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December 26th, 2016:

Expat fee, subsidy cuts: What’s in Saudi fiscal balance document

An “excise tax on harmful products” — including a 50 per cent tax on soft drinks and a 100 per cent tax on tobacco and energy drinks — will be implemented from the second quarter of 2017. — Bloomberg News’s-in-Saudi-fiscal-balance-document

Riyadh: Saudi Arabia followed a historic budget announcement last week with an 84-page document outlining how the Arab world’s largest economy plans to balance its budget by 2020. The document includes plans to curtail capital spending, raise new revenue and stimulate the private sector.

Following are highlights of what caught our attention:

Capital expenditure:

Authorities reviewed projects with a total cost of SR490 billion ($131 billion) under the five civilian ministries with the highest capital spending. Of the total, SR270 billion had already been spent and the revision identified potential savings of SR100 billion.

The next phase will see the government examining capital spending at 13 entities with a total cost of about SR1.18 trillion. To control the costs of projects, the government is creating a strategic procurement unit.

Subsidy reforms:

Additional subsidy cuts will involve a steady change in energy and water prices from 2017 to 2020. This is expected to help the kingdom save SR209 billion annually by 2020.

The government is looking to increase prices of local retail fuel by linking them to benchmark oil prices or to the average of gasoline and diesel fuel prices on the international market. Prices will change according to fluctuations in the international market and they will be revised periodically.

In 2016, a reduction in fuel and electricity subsidies saved the state between SR27 and SR29 billion despite a halt to a planned water subsidy reduction. The kingdom sees gross saving from the reforms reaching SR59 billion in 2017, SR107 billion in 2018 and SR142 billion in 2019, the document says.

The partial reduction of subsidies has also helped slow the growth in energy consumption to 1.7 per cent in the first half of 2016 from 3.5 per cent in the same period a year earlier.

Taxes and fees:

The government plans to introduce a slew of taxes and fees, raising additional revenue of SR42 billion in 2017 and SR152 billion by 2020. In 2017, Saudi Arabia will introduce an unprecedented “expat levy” on foreign workers with dependents.

The fee will start at SR100 per month in July and rise each year to reach SR400 a month in July 2020, according to the document. It is unclear whether the fee will be assessed for each dependent.

The government will also raise the monthly fees paid by employers that have more foreign workers than Saudis. It will no longer waive the fee for businesses have fewer expats than nationals, instead charging them a “discounted rate.”

An “excise tax on harmful products” — including a 50 per cent tax on soft drinks and a 100 per cent tax on tobacco and energy drinks — will be implemented from the second quarter of 2017. A 5 per cent value-added tax will be imposed in the first quarter of 2018. The government is studying taxes on sugary drinks and snacks.

Authorities will also impose “luxury tariffs” from the first quarter of 2018, the document says, without elaboration.

Private-sector stimulus package:

In the document, authorities acknowledge that confidence in the economy has declined, private sector employment has dropped and real consumption per capita is falling. To counter that, officials on Thursday announced a stimulus package for the private sector worth SR200 billion ($53.3 billion) until 2020.

The fund will provide “attractive investment capital to support the private sector,” the document says. It will be directed to raising the efficiency of industries with high energy and water usage. The package may be extended beyond 2020.

There are also plans to ease rules governing foreign ownership of companies and land, increase the mobility of foreign workers and deregulate industries like tourism and entertainment to reduce barriers to growth, the document says.

Outlook for the economy, decision making:

Overall, the newly-announced measures will increase private investment, consumption and growth over the next four years, the document predicts. The government foresees a slight rise in unemployment in 2018 followed by declines in 2019 and 2020.

Inflation is seen accelerating each year as new measures are introduced.

The kingdom pledges that there will be “no additional financial impositions’ by the government on its citizens or private sector” beyond what’s already mentioned in this document.

There will be no further removal of subsidies There will be no income tax imposed on citizens There will be no corporate income tax There will be a grace period between policy announcements and action There will be no delay in contractor payments. The government will pay within 60 days of “due dates.” There will be no retroactive decision-making.