Friday 9 December 2016

Saudis look to cuts and new taxes to tackle the crude oil price crisis

Alaa Shahine, Deema Almashabi and Glen Carey

Published 05/04/2016 | 02:30

Construction work in the capital, Riyadh. Photo: Bloomberg
Construction work in the capital, Riyadh. Photo: Bloomberg
Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman. Photo: Reuters

The biggest economic shake-up since the founding of Saudi Arabia would accelerate subsidy cuts and impose more levies, a plan to spread the burden of lower crude prices among a population more accustomed to government largess.

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Deputy Crown Prince Mohammed bin Salman said the measures would raise at least an extra €87bn a year by 2020, more than tripling non-oil income and balancing the budget.

"It's a large package of programmes that aims to restructure some revenue-generating sectors," the prince said at the royal compound in Riyadh. Non-oil income rose 35pc last year to 163.5 billion riyals (€38.5bn), according to preliminary budget data.

It's a radical shift for a country built on petrodollars since the first Saudi oil was discovered almost eight decades ago. Prince Mohammed (30) and his top aides said the administration navigated plunging oil prices last year through a series of "quick fixes". While there are no plans to tax incomes, his policies would bring the kingdom closer to the rest of the world, where governments rely on charges to fund spending.

The prince said authorities are weighing measures that include more steps to restructure subsidies, imposing VAT and a levy on energy and sugary drinks as well as luxury items. Another revenue-raising plan under discussion is a programme similar to the US Green Card that targets expats in the kingdom.

The strategy would complement a plan to sell a stake in Saudi Aramco on the stock exchange and create the world's largest sovereign wealth fund, steps meant to make the kingdom more reliant on investment income than oil within 20 years. The $2 trillion fund would be big enough to buy the four largest publicly traded companies on the planet.

The government also plans to increase its debt in the meantime to help finance spending and test the market with a dollar bond later this year.

The VAT will bring in about $10bn a year by 2020, while the "restructuring of subsidies" will generate more than $30bn a year, said Prince Mohammed, who appeared at ease discussing technical details and figures of his various plans.

The Green Card-like programme and a plan to allow employers to hire more foreign workers above their official quotas for a fee could generate $10 billion a year each, he said.

Past rulers had avoided radical measures to diversify sources of revenue for fears of triggering a backlash from one of the world's most conservative societies, where government spending, jobs and subsidies kept the economy moving.

Youth unemployment is among the highest in the world and economic growth is set to slow to 1.5pc this year, the worst since at least 2009.

There are currently no income taxes in Saudi Arabia. The government started raising the prices of fuel and utilities at the end of last year, including a move to raise those for petrol by a minimum of 50pc. That brought the price to the equivalent of 22 cents a litre at the end of March, the second-cheapest in the world after Kuwait, according to globalpetrolprices.com, which provides data and analysis on transport fuels.

Prince Mohammed has consolidated more authority than anyone in his position since the kingdom was established in 1932. As defence minister, he leads the military effort. He also oversees ministries including finance, oil and the economy through the Council for Economic and Development Affairs. The council, which was established after his father became king, also controls the Public Investment Fund.

The prince said measures taken by the council last year succeeded in lowering the budget deficit "which could have reached $250bn to less than $100bn."

He said that a decision to delay payments to contractors last year was aimed at "trying to avoid a bigger danger" after discovering that ministries and government bodies could authorize spending of more than $1 trillion based on "decrees over the last few years."

The government has paid about 70pc of all arrears and expects "that all or 95 to 98pc of all arrears will be paid" over the next two weeks, Minister of State Mohammad bin Abdulmalik Al-Sheikh said.

"During the boom years, there were no solid fiscal controls so the bureaucracy could spend without a limit and the government would always pay," he said. "Now, we've put the fiscal controls in place." (Bloomberg)

Irish Independent

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