Developing the Saudi Austerity Plan

Jan 12, 2018

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The Saudi austerity plan is well underway. On January 1st, 2018, Saudi Arabia and the UAE introduced 5% VAT on services and goods.

Five percent is not a big amount, but energy, water, and electricity prices went up because subsidies were cut. Saudi Arabia has been experiencing a price hike since 2005. Over the years, many new Saudi taxes were introduced on electricity, water, labor, and some government and private services. Prices have gone up further in the past 2 years. This puts more burdens on Saudi households with monthly income lower than SAR 4,400/US$1200. But there were protections as well.

Within the reform process, the government also introduced a minimum wage in 2014 to protect Saudis from being exploited in the market. Obviously, overcharging is a concern to consumers in VAT era.

News on social media reveal huge increases in prices, especially in groceries.

Ahmed Al Kutbi, 27 years old, posted receipts for his coffee on 1st January showing the increased price with VAT. One WhatsApp message I received showed the picture of a sign in front of a supermarket informing customers that prices have raised by not 5%, but by 15% to cover other expenses the business has to bear. The authorities responded immediately. Issuing warnings against fraud and other abuses. In the local newspapers Okaz and Al Madinah, the authorities assured citizens that they were closely monitoring adherence to the new laws. About 250 violations were reported in more than 6,000 businesses inspected over the first two weeks.

Tax ambiguity and the implementation of Saudi austerity plan

One reason for maneuvering by traders and others is that the VAT system in Saudi Arabia is still not entirely clear to everyone. The General Authority of Zakat and Tax (GAZT) has not yet issued a complete list of the goods and services that require VAT. The general rule applies to all services and goods, with few exemptions. For example, law firms have to charge VAT. But do not have to charge in-Kingdom clients if they are providing support or information on setting up business in Saudi Arabia. However, companies that are not headquartered in Saudi Arabia are charged.

In an interview with Dr. Ibtisam Al Harbi from Kuwait University on BBC Radio, she said, “the concept of tax in itself is difficult to understand. So far, it was only Zakat that was paid (religious tax paid on reserve income was set at 2.5%).” A Saudi female lawyer told me that the adjustment period will be about one to two years, and in this time some chaos is expected. The GAZT will not be able to punish or keep track of all businesses while implementation is still in limbo. This is not a very odd situation. The German tax code for example is 700 pages long, and there is no tax inspector who knows all the rules 100%.

The government decided that all raises together might be a bit too much for citizens to bear. Keeping the Saudi austerity plan in sight, it decided to support pensioners and households in the public sector temporarily. It is giving out a monthly amount (€200) of annual bonuses for the prior year.

Overcoming challenges in Saudi austerity plan

In February 2017, the government created the Citizens’ Account program. Which provides financial support to citizens to compensate for the impact of fiscal reforms on low and middle-income households. So far the program has received 144,965 applications for payments, the Saudi Press Agency (SPA) reported. Applicants say the system for applying is user-friendly and efficient.

Despite that, many Saudis expressed their concerns over price rises and the Saudi austerity plan. These changes are in every respect new to everyone. One concern was best expressed in the hashtag “Salary not enough to cover our needs”. More than 110,000 tweets were posted in 10 hours, according to the BBC Monitoring service. The author of the tweet, Ahmed al-Rasheidy wrote, “We don’t allow anyone to question our love for our nation and rulers, but the recent decisions have weighed on citizens and we are appealing to the rulers to reconsider increasing energy prices.” After the announcement, patriotic hashtags including “we are all Salman, we are all Mohammed” were trending on Twitter showing praise for the leadership.

Economist Ihsan Bu-Hulaiga was quoted by Bloomberg saying that the handouts are not a reversal of government policy, but more of a fine-tuning “Imagine yourself doing something for the first time. It’s tricky. This is the first step. We will see how the economy will unfold”.

Welcoming the change from within

Low oil income, little industry, a growing young population that has lately just started to build on skills is the reality of Saudi Arabia. At the same time, there is a new government that is implementing incredible reforms. Reducing the powers of the religious police, combatting corruption by taking money back from corrupt officials and businessmen, women driving, families allowed visiting football stadiums. All these factors helped Saudis slowly gain trust back. They now believe change is really happening.

With this belief comes the responsibility that Saudis will carry for themselves and their country. In the past, few Saudis believed that they were stakeholders in the country. Rather, they believed that they can live there, but few added to its development. That is understandable with the corrupt political and hypocritical social system existing then. When the reforms first started in April 2015 with Vision 2030, not many could make sense of it. The Saudi austerity plan is helping clear the way for future developments. With the focus on Vision 2030, the nation is emerging as one.

These are difficult times for all of us. Reforms open challenges alien to the previous generations. They are a reality now. And perhaps a chance to take our lives back in our hands. To understand that it is our right to live in our land with dignity. It is not for any government to give us anything; we need to do our part. Fighting corrupt traders is one of them. Saudi Arabia belongs to all Saudis and it will never become a better place unless its people work for that. The current reforms are Saudi people’s achievement. we fought long and hard for it.

At JFK Library in Cambridge, Massachusetts, I saw this famous quote “Don’t ask what your country can do for you, but what you can do for your country.” Yes, more should be done. At least the current results show that with consistency, we can. Let’s not ruin this success and continue to carry responsibility for our future. We have proven that we are up for the task.

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