Saudi Arabia 2020 inflation rises to 3.4% after VAT tripled

Saudi Arabian inflation rose to 3.4 per cent in 2020, lifted by the tripling of value-added tax last year as the kingdom sought to boost state revenues hit by the coronavirus crisis and lower oil prices, government data showed.

The main drivers were prices of food and beverages, which increased by 9 per cent, and transport, up by 3.8 per cent, the General Authority for Statistics said on Thursday.

Inflation spiked in the second half of last year due to the VAT hike to 15 per cent. The rise followed a mild inflation rate in the first part of the year and a deflationary trend in 2019, when the annual rate was minus 2.1 per cent.

The economy of the world’s largest oil exporter contracted sharply last year, but data suggests the rate of decline slowed in the third quarter as some Covid-19 restrictions were lifted.

Business surveys in recent months showed a rebound in economic activity, partly due to pent up consumer demand, although economists have said the VAT hike has weighed on the pace of recovery.

“The effects of July’s VAT hike will continue to keep the headline rate elevated until the middle of this year,” Jason Tuvey, senior emerging markets economist at Capital Economics, said in a note.

“But as the impact of fiscal austerity weighs on domestic demand and holds back the economic recovery, underlying price pressures are likely to soften.”

In December, the inflation rate was 5.3 per cent, official data showed, its weakest reading since the tax hike, with a monthly decline in the inflation pace of food and beverages offsetting a rise in health inflation. — Reuters