Kuwait trails foreign investments in the region

Kuwait, along with other Gulf Cooperation Council (GCC) states, is keen to attract Foreign Direct Investment (FDI) and leverage it to help diversify the economy, provide employment for young nationals, and encourage the private sector to play a greater role in economic growth and development of the country.

Over the years, GCC countries have in general been open to global trade, but less forthcoming when it came to opening up for global investments, probably from a fear that it could dilute their sovereignty. But the 2008 global financial crisis shattered this long held view, and the mid-2014 precipitous fall in oil prices further hammered home the realization that just being open to global trade and relying on government investments to diversify the economy were clearly not enough.

With various studies consistently showing that domestic resource mobilization on its own was not sufficient, and that FDI could contribute significantly to both productivity and income growth in the domestic markets, many GCC states began looking at attracting FDI. A slew of measures were introduced by states, including updating archaic legislation, launching new investment and companies laws, and reforming capital market rules. In Kuwait, one of the main entities tasked with implementing the government’s economic goals, including attracting FDI, is the Kuwait Direct Investment Promotion Authority (KDIPA).

Established in 2013, the KDIPA contributes to the national goal of economic diversification, job creation and quality training for nationals, through, among others, attracting and encouraging value-added and innovation-based direct investment into Kuwait. The authority is also mandated to receive and approve investment licenses and grant incentives, as well as collaborate with other stakeholders to  streamline business environment in Kuwait so as to enhance the country’s global competitiveness.

Presenting its annual report for the fiscal year 2018/19 that ended in March 2019, the KDIPA noted that it approved new foreign investments worth around KD156 million. The report also revealed that cumulative investments from January 2015, when the  KDIPA  commenced  its operations, until the end of March  2019, was a little over KD960 million (US$3.2 billion).

In his foreword to the annual report, the Director-General of KDIPA Dr. Meshaal Jaber Al Ahmad Al Sabah said that the expected economic and social impact from these investments are extensive at it encourages direct and indirect employment and training opportunities for nationals, transfers latest technologies from abroad, supports local research activities, and enhances the local economy by generating networks in the sectors  associated  with  these  projects.

In recent years, the momentum to attract FDI by reducing barriers and offering incentives has gathered pace in the region, with Kuwait and other GCC governments taking various steps, including further liberalizing foreign ownership regulations, strengthening corporate governance, and reducing non-tariff hurdles to investment by streamlining administrative processes and automating border procedures, as well as offering long-term residency schemes by some states.

According to a report by PricewaterhouseCoopers (pwc), as of the end of March 2019, total foreign ownership of GCC equities stood at about US$60 billion, or about 6 percent of market capitalisation. But this investment is not spread evenly across the six-nation GCC bloc. For the last six years, the UAE has been the Gulf’s leading destination for FDI and, since 2017, the country has attracted more inward FDI each year (around $10bn) than all the other five GCC countries combined.

Among the GCC states, Bahrain’s economy is the one most dependent on foreign investments as it represents around 90 percent of GDP. On the other hand, Kuwait, despite being an early mover in investment liberalization, is the least dependent on FDI as it represents only 12 percent of GDP. Not being desperate for capital has allowed Kuwait to pick and choose its FDIs. “The focus is on high-quality direct investments, with the emphasis being more on adding value and assisting the transition to a knowledge economy. It’s more quality than quantity,” said Dr. Meshaal Al-Sabah of KDIPA.

In line with this thinking, the FDI flow to Kuwait came from around three dozen companies and were mainly in the service sector, particularly in construction, energy, health, consultancy, training, market research, software and information technology, oil and gas, and in entertainment services.

Data from global investment monitor, fDi Markets, corroborates this investment mix, with their figures showing that investments to Kuwait from 2013 to 2018 totalled nearly $4 billion and that the top sectors for greenfield investments were in business services, real estate and financial services. Interestingly, fossil fuels ranked ninth as a greenfield FDI sector over this period, revealing that Kuwait’s FDI profile is a more balanced mix of sectors than the overall economy.

Further figures from fDi Markets on investments in GCC states show that during the five-year review period from 2013, Kuwait lagged its neighbors in foreign direct investment. The UAE topped the regional list with 1,582 greenfield investment projects worth nearly US$50 billion, followed by Saudi Arabia with 414 projects worth around $43 billion; Oman came in third with 179 projects valued at nearly $17 billion, and Bahrain with 159 projects totalling over $9 billion in fourth spot. Qatar with 173 projects valued at around $5 billion was also ranked higher than Kuwait which received a total of 73 projects totalling around $4 billion.

Global agencies such as the World Bank, the International Monetary Fund, the World Economic Forum and the Organization for Economic Cooperation and Development (OECD) have for long been reiterating that countries in the region need to diversify the economy and bring about reforms to attract more foreign investment, as it could have a huge impact on their growth. They point out that a diversified economy with higher foreign investment can support stronger, sustained, and more inclusive growth by improving the allocation of resources across sectors and producers, creating jobs, triggering technology spillovers, promoting knowledge, creating a more competitive business environment, and enhancing productivity.

Experts have estimated that closing the FDI gap could lead to a one percentage point increase in real non-oil per capita GDP growth, while closing the export gaps could add a further 0.5 percent to GDP growth. However, boosting non-oil exports and attracting more FDI requires a supportive policy environment, including for the authorities to invest more in human capital development and enhance labor market efficiencies.

Unfortunately, Kuwait’s experiments in these fields have been less than salutary. The government’s nearly decade-long ‘Integrated Education Reform Program’, which was conducted in coordination with the World Bank, and aimed at improving the quality of education provided to students in the country, has not delivered the anticipated results.

Though the program ended in 2019, Kuwait still performs poorly in international education standings. The World Economic Forum’s Global Competitiveness Index 2017-2018 ranks Kuwait 95th out of 137 countries for the quality of its higher education and training. The country also ranked 119th for labor market efficiency, despite reforms designed to improve productivity and boost competitiveness in the non-oil economy.

Incidentally, reforming the education system to better prepare youth to become competitive and productive members of the workforce, and developing a sustainable diversified economy are key pillars of the government’s New Kuwait development plan, which aims to transform the country into a leading economic, commercial and cultural hub in the region by 2030.