Kuwait looks beyond oil

To understand the economic climate in Kuwait, it is important to understand the sociopolitical circumstances that act as catalysts in what can be best described as a small but wealthy, relatively open economy. While other countries in the Middle East have an almost unanimous frame of executing laws or fiscal policies, Kuwait has always had a distinct model of implementing changes, backed by an independent and fairly democratic parliamentary system.

However, despite this, the country is at the center of a threefold crisis involving its wealth, economy and citizens.

State of the economy

With crude oil reserves of roughly 102 billion barrels – more than six percent of world reserves – Kuwait’s dependence on oil has been absolute over the years, accounting for 94 percent of export revenues, 90 percent of government income and more than half of the country’s GDP.

While this has contributed to the positive fiscal situation in the Arab world’s largest foreign investor, with an FDI outflow of almost  $8.4 billion (as of 2013), the strained relations between the country’s National Assembly Parliament and its government have prevented any economic diversification or the implementation of economic reforms.

In a broader sense, Kuwait has not only not diversified its economy, but has also failed to bolster the private sector owing to a poor business climate as well as a large public sector that crowds out private employment of Kuwaiti nationals.

While the government did recently detail a plan to spend up to $104 billion over four years in economic diversification and private sector participation, an uncertain political situation prevented the materializing of many of the projects chalked out as part of the plan. The acrimonious relationship between the National Assembly and the executive branch has also been cited as the key reason why many planned economic reforms have been shelved.

However, sources state that prior to the Gulf War, Kuwait did have a successful history of development of its non-oil sectors – something which quickly declined following the Iraqi invasion in 1990. The past 20 years have seen little or no developmental projects in Kuwait, while the dependence on oil revenue has increased heavily.  With the onset of the oil crisis last year, the authorities have slowly realized that a rentier-style existence would bring about disastrous consequences for the country.

In 2015, Kuwait faced a budget deficit for the first time in 15 years, after decades of high oil prices. While the government has tried to reduce the deficit by decreasing spend on the subsidies for the local population, this was not only met with limited success but also created uproar among the Kuwaiti citizens.

Will of the people

The Al-Sabah dynasty, which has ruled Kuwait since the start of the 18th century, has played a key role in the establishment of one of the most independent legislatures in the Arab world and one that has always encouraged the development of a liberal-minded society.

However, the muscle of the masses was truly felt in early 2011 when youth activist groups, supported by opposition legislators, rallied repeatedly for the Prime Minister to step down, ultimately forcing the premier to put in his resignation later that year – a first in the region. Today, this free-thinking mentality has also attributed to a populist disruption of sorts as Kuwaiti citizens have become quite vocal in recent times in their expectations of the government, especially with regard to the oil crisis – an act that has hindered economic reforms considerably.

In an article in the Kuwait-based newspaper Arab Times, Ahmed Al Jarallah, editor-in-chief, sums up the current crisis perfectly. “Until now, Kuwait has not been able to get out of the economic crisis hole due to its total dependency on oil and monopoly of services,” he wrote. “It has become necessary for the State to know that there is no exit from the crisis unless there is development in the economy by assigning management of services to the private sector.”

In recent times and following an official nod from the government, the private sector in Kuwait has come forward to initiate developmental projects – from the real estate and retail sectors.

“Kuwait has always been resilient in the face of a crisis – the Gulf War is one such example,” said Mohammed Jassim Khalid Al Marsouq, board member of the Supreme Council for Planning and Development in Kuwait and chairman of Tamdeen Group.

“The oil crisis we face is very real. But I have faith in the country and in the people – especially the youth. While there is definitely a call to open up the market and make the country business-friendly, the need of the hour, I believe, is for the youth to gear up and face the challenges that are before them,” he added.

Al Marsouq welcome the crisis, calling it a clarion call to “motivate people not to rely on wealth alone, but to accept reforms as well”.

However, these reforms do not just indicate private sector participation, but a cutback on the massive public sector workforce, which weighs heavily on the country’s reserves.

According to an official estimate, Kuwait’s public sector employs more than 300,000 Kuwaitis, who make up 80 percent of the workforce in the country and 25 percent of the total population of 1.2 million. In recent times, the salaries, wages, allowances, compensations and social security of these employees alone accounted for 50 percent of the annual budget, which ranges between KWD20 billion and KWD21 billion. Further expenditure on wages and salaries in this sector amounts to 19 percent of Kuwait’s GDP, which accounts for KWD52 billion – an amount unmatched in budget allocations in developed or developing countries outside the Middle East.

It is no surprise then that any official move to manage the public sector better would be met with strong resistance from the public. A major blow to fiscal reform measures came in the form of an impromptu public sector workers’ strike in April this year, forcing the country to temporarily reduce its daily oil output from 930,000 barrels to 520,000 barrels.

The dispute arose over a plan to cut back on wages and incentives for the public sector, which met widespread resistance from a community used to living on decades of easy state support. Following a similar backlash last year, the government was also forced to liberalize kerosene and diesel prices, while an expansion plan chalked out earlier this year to subsidise other fuels and utilities is still in limbo.

“It’s not easy to initiate change in Kuwait – not with the people and definitely not within the Parliament,” said a source in the government. “The people need to understand the seriousness of the situation and be ready to join hands to make things work, be it in streamlining state entities, slashing budgets or in reducing red-tapism.”

He added: “On the other hand, steps have been taken to tap global debt markets to help finance the deficit, which includes seeking technical advice from IMF and starting a domestic bond-sale program – positive signs of a mature economy.”

Expat woes

Kuwait’s Parliament is now considering levying heavier charges on the expatriate community living in the country. A bill has been passed earlier this month to raise power and water charges on foreign residents and businesses, but exempting the Gulf state’s citizens.  A hike of 15 to 20 percent in expat health fees is also expected by the end of the year.

In a country rated by InterNations as the worst place to live and work in for expatriates, this move could further increase the discontent, without really making any significant economic difference.

For now, the Kuwaiti government needs to roll out stringent reformative measures aimed at straightening the public sector and boosting the economy, or the oil crisis will most certainly be only the start of things to come.