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Belt-tightening deficit budget for 2018-19
February 3, 2018, 2:18 pm

State budget for fiscal year 2018-2019 estimates total expenditure at KD20 billion and revenue at KD15 billion. The deficit of KD5 billion, which climbs to KD6.5 billion after 10 percent transfer to the ‘Future Generations Fund’, is the fourth consecutive budget shortfall in recent years.

Speaking at a news conference held to announce the annual budget on 29 January, Minister of Finance Dr. Naif Falah Al-Hajraf said he was presenting a belt-tightening budget aimed at consolidating financial reforms and enhancing economic sustainability. Describing the budget, which covers the period to 31 March 2019, as challenging, the minister said the government was determined to overcome the budget’s revenue constraints by rationalizing its spending policies capping expenditures and borrowing from debt markets.

However, he made clear that the government decision to limit public spending at KD20 billion would not affect public sector salaries and that the state would continue to provide support for those who deserve it. The public wage bill at around KD11 billion accounts for over half of the budget expenses, while budget provisions for subsidies are projected to rise to KD3.4 billion, despite the recent slashing of subsidies on fuel, water and electricity.

Elaborating on the state’s income, the minister said the budget was based on an oil price of $50, which was arrived at in consultation with the Ministry of Oil and Kuwait Petroleum Corporation (KPC). While oil continues to constitute 89 percent of the budget’s total revenues, accounting for KD13.3 billion, non-oil revenue is projected to reach KD1.7 billion in the new budget, marking an increase of 6.2 percent from the previous budget, the minister said.

Minister Al-Hajraf noted that the government was committed to the New Kuwait 2035 vision and that capital spending plans on development projects would proceed as planned and would account for around 12 percent of the budget at KD2.5 billion. Funding for development projects include those covering vital maintenance and infrastructure developments, including road networks, the new airport and power generation.

The Finance Minister said the government aimed to address the budget deficit mainly by curbing expenses while enhancing revenue raising measures, including increasing non-oil revenues, making measured draw-downs from the state's general reserves, and securing additional financing by issuing domestic and international bonds. Last March, in a first ever international debt issuance, the government raised additional funding of KD8 billion from international debt market, in addition to raising KD3.5 billion from the domestic market.

While the recent up-tick in oil prices is believed to have made another international issuance generally superfluous, the overwhelming response to the first issuance has encouraged Kuwait to continue the policy of plugging deficits by borrowing. Moreover, in early January of 2018, the Parliament’s Finance and Economic Committee approved a draft bill that allowed the government to raise the debt ceiling to KD25 billion from the current KD10 billion, and extend the maximum debt issue maturities to 30 years, from the 10-year period limitation now in place.

Analysts expect the budget for the current fiscal year, which ends on 31 March 2018, to reach around KD6.5 billion, before deductions to the Future Generations Fund are made. Total expenditures in 2017/2018 are projected to be KD19.8 billion, with non-oil revenue totaling KD1.6 billion and oil income coming in at KD11.7 billion, based on a price of $45 per barrel.

With Brent crude averaging around $54 in 2017, some of the economic and financial pressures on the government precipitated by the fall in oil prices since mid-2014 have generally eased. The decision by OPEC and non-OPEC members in November 2017 to maintain their oil production cuts that began in January of the year, to the end of 2018 will probably see oil remain in the $65 range throughout 2018.

Kuwait’s recurring budget deficits despite higher oil revenues raises questions about the government’s continued commitment to the slew of economic and financial reforms that it had announced earlier. It is obvious that more than any government reform initiative it was the increase in oil prices that accounted for narrowing of the state’s budget deficit. This makes it increasingly doubtful whether the government’s multi-faceted reform packages aimed at managing budget deficits, including rationalizing spending, diversifying the economy and increasing non-oil revenues, are really going as planned.

With oil prices likely to maintain its current trajectory throughout 2018 the authorities have sufficient leeway to defer or dilute planned fiscal reform measures in deference to a voluble and contentious opposition in parliament. The government has already backtracked on energy and utility price hikes by ensuring that fuel, water and electricity subsidy cuts do not impact citizens. Incidentally, citizens are one of the largest consumers of power and utilities in the country.

Kuwait has also delayed the implementation of a 5 percent Value-Added-Tax (VAT) to 2019. In fairness, Kuwait is not the only one; the initiative, which was supposed to be rolled out across the Gulf-Cooperation Council (GCC) states in 2018, has so far found compliance only by Saudi Arabia and the UAE. Bahrain has said it would roll out VAT by mid-2018, Oman has deferred it to early 2019 and Qatar has expressed reservations about its implementation.

The higher oil prices have also slowed down the urgency to implement a slew of other economic reforms planned by the government, including boosting the role of private sector in development plans, diversifying income sources, increasing non-oil revenues, trimming public spending, and, in general, improving government performance.

Despite the foot-dragging, there have been a few positive moves, especially in rolling-out the New Kuwait 2035 development plan. This strategic plan, which envisions transforming Kuwait into a financial, trade and cultural hub in the region, has been gaining ground in recent months.

A key ingredient in the successful implementation of this ambitious plan is creating a talented national human resource pool capable of becoming competitive and competent members of the workforce. However, developing this segment of the population calls for not only reforming the educational system in order to cope with the demands of the 'fourth industrial revolution', but also encouraging young minds to imbue a culture of responsibility, ethics and respect for work — all kinds of work.

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