Saudi Arabia is taking extreme measures to manage their finances after the collapse of oil prices, as the COVID-19 outbreak capsized the economy and jeopardized the Saudi Prince’s master plan of reducing the nation’s reliance on crude exports.
This week, KSA, the biggest exporter of oil in the world, declared a series of a plan to increase their funds, which includes a quick cutback in cash handouts to the citizens and raising the sales tax to as much as 15 percent, starting from July.
Saudi Arabia is taking drastic steps to shore up its finances after the oil price crash and the coronavirus pandemic upended the economy and threatened Crown Prince Mohammed bin Salman’s grand plan to reduce its dependence on crude exports https://t.co/Ub5akkZaJa
— CNN (@CNN) May 12, 2020
The drastic measures will help the government put back on the track and will add an extra 8 percent to the yearly economic output of Saudi Arabia, after deducting spending cuts from the budget that was announced at the start of the year, says credit ratings agency Moody’s. The rise in tax is corresponding to five per cent of GDP.
KSA failed miserably in a market share war
Meanwhile, the KSA government announced that they would increase their oil production cuts up to 1m barrels a day in the month of June. One of their many attempts to raise prices after losing the war for market share with America and Russia and a sudden downfall in demand triggered by a coronavirus epidemic sent the crude oil to its record-breaking low prices.
On Tuesday, The state oil company Saudi Aramco stated that their net profit of the first quarter dropped down to 25 percent and Saudi Oil prices faced the worst collapse of history since 1991. They further added the Brent crude prices roughly jumped by 2/3 during the first three months of 2020, which later sharply fell to 23 dollars a barrel by the late-march. In April, the American oil prices become negative for the first time ever in the history but recovered quickly since.
Saudi Aramco, the state oil company, said Tuesday that its net profit fell 25% in the first quarter https://t.co/kL4onAMIql
— CNN Business (@CNNBusiness) May 12, 2020
Before making plans this week to increase the revenue, Saudi government needed a great boost in oil prices to balance their huge budget, including social spending as well as the military expenditures. The sudden downfall could also compel Muhammad Bin Salman to rethink about his grand plan to expand the economy through different projects, such as futuristic city and several tourism plans.
Crashing crude oil prices put Saudi Arabia’s war chest into the dump
The war funds of Saudi Arabia are also decreasing with an agitating rate, which they were rising through the sale of crude oil.
The researcher at the Center of Global Energy Policy from University of Columbia, Christof Rühl, expresses that the timing for oil to crash is absolutely worse because other attempts for diversifying their economy aren’t any good right now. They didn’t put serious thought on it, and it would be much more challenging to do that now with their war chest emptying very fast.
Moving forward, a lot of question arises whether the oil production cut by KSA and other partners can tackle the quick drop in demand initiated by COVID-19 pandemic. If it fails, the prices would remain the same and keep hurting the country’s economy.
Rühl believes it is a fact that prices would remain way lower than they expected in their budget plan in a long time.