IMF commends Saudi Arabia reforms, urges VAT increase to 10 per cent

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The fund said that economic reforms have started to yield results and the outlook for the economy is positive, however, volatility in global oil prices poses uncertainty.

Wednesday 11, September 2019

The International Monetary Fund (IMF) said that Saudi Arabia should consider raising value-added tax (VAT) to 10 per cent from the current five per cent, adding that the Kingdom needs a tighter fiscal policy to safeguard its budget in case of a decline in oil prices.

Saudi Arabia introduced a five per cent VAT in January 2018 to improve non-oil revenue generation after the plunging of oil prices in 2014 dented revenues across the region.

According to the IMF, “The introduction of the VAT in January 2018 was a landmark achievement with revenue collections exceeding expectations, consideration should be given to raising the VAT rate from five to 10 per cent, in consultation with the GCC.”

The IMF said that the implementation of announced fiscal measures such as the further energy price reforms, increases in the expatriate levies and allowing the 2018 cost-of-living allowances to expire at end-2019 is of paramount importance as planned.

The Saudi government is continuing to implement economic and social reforms, the reforms are beginning to have a positive impact on the economy and non-oil growth is picking up, although more jobs need to be created to reduce unemployment and absorb new labour market entrants, said IMF.

The Kingdom’s budget deficit is expected to increase this year to 6.5 per cent of GDP from 5.9 from of GDP in 2018 as higher government expenditure is likely to curb the upside of stronger non-oil economic growth.

The fund said that targeting budget balance by 2023 is appropriate but delivering on this objective will require fully implementing the revenue and energy price reforms as well as limiting the future growth of government spending.

Additionally, oil revenues are expected to be broadly unchanged from 2018 while non-oil revenues are projected to increase due to higher VAT revenues, a further increase in the expatriate levy and because previously earmarked revenues are being brought on budget.

Saudi Arabia recently led OPEC in cutting crude production to support oil markets, but the slowing oil demand and the weakening global economy have kept prices under pressure.

TAGS : International Monetary Fund, VAT, OPEC, non-oil revenue, economic diversification, reforms

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