Citizens across Saudi Arabia poured into stores once coronavirus lockdown restrictions were lifted in June, hoping to save money on non-perishable goods from food and clothing to electronics and cars ahead of the Kingdom’s tripling of its value-added tax, or VAT, CNBC reported.
Riyadh announced the levy — which increased from 5% to 15% on July 1 — in May as a means of boosting state revenue as oil prices plummeted as the pandemic lockdowns battered the economy.
But it could hurt consumer recovery, some experts say, warning that the jump in spending of the last month could come to a screeching halt through the rest of the summer and into the fall, CNBC adds.
“People attacked the malls and shopping centers. It looked like Black Friday sales,” Ali Almarri, a business owner living in the eastern city of Khobar, told CNBC. Almarri wanted to buy a new car before the tax increase set in, only to find that cars were completely sold out at every dealership he visited. “A salesman at one dealership told me they sold more cars in the last month than in the prior five months. People want to save money and they don’t want to have to pay the VAT.”
The VAT isn’t the only new policy the Kingdom has implemented in the wake of the virus and crushed oil demand. Saudi Arabia has also suspended its cost of living allowance for public sector workers, and announced cuts and delays to projects that were part of Vision 2030. The fiscal austerity measures come as the entire Gulf region is reeling from the double blow of global lockdowns and the lowest oil prices in two decades.
Tarek Fadlallah, CEO at Nomura Asset Management Middle East, described the Kingdom as facing a “triple whammy.”
“This is going to have a huge impact on the Saudi economy … it’s a triple whammy because in addition to lower oil prices and also the pandemic, we have an expat exodus which is taking place at the moment as people lose their jobs,” he told CNBC’s “Capital Connection” on Wednesday. “So we are already in a very, very difficult situation. And the increase is not just high by those regional standards. We are fairly new with VAT experiments across the region. But a 10% hike is virtually unprecedented anywhere in the world. And so this is going to have a massive impact on disposable income and a huge impact on consumption-related industries.”
Almarri believes that after June “people are going to spend less, definitely. People will be discouraged by seeing they have to pay 10% more than usual.”
Fadlallah agrees. The VAT jump “has a tremendous impact on household spending capacity,” he said. “So, whether it’s going to be absorbed easily remains to be seen but my guess is that August, July, September, October, they’re going to be particularly difficult months for the consumption sectors, given that we had a build-up in purchases over the last few weeks.”
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