Current Economic State of Kuwait
The Kuwaiti economy is driven by oil production and related industries. Kuwait holds 10 percent of the world oil reserves, some 96 billion barrels. Oil accounts for more than 90 percent of total exports and the bulk of state revenue. Its oil sector has essentially recovered to pre-Iraqi invasion levels.
Besides oil, the government has substantial overseas investments estimated at between $60-90 billion.
The country's population is just over 2.3 million, of which only 700,000 are citizens.
Currently, Kuwait has been relatively slow in implementing economic reform and privatization programs. This is in part because many of the decisions will cut into the welfare system and will be unpopular with the public. Thus to offset losses, the government has chosen to use money from the Reserve Fund for Future Generations (estimated $45 billion).
The government has taken some important steps, including creation of a new investment law designed to attract foreign investment by allowing foreign majority ownership of businesses. The law was passed by Amiri decree in June 1999 and is in effect. It can, however, be invalidated by a majority vote of the National Assembly. But the country may have to do more if it wants to overcome other negative aspects affecting foreign investment such as its small market size, poor geographical position and high labor costs to draw investors.
The government approved a $13.912 billion budget for 1999-2000, projecting a $6.645 billion deficit. Expenditures have been cut by 2 percent from the previous year. Oil income is calculated at $10 a barrel, reflecting the collapsed 1998 prices. Prices in the second half of 1999, however, have gone as high as $26 up from less than $10 in December 1998. This is the highest oil prices have risen since the Gulf war.
But the situation was different in 1998 when collapsed oil prices dragged the Kuwaiti economy down 16.3 percent from $30 billion in 1997 to $25.314 billion in 1998. It further helped shrink oil and gas contribution to GDP from 45 percent to 34 percent in that same period. Per capita income declined 18.2 percent from $15,272 in 1997 to $12,151 in 1998.
The lost revenue forced the government to suspended all new projects last year. The Ministry of Electricity & Water's budget was cut by 8 percent, which forced the suspension of plans to build a new power and desalination plant at Al-Zour.
A bright spot in 1998 was the 2.9 percent growth in the non-oil sector, although that was significantly less than the 10 percent growth in 1997. The main driver of this expansion was a return of expatriate workers to pre-invasion levels. Many of the expatriates are non-Arab single males who tend to send most of their earnings home. They have replaced many of the Palestinians who lived in Kuwait with their families before the war.
This labor and demographic change has had significant impact on consumer-oriented businesses that comprise much of Kuwait's non-oil economy since the demand from this portion of the population, more than 60 percent, is now for less expensive items.
This has put the government in a catch-22 situation. On the one hand, the government is considering changing this by allowing more expatriates to bring their families to Kuwait. Yet on the other hand, the government wants to reduce the country's reliance on expatriates though a policy of “Kuwaitization”. There is public and political pressure on all firms and government ministries to reduce their dependency on non-Kuwaitis. Nearly 50 percent of Kuwaiti nationals are under 15. As this population ages, the need for job creation will increase.
The government's two biggest expenses are its defense spending and public wages. At the end of 1998, the government announced ways to reduce the deficit such as cutting fuel subsidies, taxing consumer goods, gradually eliminating electricity and water subsidies, imposing housing, labor and airport taxes and introducing individual contributions to the social security budget. But because of fear of public reaction, the government has yet to implement any of them.
Changes may occur however with the forming of a new National Assembly and Cabinet in July 1999. Particularly important to the government's objectives will be the National Assembly's approval of proposed Foreign Investment and Intellectual Property Rights laws.
This new law permits for the first time majority foreign ownership of Kuwait-based firms. The law still prohibits foreign investment in the upstream petroleum sector, but does allow investment in joint venture petrochemical projects. The law also permits foreigners to own up to 40 percent of banks and to invest in stocks directly through the Kuwait stock exchange. Property ownership is restricted to other GCC-member states.
In 1993, the government adopted the Difficult Debts Law that should provide sufficient debt relief and a mechanism by which large Kuwaiti investors can recover losses incurred during the Iraqi invasion of Kuwait in 1991 and some losses dating to the 1982 Souk Al-Manakh Stock Exchange crisis. That crash occurred when cumulative trading losses reached US$ 100 billion, US$ 20 billion of which was attributed to approximately 3,000 well-connected Kuwait merchants. In the last decade, the Kuwaiti National Assembly passed bills aimed at forcing debtors to repay, but this legislation has proven ineffective.
