Kuwait faces economic challenges

Kuwait faces many problems obstructing its economic development, mainly in a lack of reforms and foreign labor force.

al-monitor A poster of Kuwait's Emir Sheikh Sabah al-Ahmad al-Sabah and Crown Prince Sheikh Nawaf al-Ahmad al-Sabah hangs on the Kuwait Stock Exchange in Kuwait City, Nov. 29, 2012. Photo by REUTERS/ Jamal Saidi.

Topics covered

oil, kuwait, investment, industry, economy, development, bureaucracy

Dec 18, 2014

The Kuwait National Competitiveness Committee issued its 10th report for the fiscal year 2014-2015, which confirmed that Kuwait dropped on the World Competitiveness Index to the 40th ranking, from the 35th ranking in the fiscal year 2010-2011. The index includes 144 countries. The UAE, Qatar and Saudi Arabia achieved higher rankings, respectively 12th, 16th and 24th.

The report identified the main structural imbalances in Kuwait’s business environment that led to this drop, notably the slow licensing procedures, the lack of legislative framework supporting the initiatives of investors and businessmen, the complexities of the labor market, the absence of economic reforms, the inadequacy of education to the labor force and the weak competitiveness of infrastructure such as ports and airports.

To understand the potential of the Kuwaiti economy, it must be noted that the GDP reached 49.8 billion dinars ($170 billion) in 2013, while the growth rate registered 2.3%. Yet, a 63% contribution was registered for the oil sector, 16.9% for non-financial services, 6.8% for transformational industries, 6.5% for financial services, 3% for wholesale and retail and 5% for transport, storage and transportation.

The oil sector remains dominant in the economy and has substantial indirect effects on the non-oil sectors. The public spending funded by oil revenues remains essential to activate various economic activities. Kuwait is still the least attractive Gulf country to investors, as many businessmen refrain from investing their money there given the bureaucratic impediments and long and debilitating procedures necessary to obtain business licenses.

Moreover, private property, whether national or foreign, is still not authorized in many sectors, such as oil and vital public utilities.

Other projects in the non-oil sectors do not have relative advantages, including many projects in manufacturing industries. Statistics issued by the Central Statistical Bureau showed that the total foreign capital invested in Kuwait reached about 2.9 billion Kuwaiti dinars [$9.9 billion] at the end of 2012. These funds grew by 39.5% compared to 2011, i.e., by 842.5 million dinars [$2.8 billion].

Foreign direct investments were concentrated in communications at 61%, followed by 20% in investment firms and 9.5% in the insurance sector. Qatar comes at the top of the list of countries exporting investments to Kuwait, followed by Bahrain, the UAE, Saudi Arabia and Lebanon. Foreign investments in Kuwait are basically inter-Gulf investments made significantly in the telecommunication and financial services sectors.

Kuwait could become an important hub for foreign investment if it amends its legislation and frees government procedures from bureaucratic obstacles. Allowing the private, foreign and domestic investments in the oil sector may increase the cash flow, especially since Kuwait has important relative advantages in this sector.

There are foreign placements in petrochemicals, such as the investment of Dow Chemical Company in Petrochemical Industries Company, but these remain far from the productive potentials in this sector. Kuwait made efforts in attempts to develop oil fields in the north in the mid-1990s and raised formulas for cooperation with the major oil companies, but things got complicated after the intervention of the National Assembly and the reservations made on the proposed participation formulas.

Labor market efficiency is among the most important competitiveness elements between countries of the world. Statistics indicate that the size of the labor force in Kuwait in 2013 amounted to 2.4 million workers, 83% of whom are immigrants and 17% are citizens.

There are 423,000 workers in the government sector, of whom 300,000 or 71% are Kuwaiti nationals, compared to 123,000 or 29% who are immigrants. As for the private sector, the number of workers amounts to more than 1.6 million, of whom only 76,000 are Kuwaitis, representing 4.6% compared to 95.4% migrant workers.

The problem of university graduates is still a major impediment for employing local workers in the private sector. The education systems do not offer potential to graduate skilled and highly competent workers. Moreover, the majority of workers coming from abroad are marginalized, have low professionalism and low educational levels. There are several reasons as to why private sector institutions prefer to rely on low-wage migrant workers, including large gaps among salaries and wages allocated for citizens in the public sector and the private sector.

There is a long way to go to develop the capacities of local workers. This requires re-examining the educational system, promoting professional vocations among students, advancing basic education and improving the efficiency of higher education.

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