Kuwait’s large fiscal and external surpluses as a result of high oil prices should not obscure the need for the rapid execution of development projects and a much more aggressive approach to economic reforms, a report said. The common perception is that Kuwait’s economic performance has been poor in recent years, said the latest GCC Brief published by the National Bank of Kuwait (NBK).
But nominal GDP growth has in fact bounced back reasonably well in the post-crisis period. Output rose by 21 per cent per year on average between 2009 and 2011, only slightly below the pre-crisis average of 23 per cent recorded during the boom years between 2002 and 2008, the report said.
The increase has not just been attributable to rising oil prices and output: in 6 out of 8 non-oil sectors, growth has recently been faster than during the pre-crisis years. Given low levels of business confidence, the need for financial consolidation and the fragile global environment, this can reasonably be seen as an encouraging development.
According to the GCC Brief, some of this recent growth can be attributed to the tendency for activity to bounce back naturally after a fall. In the year missing from the growth figures above – 2008 to 2009 – nominal GDP fell by a huge 23 per cent, largely due to a 33 per cent decline in oil prices as the global financial system buckled and the world economy shrank.
Non-oil GDP fell by 4 per cent in 2009 as asset prices plunged, businesses tightened their belts and government spending fell. Once 2009 is included, the average annual growth rate over the past few years falls back from 21 per cent to just 4 per cent - much less impressive. The number of non-oil sectors that have enjoyed superior growth of late falls from 6 to 2. Leaving the crisis year aside, the sectoral performance of the economy is also revealing.
Unfortunately, many of the sectors that have performed well of late – such as utilities and construction – are comparatively small, so their strength contributes little to the health of the economy overall. Similarly, in the larger sectors that have performed better – such as trade and ‘other services’ – the improvement has been marginal.
Again, this limits their overall impact. By contrast, the sectors that have performed badly in recent years – notably finance & business services (which include real estate) and communications – are large and the dip in performance has been huge. The gap between the pre and post-crisis contributions to growth from these two sectors of the economy far outweighs the gains in all of the other sectors combined, said the report.
For the financial and real estate sectors, whose combined output is still 33 per cent below its peak of 2007, this reveals the scale and enduring legacy of the financial crisis. Weak investment Meanwhile, the expenditure side of the national accounts reveals a larger and long-standing structural problem: the weakness of investment spending.
Kuwait’s fixed investment, at 17.6 per cent of GDP on average over the past 10 years, has been the lowest in the GCC region, and less than half the level of the region’s strongest performer, Qatar, at 37 per cent of GDP. Admittedly, the last five years have seen two of the strongest performances of recent times.
But this is of limited comfort. The high figure in 2007 may have been linked to boom-time investments that subsequently soured. And the performance in 2010 may have been focused on the oil sector rather than the economy at large. Either way, these figures are still low on a regional comparison.
The figures for 2011 are particularly alarming. Fixed investment as a share of GDP stood at its lowest for a decade, at 15.6 per cent. This is despite hopes that the government’s ambitious KD31 billion ($110 billion) four-year development plan (2010/11-2013/14) would have kick-started capital spending by now.
Moreover, investment actually fell 1 per cent in money terms. Since this fall excludes any depreciation of existing assets, the figures imply that an even larger amount of the capital stock was actually lost, which may have damaged the economy’s growth potential, according to the report.
Why has investment remained so low, especially when – owing to high oil prices – the economy’s financial position has been so strong? One reason has been the government’s poor record on capital spending. Recently-released public finance figures show that on-budget government investment fell by 2 per cent in absolute terms in FY2011/12, which was a major disappointment in light of the huge boost to investment earmarked in the development plan.
In fact, while it has a track record of being low, the rate of capital spending fell to 64 per cent of its budget allocation – the second lowest of the past decade. Since government investment accounts for around half of all fixed investment in the economy, the broader impact has been large, the GCC Brief said.
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