In its latest economic brief on public finance, National Bank of Kuwait reports that the Ministry of Finance has recently released the closing accounts of the government budget for the 2007/08 fiscal year (FY07/08). It showed the fiscal surplus reaching a record high KD 9.3 billion, before the allocation of 10% of revenues to the Reserve Fund for Future Generations (RFFG). The surplus was up 23% from last fiscal year, and equivalent to 29% of 2007 GDP. Oil revenues were the major contributor to the growing surplus. A smaller contribution came from the fall in government spending due to the absence of extraordinary transfers to the Public Institution for Social Security (PIFSS). Non-oil revenues recorded remarkable growth as well, besting their strong performance of last year.
The reported surplus, in spite of its large size, underestimates the net additions to state reserves as the budget excludes government investment income. The two major sources of investment income are the distributed profits of state-owned Kuwait Petroleum Corporation and the returns on government investments abroad. While revenue from crude oil production is reflected in the budget, all other income from refining and downstream activities accrue to KPC, whose profit distributions go the General Reserve Fund. Such distribution amounted to KD 1.5 billion in 2006/07 (latest figure available). Meanwhile, investment income from foreign asset holdings reached KD 2.4 billion in 2007 according to balance of payments statistics. Together these two income sources represent at least 20% of budget revenues.
NBK states that, at KD 19 billion, government revenues were up 23% from last year, spurred by higher oil and non-oil revenues. Oil revenues climbed 22% to KD 17.7 billion on the back of higher oil prices, and represented 93% of budget revenues. The price of Kuwait Export Crude has averaged $75.4 a barrel over the period compared to $57.4 in FY06/07 and to the extremely conservative $36 assumed in the budget. Hence, oil revenues came 129% higher than their projected value in the budget. Meanwhile, oil production averaged 2.564 million barrel a day in 2007/08 according to official sources, 3% below the previous year’s level.
Non-oil revenues maintained their robust growth for the second consecutive year to reach KD 1.3 billion, up 31% from the previous fiscal year, and 50% above budget projections. Almost all sources of non-oil revenues saw healthy growth for the year. The biggest increase came from “miscellaneous revenues and fees” which rose by KD 161 million to reach KD 404 million. Around half of this increase came from a KD 188 million payment by the UN Compensation Commission (UNCC).
The NBK report cited that the largest component of non-oil revenues, namely service charges grew 18.3% to reach KD 531 million. The KD 82 million increase was due to a rise in healthcare insurance and water & electricity receipts. Obviously, revenues from service charges were boosted by the significant jump in Kuwaiti population. However, the contribution of service charges to non-oil revenues has been declining for the second year in a row, from 53% in FY05/06 to 41% in FY07/08.
Strong imports lifted custom duties by 7.7%, to reach KD 224 million. According to CBK estimates, commodity imports rose 45% during the fiscal year. Meanwhile, revenues from corporate income and profit taxes increased by 33% reflecting a significant jump in profits of listed companies.
Total spending saw its first drop in 8 years, reaching KD 9.7 billion, or 5.9% below last year, suggesting a change in the expansionary stance of Kuwait’s fiscal policy. In fact, this drop resulted essentially from the absence of a KD 2 billion exceptional transfer to PIFSS which took place in the previous fiscal year. Excluding such a transfer, growth in government spending would have reached 16.8%. Interestingly, actual spending out of budget allocations was the lowest in more than a decade, only 86% in FY07/08 compared to an average of 96% over the previous four years. Under-spending was apparent across all spending categories, particularly in capital expenditures, which can only be attributed to slow project implementation. Growth in demand-impacting expenditures, which provide economic stimulus, cooled down from last year, measuring an estimated 16% compared to 26% in FY06/07.
The NBK report adds that expenditures on goods and services recorded the largest absolute increase to reach KD 1.8 billion, up KD 396 million for the year. The bulk of this increase came from higher fuel costs incurred for power generation. Hence, spending on fuel absorbed 13.4% of total government spending in 2007/08 compared to an average of 8.3% over the last five years and 1.4% a decade ago.
Spending on wages and salaries rose by KD 251 million (11.3%) to reach KD 2.5 billion. The largest increases were at the ministries of Public Health (KD 58 million), Education (KD 49 million), and Interior (KD 44 million). After declining by 2.6% last year, military wages and salaries which are classified under Chapter 5 (Transfers and Miscellaneous) rose by KD 203 million (29%) to reach KD 912 million. Employment-related expenditures which cover wages and salaries of civilians and military personnel, payments under the National Labor Support Law and transfers to PIFSS accounted for 43% of total spending. Excluding the previous year’s exceptional transfer to PIFSS, employment-related expenditures rose a solid 17%.
Spending on capital projects (development projects, maintenance and land purchase) maintained their healthy growth for a second consecutive year, even as they fell short of original budget allocations. Capital spending rose KD 217 million to reach KD 1.2 billion in 2007/08. The bulk of this growth came from a KD 310 million increase in spending on development projects, mainly in the electricity and water sector, but was partially counterbalanced by a KD 93 million drop in land purchases.
Transfers and miscellaneous expenditures remained the largest spending category, accounting for 43% of budget expenditures. Spending by the Ministry of Defense on wages and military procurement accounted for a quarter of this chapter. The remaining major items include transfers to public institutions, grants to other countries, general subsidies and spending on education and medical treatment abroad. After growing 84% in FY06/07, this chapter recorded a 26% drop in FY07/08 to reach KD 4.2 billion. However, if we exclude the exceptional transfers of last year to PIFSS, spending under this category grew 14%. Among public institutions, the Public Authority for Applied Education received the highest increase in transfers (KD 58 million), followed by Kuwait University (KD 55 million). Meanwhile, government assistance to other countries escalated to KD 289 million, 161% above last year, while spending on local subsidies soared 75% to reach KD 85 million.
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