The impact of dependent tax on markets

July 17, 2017
The impact of dependent tax on markets
Abdullah Sadiq Dahlan


THE economics of operation is meant first and foremost to balance expenditures with revenues and earn a profit. In operation economies, most planners will resort to rationalization of expenditure as the easiest way to achieve the budget balance. There are others who will cut incentives and benefits granted to workers, the most important element of production, to reduce spending.

The second option may balance a company's budget but will reduce the productivity of its workers, who in return for the incentives used to perform to full capacity, thus increasing output while ensuring quality.

In a market economy, any drop in the per capita household income will directly contribute to weakening of the market because of the reduced purchasing power of the consumer, which in turn reduce the demand for products and services, whether essential or luxury.

This theory applies to both Saudis and non-Saudis. We realized the credibility of this theory when the government decided to freeze certain allowances for civil servants. We saw the difference in the purchasing power of the people during the freeze and after it was lifted, and its subsequent impact on the market.

When the allowances were restored, we realized that the negative impact of the freeze was much serious compared to the money it generated for the state coffers.

In light of this experience, let us consider the probable impact of the new levy on expat dependents. We will soon realize that the gross outcome of the move will not be beneficial at all for the national economy. No doubt, it will initially bring money to state coffers but harm the market eventually because in the first year after the imposition of the new tax at least 1 million expats, 75 percent of them dependents, are likely to leave the Kingdom.

The departure of expat families in large numbers will also contribute to an increase in remittances by expatriate workers. Foreign workers will then transfer 80 percent of their salaries to their families back home.

As a result the Saudi market will lose 80 percent of the liquidity provided by about 1 million foreigners, who used to spend this money inside the Kingdom to purchase goods and services.

On the other hand, the new flow of funds will boost markets in the expats' own countries. We will soon start experiencing the negative effect of the levy on the Saudi market, especially the retail sector and institutions that provide such services as healthcare, education and recreation.

The government last year introduced fees for Umrah and family visit visas in an effort to beef up state revenue. Instead of increasing the revenue, the visa fee hike in fact affected the market negatively. The number of visits by family members of foreign workers dropped drastically. Instead of bringing family members to the Kingdom, expat workers traveled to their home countries to spend their vacation with families, resulting in a surge in the flight of money outside the Kingdom.

We should think about the negative effects of SR5 billion leaving the Kingdom every month or SR60 billion annually in foreign remittances of expats as they will transfer 80 percent of their monthly salary — SR5,000 on average — to support their families back home. This will have a negative impact on the sale of products and services in the Kingdom.

I hope the authorities would conduct an exhaustive study on the role of the levy in weakening the purchasing power of expats and its negative impact on the market.

The government’s efforts to Saudize jobs in various sectors have received wide support from all quarters due to its lofty objectives. Its move to establish investment and development projects and generate more jobs will increase the country’s GDP and enhance the prosperity of citizens. I think the government must urgently initiate a study on the negative impact of the new levy, which is likely to create depression in the market and slow down economic growth.

I believe the exodus of 1 million foreign workers and their families within a year will have a very damaging effect on the Saudi economy. The departure of family members will also affect the productivity and behavior of foreign workers. We don’t have enough buildings to accommodate bachelors and at the same time many flats formerly used by expat families will become vacant.

Expressing opinions and absorbing divergent views is the best way to exchange ideas. Voicing an opinion does not mean imposing it on others, but it will help identify weak areas and thus contribute to increasing efficiency. In order to achieve our objectives, we have to avoid all negative aspects as much as possible. A successful plan should not only help us achieve our objectives but also avoid all negative aspects that may harm individuals, markets and the economy at large.

July 17, 2017
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