Saudi Arabia has announced on Monday that starting July 1, value added tax (VAT) will increase from 5 percent to 15 percent in a bid to aid its economy mid pandemic. The kingdom has also revealed that living allowances - a 1,000-Saudi riyals ($266) per month allotment to state employees - will be halted starting June 1. 

Both VAT and allowances were launched in 2018. The former was placed to guide Saudi Arabia's economy away from its reliance on oil, while the latter was introduced to alleviate financial burdens (VAT introduction and increased petrol prices) faced by the employees of the public sector. 

"These measures are painful but necessary to maintain financial and economic stability over [the] medium to long term... and overcome the unprecedented coronavirus crisis with the least damage possible," finance minister Mohammed al-Jadaan said in a statement, according to BBC.

The novel coronavirus pandemic has taken a toll on many sectors worldwide, meaning the remaining surviving industries in each country won't be able to carry the economic load independently. 

Experts are expecting more GCC countries to follow the steps of Saudi Arabia in increasing taxes. For now, UAE's finance minster ruled out any such plans. 

Source: Ajel

The first three months of 2020 saw the kingdom dive in a $9-billion budget deficit after state spending outpaced income, which was mainly caused by a drop in oil prices and revenues. 

"At the same time Saudi Arabia's central bank saw its foreign reserves fall in March at their fastest rate in at least two decades and to their lowest level since 2011," BBC reported.

According to Ernst & Young tax expert Sanjeev Fernandez in an interview with Arab News, the 15-percent VAT rate could be permanent as it would push the Saudi government to continually invest in sectors that are non-oil related. 

"Ultimately, sustainable government spending in an economy creates jobs, which in turn stimulates economic activity and growth," Fernandez explained. 

The International Monetary Fund (IMF) has advised Arab governments to increase taxes to meet global standards, especially that oil prices and consumption have plummeted during the pandemic. 

Religious tourism and its impact on Saudi Arabia's economy

Kaaba in Mecca (left, 2019) and Kaaba on the first night of Ramadan (right, 2020). Photo Credits: Reuters.

Home to the holiest two cities in Islam, Mecca and Medina, Saudi Arabia is also facing greater losses as religious tourism - and tourism in general - has been suspended this year. 

It's no hidden mystery that the kingdom relies heavily on oil revenues for a huge chunk of its budget (87 percent to be exact). However, there's also no denying that the oil-rich nation has been shifting gears to diversify its revenue streams in recent years. Religious tourism has always been one major contributor in this realm; leisure tourism had been turning into a contributor as well before COVID-19 pushed the progress off the rails. 

In 2017, around 2.4 million Muslims descended on Mecca to perform the annual pilgrimage, Hajj. Of these, some 1.8 million came from outside of Saudi Arabia. An estimated 2 million people were expected to travel to Mecca and Medina for the annual pilgrimage this year. The large swarms of people who visit Saudi Arabia to embrace their spirituality bring in billions of dollars to the kingdom's economy. 

According to numbers released by the national real estate committee at the Council of Saudi Chambers in 2018, both Hajj and Umrah pilgrimages were expected to generate $150 billion in income in Saudi Arabia over a period of five years. 

"The hajj industry is probably one of Saudi Arabia's most valuable treasures due to the money it generates for Mecca and Medina, and the wider hajj logistical train," Theodore Karasik, a senior adviser to Gulf State Analytics, a Washington DC-based consultancy, once said

One of the key goals under Saudi Arabia's ambitious Vision 2030 is to increase the number of tourists who visit the country and revenues generated from the sector to 18 percent in the next decade or so. But with all its operations - from religious tourism to leisure tourism - suspended, it seems as though that goal is not attainable at the moment.