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World Economy January 4, 2018

Understanding the Post-Oil Saudi Economy

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Saudi Arabia could manage to run the economy even on zero taxes, thanks to the discovery of crude oil in the country and the escalating costs of petroleum products.As the world’s largest exporter of oil, the West Asian country can boast of an extremely high standard of living of its citizens. The migrant laborers could also find ample work opportunities in the kingdom where local populace can survive without tough labors.

But the year 2014 changed all this. Oil prices fell to half in quick time owing to glut, and the oil revenue of the kingdom has been shrinking since then. The much-talked-about crown prince of Saudi Arabia, who often makes headlines for his bold, sometimes knee-jerk, reforms, has outlined a ‘Vision 2030’ where oil isn’t the lead protagonist. The economy, he foresees, will be driven by other sectors including tourism and innovation in renewable energy.

In simple terms, let us decode where the kingdom is heading in the short-run.

One fact is clearly out in the open- Saudi Arabia is no more the dream destination for migrant workers and the leisure time for citizens is almost over.It can be hard to believe that the nation which supplies most of the oil to the world and influences its global production and pricing has been running a budget deficit, which is likely to stayfor at least next five years.For the first time, Saudi residents will have to shed more money on account of value added tax, which is set to be applicable from next fiscal year.

Inflation has remained high and a 5 percent VAT on goods and services including food, water, fuel and electronic items will only up the miseries of people who are reeling under job cuts and near-zero salary increments. The latest budget also highlights how the government plans to raise non-oil revenues and spend on infrastructure after years of austerity measures that have badly hurt corporate growth.

Not only is the kingdom willing to shift from its ultra-conservative image toward being a country with an inclination towards moderate Islam and acknowledgement of human rights and liberties, it is also contemplating increased earnings from non-oil sectors, something recommended by the International Monetary Fund and following which taxes on tobacco products and soft drinks have been introduced.

Expatriate workers who make up more than a third of the population of Saudi Arabia may be hurt with the imposition of VAT, but they can find solace in the fact that nil income tax policy for both Saudi citizens as well as foreign nationals is to stay, at least for the time being.Key optimistic budget announcements include an increase in capital spending by 13 percent in next fiscal and a hope that contraction ofthe economy in 2017 is set to be reversed in 2018 with 2.7 percent growth, along with the commitment of 72-billion-riyal stimulus package.

Saudi Arabia recently lifted its ban on driving for women and has unveiled the ambitious concept of a futuristic city. All measures indicate that the kingdom is executing its rhetoric in real terms and the prolonged dependency on oil revenues can end given that reforms are planned wisely.

Also read: Brexit moves to phase two-Loss to Indians or Opportunity?

Disclaimer – The views or opinions expressed in the article are the personal opinions of the author and do not in any way reflect the views of Suvipra. Suvipra does not assume any responsibility or liability for the same.

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