KPMG: Saudi Arabia’s deflation expected to normalize in 2020

Riyadh: 28 August 2019  – KPMG Al Fozan & Partners, the leading provider of audit, tax and advisory services in Saudi Arabia, today released its report on the inflationary trends in the Kingdom of Saudi Arabia, which analyzes the inflationary trends from 1964 to 2019.

Saudi Arabia overhauled its tax system to increase revenue from its non-oil sectors as it successfully introduced VAT in January 2018.  The VAT for most goods and services, such as food and beverages, domestic transportation, hotels, private education, and private healthcare, put upward pressures on prices, as inflation reached to 2.5 percent in 2018 from -0.8 percent in 2017.

“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 percent 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 normalizing in 2020,” commented Dr. Hussain Abusaaq, Chief Economist and Head of Research, KPMG Al Fozan & Partners.

While the timing of the introduction of tax-based reforms and energy reforms might not be favorable due to the prevalence of deflationary situation in 2017, the benefits of such reforms are likely to very good for the Kingdom in the long-run.

“In the short run, VAT is expected to cause minimal one-off price rise. In the long term, it is not likely to cause a significant or sustainable increase in underlying inflation,” he added.

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

Saudi Arabia’s Small and Medium Enterprises Authority (SMEA) supports SMEs by 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 programs, 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,” Dr. AbuSaaq concluded.