Riyadh – Saudi Arabia’s inflation is expected to normalise in 2020 despite that the economy is experiencing a deflationary period at the beginning of 2019, according to a recent report by KPMG Al Fozan and Partners, the leading provider of audit, tax and advisory services in Saudi Arabia.

In January 2018, the kingdom implemented the value-added tax (VAT) in a move to increase revenue from its non-oil sectors.

The VAT was implemented on most goods and services provided in Saudi Arabia, including food and beverages, domestic transportation, hotels, private education, and private healthcare.

The inflation rate reached 2.5% during full-year 2018, compared to 0.8% in 2017, the report said.

“Although the introduction of VAT was essential to achieve some of the Vision 2030 goals, such as increasing non-oil revenue, other economic indicators need to be looked at such as GDP growth, especially considering total real GDP slowed by 0.9% in 2017. However, the economy experienced prices deflationary period at the beginning of 2019, where it is expected to remain for the rest of the year, before normalising in 2020,” Hussain Abusaaq, chief economist and head of research at KPMG Al Fozan & Partners, commented.

He added that the VAT s expected to cause minimal one-off price rise in the short run.

In the long-term run, VAT is not likely to cause a significant or sustainable increase in underlying inflation, the report showed.

Meanwhile, small and medium-sized enterprises (SMEs) experienced a moderate impact from VAT due to high compliance costs, and due to concerns regarding VAT neutrality.

“In response, the government introduced the ‘Private Sector Stimulus Plan’ to stimulate growth, remove any potential obstacles and enhance private sector confidence,” Abusaaq noted.

On the other hand, the Saudi Small and Medium Enterprises Authority (SMEA) supports SMEs through establishing several initiatives such as returning government fees, indirect lending to SMEs, and raising the capital of some existing programs (Kafalah).

“As the government gradually moves towards accomplishing its goal of fiscal balance by 2023, increasing capital expenditure, a greater focus on its fiscal policy, Vision 2030 programmes and Citizen’s Account Program could help to pull out the Kingdom from the current state of prices deflation and into the usual and healthy levels of inflation,” Abusaaq concluded.

Source: Mubasher

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