(In billions of Kuwaiti Dinars, unless otherwise indicated)
1999e 1998 1997
GDP (KD billion by current prices)- 7.7 9.2
GDP Per Capita (US$) 11,584 12,151 15,272
GNP (KD billion by current prices)- 9.5 11.1
Inflation 0.9 0.15 0.66
Government Spending as % of GDP 51.8 56.9 43.4
Unemployment (%) 0.7 1 1.3
External Debt (US$ millions) 137.7 244.7 425.3
Exports (KD billions) 2.9 4.3
Oil Exports (KD billions) 2.6 4.1
Imports (KD billions) 2.2 2.4
Domestic Debt (KD millions) 4.3 4.6
Deficit (KD billions) 2.1 1.2 0.7
Oil Production - 2.077 2.089
Major Economic Domains
The Kuwaiti oil sector is government-owned. Crude oil production is currently under 1.9 million barrels per day (bpd) with a capacity estimated at 2.4 million bpd. Kuwait's refining capacity is currently 895,000 bpd, almost 100,000 bpd above the pre-invasion level. Production is limited to 1.84 million bpd by an OPEC arrangement designed to lift deflated oil prices. The country, however, plans to expand production capacity to three million bpd by 2000 and 3.5 million by 2005.
Kuwait is looking to expand into petrochemicals. There is a $2 billion petrochemical complex in the Shuaiba Industrial Area.
It is unclear if the strong growth of 1996 and 1997 can continue without economic reforms. Privatization may promote long-term growth in telecommunications, housing, power generation and health care. So far the government has resisted privatization out of fear of increasing unemployment among Kuwaitis and causing prices to rise if they discontinue subsidizing public utilities.
Kuwait’s non-oil economy has been flat since a reconstruction boom that followed the country’s liberation after the Gulf War. The poor economic performance can be traced, in part, to the country’s changing demographics following the Gulf War. Even now, Kuwait’s population is less than 80 percent of the pre-war population.
In general, Kuwait’s government presently dominates the local economy. With increased pressure from the business community and the public, however, that role will decline and the country should move towards privatization and rationalization of the economy. Kuwait’s economic system, modeled on a welfare state, provides for a large measure of government regulation. These regulations restrict participation and competition in a number of sectors of the economy and strictly control the roles of foreign capital and expatriate labor.
The Kuwaiti government owns interests in many of the private companies in the country including most of the nation’s banks. In some cases, the government bought these shares to ameliorate the Souk Al-Manakh stock market collapse in 1982. In other cases, the government ownership was used to provide capital for local industries.
The era of government ownership seems to be coming to an end, however. As a part of ongoing privatization efforts, the Kuwaiti government has begun to relinquish its interest in these companies, generally by offering its shares for sale on the Kuwaiti Stock Exchange. Private foreign investors may participate in this privatization process by purchasing up to 40 percent ownership of Kuwait’s national industries, subject to prior Kuwaiti government approval.
Finally, the Kuwaiti government is, by far, the largest employer of Kuwaiti nationals, 93.4 percent of who work for the government or a government-owned company. Through efforts to “Kuwaitize” its work force, the government of Kuwait, in effect, has guaranteed employment to all Kuwaiti nationals. While this has had a social benefit, at least superficially, it has resulted in many government ministries being over-staffed and under-productive. It has also made it difficult for private companies to recruit Kuwaitis for meaningful, but rigorous, jobs.
Balance of Payments
Kuwait’s balance of payments situation is healthy, with exports exceeding imports by a comfortable margin. Since crude oil and refined petroleum products comprise more than 90 percent of the value of exports, the country’s balance of payments is highly susceptible to changes in oil prices. The Kuwaiti government generally takes a conservative pricing position for oil revenue in its budget projections.
In 1998, the country had a $1.97 billion trade surplus and a current account surplus of $2.59 billion. These accounts are expected to remain in surpluses as long as oil prices remain strong.
© 2000 Mena Report (www.menareport.com)
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