Forgot your password?



Back to login

Digging out of debt with deficit spending
June 30, 2018, 2:59 pm
Share/Bookmark

In mid-2014, when oil prices began a precipitous fall, Kuwait, like many other resource rich hydrocarbon exporters, was caught unprepared. The subsequent slide in oil revenues led to Kuwait posting its first budget deficit in 16 years in fiscal year 2015/2016. The KD5.9 billion deficit budget in that fiscal has been followed by repeated deficits in fiscal years 2016/17, 2017/18 and now in 2018/19, with the parliament’s approval last week of a KD7.9 billion deficit budget.

From an economic standpoint, it could be argued there is nothing wrong in posting repeated budget deficits. In general, deficit spending is not bad for a country, especially when an economy goes into recession, as spending on new infrastructure projects, or the purchase of goods and services by the government can help stabilize and even make an economy turnaround. But, in the case of Kuwait, many of characteristics of a typical recession have not manifested in the economy.

In recent years, interest rates have remained benign, inflation has been within manageable limits, real wages have not fallen sharply, and consumer confidence has remained, for the most part, undented. Despite the absence of these usual recessionary traits and the fact that since 2016 oil has regained much of its luster and is now trading at around $70 per barrel, the finance ministry appears to have excelled in coming up with repeated deficit budgets. Clearly, the recurring budget deficits point to a mishandling or structural mismatch between the government’s spending and its revenue.

In 2017, following assessments of financial developments and discussions on economic and financial policies, as part of its Article IV consultations with Kuwait, the International Monetary Fund (IMF) said that the country would need $100 billion in additional financing over the next five years. The Fund added that this amount would be needed to tide over the government’s annual budget deficits, which it projected would be in the range of 15 percent of GDP.

The IMF arrived at this deficit figure relying on what can at best be called debatable data. The Fund’s calculations involved using $49 per barrel as the baseline price of oil and excluding income from the country’s copious wealth fund investments on the revenue side, while including the mandated 10 percent transfer from revenues to the Future Generations Fund as an expenditure item. This is the same calculations that the government relies on when tabling its annual budgets.

But even if one were to accept these deficit figures, budget deficits are only one part of the story; national debt, which is usually referred to as the accumulation of annual deficits, is the economically scarier stuff.

Kuwait government debt in 2017 was equivalent to 27.1 percent of the country's Gross Domestic Product (GDP); this was a jump of 47 percent from the 18.5 percent debt to GDP ratio recorded a year earlier. According to analysts, Kuwait’s debt to GDP has averaged around 42 percent from 1990 to 2017, recording a high of 203 percent in 1991 and a low of 1.09 percent in 1990. This apparent huge fluctuation was a one-off situation and marked the period between the invasion and occupation of Kuwait by Iraqi troops in 1990, and the country’s liberation and reconstruction in 1991.

At a little over quarter of the GDP, Kuwait’s debt level still remains innocuous and manageable. However, the potential for this debt to grow over the coming years should be a serious cause of concern to the country’s financial managers, as increasing debt will affect Kuwait’s economy in more ways than one.

First, the annual interest payments on debt increases budget deficits and this becomes a self-defeating loop with deficits building up the debt each year. Second, in the long run, national debt decreases business confidence and the amount of government revenues, which further increases the deficit. Third, as debt continues to rise, creditors, both local and international, begin to get worried about the country’s ability to repay. This then leads to a fall in credit ratings and demands by creditors for higher interest payments, which in turn dampens economic growth and increases the deficit.

Another threat from increasing national debt is its effect on the government’s social security programs. As each new generation of retirees dip into the social security pool, a debt-laden government will find it increasingly difficult to keep funding social securities for citizens. Either it would have to cut down on social security spending or increase taxes and other revenue sources, which could then stifle economic growth and increase unemployment.  

It can be argued that a resource-rich country such as Kuwait with stable ratings and a copious sovereign wealth fund can easily withstand repeated budget deficits and increased debt levels, at least in the short-term. No doubt, deficit spending and the resultant debt will initially boost economic growth by helping to pump liquidity into the market. And, ‘if’ the government uses the deficit spending to spur the economy, create employment for youth and engage in other revenue-generating activities, while pursuing prudent fiscal and monetary policies, it is possible for the country to tide over its budget deficits and repay its debts.

But that is a big ‘if’. Because, rather than stimulating the economy, if the government utilizes the deficit spending to fund largely inefficient economic activities, such as buying arms and ammunition based on non-existent threats, or by delivering hand-outs and subsidies to placate citizens demands to ensure their continued support, then future generations will only be able to read about Kuwait’s once fairy-tale welfare state, they will not get to enjoy any of its benefits.

- Staff Report

Share your views
CAPTCHA
 

"It is hard to fail, but it is worse never to have tried to succeed."

"Envy comes from wanting something that isn't yours. But grief comes from losing something you've already had."

Photo Gallery