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Diversification critical to economic growth in Kuwait
October 22, 2016, 4:37 pm

The impetus to diversify the economy in Kuwait has never been higher. Revenue from oil exports, which account for 60 percent of the country’s GDP and close to 95 percent of government revenue, has been dwindling. For the second consecutive year, the National Assembly approved a deficit budget for fiscal year 2016/17 (FY16/17) with an official deficit projection of KD 8.7 billion, or 26 percent of gross domestic product (GDP).

After five years of average annual budget surpluses of 21 percent, the country announced its first deficit budget in FY15/16 with a deficit of KD4.6 billion or 13.4 percent of GDP. With oil prices barely touching $50 per barrel throughout the past year, it was no surprise that the country announced a second year of deficit budget.

The low oil price scenario slashed oil revenues in FY15/16 by 46 percent to KD12.1 billion, leading to the budget’s total revenue dropping by 45 percent to KD13.6 billion, the second consecutive year in which the budget posted a drop in revenues. Though taxes and customs notched an increase of 41 percent and 9 percent respectively, total non-oil revenues fell by 39 percent on the back of a decision to postpone Iraq’s reparation of KD1.4 billion in compensation.

Prevailing low oil prices have also led to stagnant economic growth, with the International Monetary Fund (IMF) forecasting Kuwait’s GDP to grow by less than two percent a year for FY 2016/17. This is far below the peak levels of around 15 percent witnessed during the oil boom decade between 2000 and 2010.

Fall in revenues have prompted the government to initiate a slew of economic and fiscal reforms, including cutting expenses and curbing some of the lavish subsidies given to citizens, as well as increasing prices on utilities such as water, electricity and fuel.

But luckily for the country, low oil prices have not diluted the government’s commitment to executing capital spending plans. In fact, capital expenditure of KD2.1 billion in FY 2015/16 was up by 13 percent and plan execution was at its highest pace in nearly a decade. Steady growth was witnessed in capital expenditure on transportation, equipment, projects, maintenances and land purchases.

An inadvertent benefit of the low oil price scenario is that it has compelled the government to re-think some of its economic strategies. Policy-makers are now emphasizing the need to wean Kuwait away from its over reliance on oil revenues through economic diversification. The country’s push for economic expansion involves a multi-pronged approach that includes ramping up infrastructure developments, stimulating greater private sector participation in the economy and encouraging use of renewable energy to ensure sustainable growth and development.

Plans are already underway to meet 15 percent of Kuwait’s energy needs from renewable sources by 2030. The Ministry of Electricity and Water, in association with Kuwait Institute for Scientific Research (KISR), has already begun building a greenfield renewable energy park in Shagaya, about 100km to the north of Kuwait City.

In September 2015, Kuwait signed a KD115 million contract with Spanish firm TSK to construct the country’s first solar power plant in Shagaya Renewable Energy Park. The 60MW project, which is divided into a 50MW thermal solar plant and a 10MW photovoltaic plant, is expected to come online by 2017. When completed, the plant will have one of the largest thermal energy storage capacities in the world and will be able to supply stable electricity 24 hours a day. A separate 10MW wind farm is also planned for the Park; when fully operational by 2030 the Park is expected to have 2,000 MW of installed capacity.

To increase private sector involvement in the economy, the government is also encouraging young Kuwaitis to originate their own start-ups. The country has earmarked KD2 billion or a National Fund for Small and Medium Enterprise Development (SME) to stimulate entrepreneurship among young Kuwaitis and spur the growth of small and medium enterprises. As part of this initiative, the government has set aside KD50 million for workforce training and business incubation programs.

Kuwait has long had a reputation for being rather lethargic when it comes to implementing projects or initiating progressive economic policies, especially when compared to some of its more nimble GCC partners. But Kuwait has a unique advantage in that it is a relatively small country where people can easily unite around a shared vision the problem has been finding that shared vision. Hopefully the entry of young entrepreneurs, the introduction of renewable energy sources and implementation of sustainable development projects could mark a change for the better.


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