Saudi authorities may have underestimated the financial cost of royal handouts dolled out to citizens complaining about rising prices, according to Bank of America Merrill Lynch.
The government will spend 61.8 billion riyals ($16.48 billion) on a package that included paying civil servants a monthly 1,000-riyal ($266) allowance for a year and restoring annual pay raises suspended in 2017, London-based economist Jean-Michel Saliba wrote in a report. Officials said the package would cost about 50 billion riyals.
King Salman issued the royal order this month after public complaints about the impact of higher fuel prices and the introduction of a 5 percent value-added tax.
The measures will likely make the government more reliant on higher oil prices to boost revenue, chipping at the credibility of Crown Prince Mohammed bin Salman’s plan to end the economy’s addiction to hydrocarbons.
“Nearly all announced payments risk having a permanent impact on the budget,” Saliba wrote. “They may not be phased out in a year, especially as they set a precedent and their re-introduction or continuation would be anticipated by Saudi nationals if further fiscal reform efforts push inflation higher.”
The government will also pay part of the newly introduced VAT recently implemented to help diversify state revenue. The measures will almost wipe out savings planned in this year’s budget, according to Cairo-based investment bank EFG-Hermes.
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