Proactive reforms needed for a better future

A recent statement attributed to the Ministry of Finance said that the ministry is reviewing Law No.79 of the year 1995 pertaining to the fees and financial costs applied to utilities and public services, with the aim of amending some of these charges. The ministry is understood to have submitted a report on this matter, and other financial reforms and plans, to the Council of Ministers for further consideration and action.

Restructuring fees and other amendments and reforms were needed to increase efficiency and further enhance the development of regulations, policies and procedures in government bodies, said the ministry in its statement.  Hinting that other financial measures were also being planned in this context, the ministry said adoption of revised tax laws through the drafting of new tax procedures and selective taxes, was also being considered.

Shortly after news of this move emerged, lawmaker Ahmad Al-Fadel, who heads the parliamentary committee for state priorities, said the statements revealed that the ministry is thinking along the lines of introducing taxes on businesses in the country. He affirmed that he would forcefully oppose any such moves. As chairman of the parliamentary committee on state priorities I will make sure that “the implementation of VAT and the GCC selective tax will never see the light,” said the parliamentarian.

With finances strained from a low oil price scenario, the six-nation grouping of Gulf Cooperation Council (GCC) states had agreed in 2016 to introduce a uniform 5 percent Value-Added-Tax (VAT). However, when it came to the time for rollout in January 2018, only two countries, Saudi Arabia and the United Arab Emirates introduced VAT, the other four agreed to postpone its launch due to internal political exigencies. Bahrain eventually launched VAT at the start of this year, while the remaining three have delayed the introduction without assigning any firm date for its launch.

Kuwait cited the potential negative impact on consumer spending and the technical challenges involved in implementing a new tax, as reasons for delaying VAT. While it is true that introducing a clear, efficient and effective VAT will take a lot of hard work, analysts believe the real reason for the delay was due to the government’s apprehension about getting the law passed through the National Assembly, where many lawmakers are vehemently opposed to VAT. In May of 2018 the parliament’s powerful budget committee is reported to have said that Kuwait would not implement value-added tax (VAT) before 2021 at the earliest, but would push ahead with plans to implement a ‘sin’ tax on select goods, such as tobacco, energy drinks and carbonated drinks.

Kuwait clearly needs a proactive government that is capable of successfully overcoming hurdles and objections from a contentious parliament, and finding suitable solutions to potential problems before they become intractable issues. The country needs the authorities to take firm decisions and implement them efficiently. Sadly, the country has lacked such bold and perspicacious actions implemented in a timely manner and as a result has lurched from one problem to another. Most of the responses could, at best, be termed as lukewarm, reactive measures that invariably totter at the slightest signs of opposition from citizens and lawmakers.

Moreover, the government’s reactions usually come only when it is left with no other option. For instance, take the government’s response in the aftermath of the precipitous fall in oil prices in mid-2014. Faced with lower oil revenues that induced tighter economic and financial conditions, the government introduced a slew of austerity measures to cut spending and raise savings in ministries and public entities.

The authorities also took steps to encourage the private sector, reduce bureaucracy and enhance the business climate.To its credit, the government even announced a valiant plan to restructure salaries and rationalize employment benefits of public sector employees. The most visible aspect of the belt-tightening came in the form of raising the price of fuel by 40 to 80 percent in 2016 and reducing the energy and water subsidies in 2017.

The World Bank, the International Monetary Fund and economic experts lauded the steps taken by the government. But soon, the lofty reforms started to crumble one by one. Following public resentment and scathing attacks on the austerity moves by members of the country’s litigious parliament, the government began to roll back or scale down many of the measures that it had begun to implement. Lawmakers vehemently opposed to the increase in tariffs, argued that the higher rates would impact inflation and raise the price of goods for Kuwaitis.

As expected, the government’s resolve to remain firm on its decisions collapsed. The statement from the authorities that price hikes were needed to encourage consumers to rationalize consumption, also appeared hollow when the largest consumers — Kuwaiti households — were exempted from the increased electricity and water charges, and the hike in fuel prices was softened for citizens by providing them with up to 75 liters of free petrol each month.

Besides delay in launching VAT and excise taxes, as well as watering-down the subsidy cuts due to objections from lawmakers, the government has also not been able to push through parliament a new debt law. The country urgently needs a new debt law to enable it to approach the international bond market with new sovereign debt issues. But lawmakers have been reluctant to give the green signal, fearing it could lead the government to accumulate heavy debt that would burden future generations.

The government has smoothed over the successive deficit budgets in recent years by dipping into the country’s General Reserve Fund. But, over the last few years, this fund has been dwindling as it was not being replenished by a steady flow of excess oil revenues. In January, parliament approved the government budget for the fiscal year 2019/2020 which envisages a deficit of KD7.7 billion, after the mandatory 10 percent of revenue was transferred to the Future Generations Fund. The budget showed an expenditure of KD22.5 billion on a revenue of KD16.4 billion, with the budgetary shortfall representing 15.7 percent of the country’s gross domestic product (GDP) and marking the fifth year in a row that Kuwait was running a deficit.

The budget also shows that salaries and bonuses of public sector employees at KD15.98 billion takes the biggest bite (71%) on expenditure, leaving only KD3.83 billion (17%) for capital spending, and the remaining KD2.7 (12 %) for all other expenses. The government is now hoping that somehow its 17 percent spending on capital expenditure will stimulate economic growth in the country this year.

Since the government cannot touch the public wage bill, or introduce any plans that impose taxes or raise the cost of public services for citizens, or bring about reforms that infringe on entitlements that citizens have become accustomed to, the government is limited to only raising prices or cutting subsidies for expatriates, and perhaps even taxing them in future.

Unrelenting opposition from lawmakers, to the introduction of any meaningful financial, economic and administrative reforms, or to approach the international debt market with sovereign bonds, has meant the government is limited to very few options. It can continue succumbing to popular and legislative demands and run annual budget deficits by dipping from the General Reserve Fund. Or it can decide to take a proactive stance and introduce unpopular   reforms today so as to meet the exigencies of tomorrow.

The Times Report