Kuwait benefits from oil price boom but long-term economic challenges loom

Kuwait's Ministry of finance announced on Nov. 20 that it had narrowed its budget deficit for the 2021-2022 financial year more than it had initially forecasted, dropping 72.2% year-on-year to 2.99 billion dinars ($9.71 billion). The improvement comes on the back of elevated oil revenues. 

Meanwhile, the newly elected parliament approved on Nov. 1 the country’s delayed budget for the fiscal year 2022-2023. The budget assumes an oil price of $80 per barrel and a break-even point of $80.4. It forecasts that revenues will be 23.4 billion dinars ($76 billion) with 91% deriving from oil. Expenditure is expected to be at 23.5 billion dinars ($76.3 billion), with around 75% of expenditure being directed toward public sector salaries and subsidies.

After a lackluster performance over the past few years due to the pandemic and depressed global oil prices, Kuwait’s economy is set to have a strong 2022 and 2023. Real GDP is expected to be 8.5% this year, the highest among all GCC countries, according to a recent World Bank forecast.

Kuwait is a major oil producer, holding around 7% of the world’s oil reserves. Oil accounts for around half of Kuwait’s GDP, as well as 95% of exports and approximately 90% of government export revenue.

The Gulf state remains heavily reliant on oil and faces challenges in passing key reforms, an unsustainable public sector wage bill and a lack of a diversified economy.

Kuwait’s domestic politics have also hindered progress in enacting key economic reforms.

Although the emir heads the executive, the country’s 50-seat parliament is responsible for legislative, political and financial affairs, which include debates and ratifications of public budgets as well as key financial bills such as the public debt law.

As a result, Kuwait is subject to frequent political stalemates, a high turnover of government officials, frequent dissolutions of parliament, and has had numerous Cabinets and elections since 2006.  

Bader Al Saif, assistant professor at Kuwait University and nonresident fellow at the Arab Gulf States Institute in Washington, explains that the government keeps changing primarily due to the hybrid political model in place and the need for cooperation and goodwill between both branches for the system to smoothly operate.

“I’d call it the growing pains of a unique political system, and it will eventually come together with hopes for serious political reform and constitutional amendments,” he said.

At the September parliamentary elections, opposition candidates made considerable gains with 16 first-time parliamentarians. As a result, the opposition-dominated parliament could once again prove a challenge in agreeing on reforms proposed by the Cabinet.

“Hopes are high with the formation of the new government, and prioritizing project execution would be one of the key elements of the performance of new ministers,” said Junaid Ansari, head of investment strategy and research at Kamco Invest, a Kuwait-based nonbank financial institution.

Others such as Issam Altawari, managing partner at Newbury Economic Consulting, a Kuwait-based debt advisory firm, are more skeptical.

“I don’t think with the current group of parliamentarians we will see much in the way of reforms,” said Altawari. “This is primarily because they won on the basis of siding with the people. And the side of people means more handouts, increasing salaries and not necessarily taking difficult decisions needed for reforms and the pain and agony that comes with it.”

One of the most contentious reforms is the public debt law. The law would enable Kuwait to borrow via international bond markets. The IMF notes that a public debt law would provide the government with a fiscal anchor, reduce fiscal risks and improve its ability to manage adverse shocks. The fund also notes that the law would also set the debt ceiling, improve financial transparency as well as clarify the borrowing of state-owned entities.

In the absence of the public debt law, Kuwait is unable to sell international bonds and instead relies on the General Reserve Fund (GRF). The GRF is the main repository of all of Kuwait’s oil revenues and income earned from GRF investments. The GRF’s assets and income are available for use by the government through the budget.

Derek Silva, director of research at Market Securities Limited, a Dubai-based brokerage with business ties in Kuwait, said that the Kuwaiti government needs a funding strategy and better access to capital to handle the deficits that inevitably occur when oil prices revert back down to below $80 per barrel.

“The public debt law is needed to allow for parliamentary authorization to issue debt,” he said. “Without it, Kuwait has been relying solely on funding from the GRF, which has been depleting rapidly. Nor can it directly access the bigger Future Generation Funds (FGF), but instead has had to rely on asset swaps from the GRF to the FGF in exchange for cash. [Thus], another positive reform would be authorization for easier access to the FGF.”

Kuwait sold its first and only Eurobond — an $8 billion dual-tranche deal consisting of a $3.5 billion 2.8% 2022 note and a longer-dated $4.5 billion 3.6% 2027 piece — in March 2017.

The issuance received orders amounting to $20 billion. While the deal was hailed by international investors, domestically it received some strong criticism from segments of Kuwait’s political and business class over corruption and wastefulness.

At the time, the government sold the international debt after parliament provided a temporary debt law to plug a public financing gap. That provision expired in 2017, and successive parliaments have failed to pass a permanent law despite past government efforts.

One local investment banker expressed his pessimism on the prospects of the debt law being passed anytime soon.

“Debt is unlikely to be raised unless the government raises it as a subject in parliament,” said the banker who spoke on the condition of anonymity. “But already in the first parliamentary hearing, nobody is talking about debt and borrowing because of the Ukraine-Russia war and the volatility in global bond markets. Adding to that, [the GCC] region is doing better economically than a year ago.”

Similarly, Altawari is not optimistic the current parliament will pass the law anytime soon.

“While there will be some political maneuvering, it’s not on their (parliament's) radar, especially with prolonged higher oil prices,” he said. “Furthermore, with an expected surplus next year, it's not a priority for the current parliament.”

Other pressing reforms include economic diversification, reforming Kuwait’s sovereign wealth funds, and introducing VAT and other taxation.

MENA macroeconomist Monica Malik, who currently serves as chief economist at Abu Dhabi Commercial Bank, stresses that the challenges of diversifying the economy are significant, especially given the reliance on the oil sector and greater progress of other GCC counties.

“On fiscal diversification, the government has also been unable to lower subsidies and handouts, while VAT has not been introduced,” she said.

In 2017, Kuwait agreed to introduce a GCC-wide VAT but it has yet to implement it or announce a formal date. Similarly, the IMF has encouraged Kuwait to introduce other forms of taxation such as excise duties, expanding corporate tax to domestic firms and implementing property tax.

“The high oil prices of late are obviously good for Kuwait, but this also reduces the near-term desperation for reforms,” said Derek Silva. “Among the reforms is a need to find ways to adopt new taxes. They also need to reform the big, costly public sector and costly social programs.”