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Fiscal, structural reforms help trim budget deficit
August 27, 2016, 5:20 pm
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Kuwait’s annual budget for fiscal year 2016/2017 (FY16/17) with a projected official deficit of KD8.7 billion, or 26 percent of GDP, recently received approval from the National Assembly. However, analysts believe the deficit is likely to be significantly smaller, given that the base price of $35 per barrel of oil, used as the basis for the budget, is below the average price.

According to analysts at the country’s leading commercial bank, the National Bank of Kuwait (NBK), the deficit, before the mandatory transfer to the Future Generations Fund (FGF), is likely to be in the range of 13 percent. The bank also notes that in order to partially tide over the third consecutive budget deficit brought about sustained low oil prices, the government is expected to issue sovereign bonds, in addition to introducing much needed structural and fiscal reforms.

A review of salient features in the budget reveal that total revenues for FY16/17 at KD10.2 billion are lower by 16 percent from a year earlier. Despite a slight increase in oil production to 2.8 million barrels per day, the budget projects oil revenue which makes up 89 percent of total revenue to decline. On the other hand, non-oil revenue, which makes up 11 percent of total revenue, is budgeted at KD1.6 billion, up 11 percent from the previous year. But experts believe that this oil revenue decline is again based on an assumed price of $35 per barrel, compared to $45 in the last fiscal. With oil currently trading at over $40 per barrel, they expect actual oil revenue to be 35 to 40 percent higher than official projections, and to be mostly the same as in the year before.

Though expenditure in the new budget is reduced by 1.5 percent to KD18.9 billion, the two chapters that account for the largest share of expenses — wages and salaries (chapter1), and, miscellaneous and transfers (chapter 5) — are to grow by 2.7 percent and 1.5 percent respectively. Meanwhile, expenditure in the goods and services (chapter 2) and the projects, maintenance and land purchases (chapter 4) are set to decline by 14 percent and 13 percent respectively.

Despite the lower oil price scenario, overall government capital spending is expected to maintain healthy levels. Though the budget allocation of KD2.2 billion to chapter 4 and to transportation and equipment (chapter 3) is down by 8.4 percent from a year earlier, a draft budget had allocated KD1 billion under chapter 5 for on-budget development plan projects allocated for the year.  This results in total on-budget capital spending to rise by 2.7 percent to KD3.3 billion.

Meanwhile, the spending pace on government development plan projects, the bulk of which are off-budget, is picking up. Among these projects are those in the oil sector and those in public-private partnerships (PPP), including around KD2.25 billion  that have been awarded so far this year and another KD8.4 billion expected to be awarded before the year ends.

The National Assembly also approved financing part of the budget deficit by issuing KD5 billion in local and international bonds and sukuk during FY16/17. The Ministry of Finance has also said it intends to borrow KD2 billion through dinar issuances in the local market.

The government already raised KD900 million in government bonds and sukuk during the first four months of FY16/17. The ministry plans to borrow a further KD3 billion from international markets, through instruments denominated in foreign currency. The rest of the deficit will be financed by withdrawals from the General Reserve Fund (GRF), which along with FGF, is managed by the country’s sovereign wealth fund manager, the Kuwait Investment Authority.

The government is also keen to push through fiscal and structural reforms in a bid to reduce the persisting budget deficits and address other imbalances in the country’s economy. These plans include implementing significant cuts in subsidies and introducing a corporate income tax and a value added tax (VAT). In line with these reforms the National Assembly approved increases in electricity tariffs to take effect from September 2017, electricity and water subsidies currently eat up over half the subsidy bill. The tariff reform, even in its watered-down version should help save the budget around 1 percent of GDP.

Meanwhile, the government is believed to be looking to introduce new taxes to boost non-oil revenues, including a 10 percent corporate tax on local and foreign companies. The new tax, expected to come into force by 2019 and projected to broaden the tax base, will replace existing taxes on corporate earnings. The government is also preparing to introduce a 5 percent VAT in conjunction with other Gulf Cooperation Council (GCC) states. Both measures which require further legislation is already behind schedule.

 

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