Pretax spree Saudis pack shops, buy gold, cars before VAT hike

The tripling of value-added tax to 15 percent is meant to boost Saudi revenues amid its worst ever economic decline.

People in Saudi Arabia rushed to buy goods from imported fruit juices to cars ahead of a sharp rise in value-added tax (VAT) on July 1, introduced by the oil-rich kingdom to boost state revenues amid its worst-ever economic decline.

The tripling of VAT to 15 percent comes against a backdrop of lower consumer spending and an easing of inflation due to a three-month coronavirus lockdown that was fully lifted on June 21.

Supermarkets in the capital, Riyadh, were packed over the weekend as shoppers stockpiled non-perishable goods. Furniture and appliances stores offered discounts to lure buyers.

“Demand has been very weak but people are now actively buying ahead of the VAT so there is a bit of demand,” said Najem Alotaibe, a car dealer in Riyadh.

‘More expensive’

Jaber al-Sahari, who works in a gold shop, also reported an increase in demand in the last two weeks.

Saudi Arabia announced the VAT increase and suspension of a cost of living allowance in May, shocking citizens and businesses expecting more support from the government.

“Life is getting more expensive. I bought some imported food and juices and stored it because prices will rise,” said Sarah, a Saudi mother of two.

In recent months inflation eased to approximately 1 percent due to low demand for non-food items and reduced fuel prices, but some analysts expect it to surge by up to 6 percent year-on-year in July due to the VAT increase.

Authorities this month increased import tariffs to contain a ballooning fiscal deficit, which the International Monetary Fund projects at more than 12 percent of the gross domestic product (GDP) from 4.5 percent last year.

These steps could reduce the overall deficit by 4.5 percent to 6 percent of the GDP, but may dampen economic recovery, Arqaam Capital has said.

For Abu Omar, an Egyptian expatriate, the VAT increase comes on top of a 20 percent salary reduction due to the coronavirus crisis.

“So now I have to live with 35 percent less, this will be very difficult with three kids,” he said.