Government rhetoric about enhancing non-oil activities, encouraging greater participation of private sector, and diversifying the economy away from its over-dependence on hydrocarbon revenues notwithstanding, oil and gas resources will remain the main driver of growth and development in Kuwait for the foreseeable future.
Importance of hydrocarbon resources to the country’s economy was underlined in the latest macroeconomic outlook for 2020-2022 by the National Bank of Kuwait (NBK), the country’s leading private lender. The bank noted that after underperforming for several years, oil GDP growth is expected to exceed non-oil growth in 2021-22, and push total GDP growth above 3 percent — from the zero percent growth in 2019 and the 1.8 percent growth expected in 2020.
In the meantime, non-oil growth which averaged 2.3 percent in 2016-19, is expected to only maintain a similar or slightly better performance over the next few years.
Although Kuwait has steadfastly complied with production cuts mandated by the Organization of Oil Exporting Countries (OPEC) and its non-OPEC allies since 2017, and is committed to fulfilling its additional quota cut of 55,000 barrels per day set for the first-quarter of 2020, economic growth in Kuwait is expected to rebound in 2020 largely due to oil prices that have averaged above $64 per barrel in the first nine months of fiscal 2019/20.
Moreover, although total oil output fell to 2.66 million barrels per day as a result of new production cuts, economic growth in Kuwait will continue to be propped up by the oil sector in the 2020-2022 period. In the absence of any major geo-political or economic upheaval, hydrocarbons will continue to dominate the economy, from increased output of new gas wells and renewed production from the Neutral Partitioned Zone, as well as from market
demands for refined oil products that are expected to come onstream in the coming years from the Clean Fuel and the Al-Zour Refinery projects, said NBK. However, the crucial role of oil to the economy also remains Kuwait’s main economic vulnerability. The volatility of oil prices on international markets determines the fiscal challenges that the country faces today, and will confront in the future. Hydrocarbon revenues account for over half of the country’s GDP, 92 percent of its export revenues, and 90 percent of government income. High level of government spending under a lower oil price scenario has resulted in concurrent budget deficits that are expected to continue in the near-term.
Latest figures from the Ministry of Finance give credence to the view of continued deficit budgets, with numbers showing that in the first eight-months of the current fiscal year (FY2019/20) Kuwait’s revenues amounted to KD11.5 billion and total expenses reached KD12.2 billion. The budget recorded a total deficit of KD1.8 billion, after including the 10 percent of revenues mandated by law to be transferred to the Future Generations Fund. The deficit during the period under review compared to a surplus of KD2.3 billion in the corresponding eight months of fiscal year 2018/2019.
It is particularly noteworthy that the current deficit comes despite oil prices averaging US$64 during the first eight months of the fiscal year, which was higher than the corresponding period in the last fiscal year. The finance ministry has projected a deficit of KD5.3 billion for the entire FY2019/20, which incidentally is in line with the thinking among analysts, who fear that stagnant oil prices, rising government spending and the lack of measures to boost non-oil revenues will leave a funding gap of around KD5 billion annually over the next four years.
To tide over recurring budget deficits the government has relied on dipping into the country’s General Reserve Fund (GRF) of around KD20 billion. But this fund risks being depleted in the coming years unless oil prices soar, or the government is able to implement meaningful reforms, including passing through parliament the sovereign debt issuance law, which would allow for external borrowings. However, rather than being a source of solution, parliament is where much of Kuwait’s economic woes originate and get multiplied. Government measures to introduce meaningful financial and economic reforms have in the past often been stymied by lawmakers, more eager to please their voter base than support changes necessitated by economic realities.
In addition, amid calls by lawmakers for public sector to replace expatriates and continue employing nationals, steps taken by the government to have private sector absorb the growing number of young nationals entering the labor pool each year, have been less than successful. Though the authorities have alternatively tried cajoling private companies, by agreeing to pay a percentage of the salaries of employed nationals, and compelling them, with a quota system that fixes the ratio of nationals to expatriates employed in a firm, both have so far failed to achieve the desired outcomes.
Parliamentary objections and less than enthusiastic response from private sector have also hindered attempts by the authorities to privatize government entities, such as the national carrier Kuwait Airways, or to shift mega infrastructure projects to the private sector. The one successful private infra-project that the country can boast of — Az-Zour North Integrated Water and Power Project — is a public-private partnership where the Ministry of Electricity and Water has guaranteed to buy the entire power and water generated by the firm for a period of 40 years at an attractive rate. Some would characterize this as a dole-out rather than a business venture.
On the issue of privatization, one cannot deny that privatization of Kuwait Stock Exchange and its renaming as Boursa Kuwait in recent years has been a welcome and positive move on the part of the authorities. This has led to implementation of necessary financial and administrative reforms that allowed Kuwait Boursa to improve its international status and attract a record KD600 million in active and passive flow into the Boursa.But, despite this increased inflow, Kuwait will continue to be a net capital exporter due to low levels of foreign direct investment (FDI) in the country, and given the parliament’s reticence to pass a sovereign debt law.
Available data from global investment monitor, fDi Markets, show that during the 2013 to 2018 period Kuwait lagged neighboring GCC countries in FDI flows. The UAE topped the FDI flow list in the region, with 1,582 greenfield investment projects worth nearly US$50 billion during this period. This was followed by Saudi Arabia with 414 projects worth around $43 billion; Oman came in third with 179 projects valued at nearly $17 billion, and in fourth spot was Bahrain with 159 projects totalling over $9 billion. 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.
In its latest assessment of Kuwait’s economy, global rating agency Fitch Ratings said that Kuwait has been the slowest reformer in the Gulf Cooperation Council in recent years, partly due to political friction between the executive and legislative, and partly due to its exceptionally large sovereign assets, which have dampened enthusiasm for any meaningful reforms. Sadly, while conflicts between an appointed government and an elected parliament have become a recurring feature of politics in Kuwait, it has come at the expense of growth and development of the country and its economy.
But, it is not all negative news, Kuwait has improved its ‘Doing Business’ rank in the World Bank index, and the launch of the new five-year development plan for FY2020/21-24/25 could probably prove a catalyst for necessary reforms. Moreover, there remains plenty of scope for greater investment given the mega projects planned in the power and petrochemicals sectors, as well as the huge backlog in the awarding of many projects over the past two years. But the slow pace of reforms, persistent budget deficits, steady depletion of the General Reserve Fund and the obstructionist policies of parliament, are likely to limit the ability of Kuwait’s economy to shift into top gear any time soon.
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