LOW CRUDE OIL PRICES FORCED SAUDI ARABIA TO CUT SUBSIDIES ON WATER, DIESEL, KEROSENE AND PETROL
LOW CRUDE OIL PRICES FORCED SAUDI ARABIA TO CUT SUBSIDIES ON WATER, DIESEL, KEROSENE AND PETROL
By:
Nurudeen Dauda
June 10, 2016
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Saudi Arabia is the largest exporter of crude oil among the OPEC producing countries with 9.475million barrels daily production; petrol and Gas price were hiked . Also subsidies were cut, the decision shook the government. Petrol prices has been increased by up to 40% and Gas by 50% after the country suffered a record $98billion budget deficit this year. The nation is the world's biggest exporter of crude oil and has been suffering cuts to fuel and utility subsidies. The 2016 budget projects revenues at $137 billion, the lowest in six years, and spending at $224 billion, slightly below 2015 projections of $229 billion.
The Kingdom of Saudi Arabia which raised its petrol and Gas prices has also cut subsidies on diesel, kerosene and water. Prices will also increase for electricity under the cuts, which were decided by the council of ministers headed by King Salman, the official SPA news agency was reported which was confirmed by the Economist. The amount of reserve assets held by the Saudi government now stands at $593 billion (£411 billion), more than $150 billion (£104 billion) down from its recent peak in late 2014, just before oil prices started plummeting.
This development comes at a time when the country posted the highest budget deficit in its recent history at N19.4 trillion ($98 billion) in 2015, following the trend of dwindling oil prices. In its 2016 budget, presented by King Salman on Monday, the deficit will be reduced in to N17.2 trillion ($87 billion), with the total budget at N44.4 trillion ($224 billion).Like Nigeria, the Kingdom is forced to cut subsidies and resort to domestic and foreign borrowing in order to meet its budgetary obligation of funding deficit.“The budget comes in light of lower oil prices and economic and financial challenges on regional and international levels…our economy, with the help of God, has what it takes to overcome the challenges,” King Salman said while addressing the nation.
On Dec. 29, Saudi Minister of Finance Ibrahim al-Assaf was quoted as saying to Al-Hayat newspaper, “Saudi Arabia will gradually apply a value-added tax of 5% as of the beginning of 2016.” Saudis thus entered 2016 anxious and pessimistic about the future. Long lines of cars stretched for hours outside gas stations on the evening of Dec. 29. The oil price hike will kick in as per the Saudi Cabinet decisions. In its Dec. 28 session chaired by the Custodian of the Two Holy Mosques King Salman bin Abdul-Aziz Al Saud, the Cabinet announced new fees on numerous services and the lifting of subsidies on numerous goods, notably petroleum derivatives.
Mohammed bin Salman gave an interview to The Economist on Jan. 4, In the interview, he denied any taxes had been imposed, other than the 5% value-added tax on accessories, soft drinks and cigarettes. Saudi Arabia had never imposed any tax system in the past, except on foreign companies operating inside the kingdom, who are taxed 20% of their profits and 5% of annual transfers. However, the Saudi Department of Zakat and Income Tax does collect a 2% zakat (obligatory charitable payment) from Saudi and Gulf companies operating in Saudi Arabia. The total revenues of the department amounted to 30 billion riyals ($8 billion) in 2015.
Saudi Arabia is raising $10bn from a consortium of global banks as the kingdom embarks on its first international debt issuance in 25 years to counter dwindling oil revenues and reserves. The landmark five-year loan, a signal of Riyadh's newfound dependence on foreign capital, opens the way for Saudi to launch its first international bond issue. It comes as the sustained slump in crude encourages other Gulf governments, such as Abu Dhabi, Qatar and Oman, to tap international bond markets.The government raised the amount it wanted to borrow from $6bn-$8bn to $10bn after the deal was oversubscribed. Saudi Arabia may now raise its first global bond in the wake of the loan deal, bankers said. Institutions that loaned the most would be set to benefit from a mandate to help Riyadh raise the bond."The loan is a way for Saudi Arabia to test the waters and set up an international borrowing profile," said Ewen Cameron Watt, chief investment strategist at Blackrock, the world's largest asset manager. "This is paving the way for the kingdom to transform from a creditor nation into a debtor nation. It's a significant moment of change in debt markets."
The strategy of raising debt overseas aims to slow the drawdown of foreign reserves and reduce pressure on local banks, which have been supporting state related companies and buying Saudi domestic bonds for almost a year. The lead lenders, each pledging around $1.3bn, include Bank of Tokyo-Mitsubishi, HSBC and JPMorgan, bankers say. Lenders were required to lend at least $500m to participate. The loan is Saudi Arabia's first international debt issuance since 1991, when it raised around $1bn in the aftermath of the Iraqi invasion of Kuwait. Bankers are now confident that Saudi state-related companies will also seek to raise funds, using the sovereign loan, and later bond, as a benchmark.
Gulf Cooperation Council group of countries--Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain and Oman--have agreed to introduce a value-added tax across the region in 2018.
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