 2.0 percent of GDP.

But it marks a major change for two super-rich countries where the mall is king. Dubai has long held an annual shopping festival to draw bargain hunters from around the world to its glitzy retail palaces. Saudi Arabia has deposited billions of dollars in special accounts to help needy citizens face the resulting rise in retail prices. The other four Gulf states – Bahrain, Kuwait, Oman and Qatar – are also committed to introducing VAT but have delayed the move until early 2019. None of the Gulf states levy any personal income tax and none have any plans to do so.

The International Monetary Fund has repeatedly urged Gulf states to diversify their revenues away from oil, which accounts for more than 90 percent of the Saudi budget and 80 percent in the UAE. Both Riyadh and Abu Dhabi asked all companies with earnings of $100,000 or more a year to register in the VAT system. The UAE finance ministry said that VAT returns will be used “for infrastructure development … (to) upgrade public services … and boost UAE economy competitiveness.”

The hike in fuel duty in Saudi Arabia was the second in two years. But it still leaves petrol prices as some of the lowest in the world. High-grade petrol rose 127 percent from 24 cents a litre ($1.09 a gallon) to 54 ($2.46), while low-grade petrol rose 83 percent from 20 cents a litre (91 cents a gallon) to 36.5 ($1.66). Duty on diesel and kerosene remained unchanged.
The introduction of VAT coupled with the increase in fuel duty is expected to bring an abrupt end to a year of negative inflation in Saudi Arabia. Riyadh-based Jadwa Investment predicted that inflation could reach as much as five percent after the new measures. Saudis reacted sarcastically on social media to the new sales tax. “They are even taking taxes on car parking. I am afraid they will next tax the air,” wrote Ahmed bin Fatima.

Saudi Arabia, whose economy contracted by 0.5 percent last year for the first time since 2009, has introduced a raft of measures to raise revenue and cut spending as it bids to balance its books. Last month, it cut the government subsidy on electricity supply for the second time in two years, leading to a sharp rise in bills. Riyadh posted budget deficits totaling $260 billion over the past four fiscal years and does not expect to balance its books before 2023. To finance its mounting public debt, the kingdom has withdrawn around $250 billion from its reserves over the past four years, reducing them to $490 billion. It has also borrowed around $100 billion from the international and domestic markets.

Meanwhile, Oman adopted yesterday its 2018 budget projecting a deficit of $7.8 billion due to low oil prices, but said the shortfall is declining. Like other energy-rich Gulf states, Oman was hit hard by the slump in oil prices since mid-2014 and joined an agreement by oil producers to cut production in a bid to shore up prices. Revenues in 2018 are estimated at $24.7 billion, up just three percent on last year, with spending projected at $32.5 billion, seven percent higher, according to a statement by the finance ministry.

Despite measures to reduce dependence on oil, income from crude is estimated to account for 70 percent of total revenues, the ministry said. In 2017, the ministry said the country posted a higher-than-expected deficit at $9.1 billion due to cuts in oil production in line with an agreement by OPEC and non-OPEC members. The ministry said the budget shortfalls have been on the decline due to raising non-oil revenues and higher oil income. To finance the budget deficit, Oman last year raised $11.2 billion in debt in the form of bonds, Islamic sukuk and loans. It plans to raise $6.5 billion this year, the ministry said. About one-third of the budget spending this year has been earmarked for social services, education and health, the statement said. – Agencies

This article was published on 01/01/2018