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General Reserves may run dry even with oil at $100
June 18, 2018, 3:54 pm

Finance Minister Nayef Al-Hajraf said last week that Kuwait’s General Reserve Fund (GRF) will continue to remain “critical”, even if oil prices jump to $100 a barrel.

The minister made the remarks during a meeting of lawmakers on 10 June. In a bid to win parliamentary nod for the government’s economic and fiscal reform program, the finance minister warned the legislators that the GRF, where the state’s total revenues are initially deposited, “is under pressure due to growing budget expenditure and the low oil-price environment in recent years.”

Since the steep decline of oil prices in mid-2014, the government has struggled to balance the budget with its customary surplus budgets turning into yawning deficits. The budget deficits in the three full financial years since 2014 have totaled KD14.6 billion. Though the shortfall was mitigated to a large extent by withdrawing from the state’s GRF, the government has also had to resort to borrowing nearly KD4.8 billion from local and international debt markets.

The state budget for the financial year 2018/19, which is scheduled to be approved by parliament later this month, envisions raising spending to KD21.5 billion. Even with oil hovering at over $70 a barrel the government could find itself hard-pressed to introduce a balanced budget, especially with public-sector wages and subsidies continuing to consume as much as 70 percent of total budget expenditure.

Kuwait manages its revenues through the venerable Kuwait Investment Authority (KIA), which was established by the government in 1953 to manage the state’s funds after the discovery of oil. The KIA is the world’s oldest sovereign wealth fund (SWF) and fifth largest with estimated assets of over $590 billion. Both, the General Reserve Fund (GRF) and the Future Generations Fund (FRF), which receives a minimum of 10 percent from the state’s oil revenues each year, are managed by KIA.

The government has now realized that, rather than continue to deplete GRF reserves, a more effective option is to approach international and local debt markets to meet its budget deficits. Especially given that recent higher oil prices, the country’s strong ratings and financial reserves make Kuwait debt instruments very attractive on global markets. This was proven in March 2017, when the government’s debt issuance of KD2.4 billion with maturities of five and 10 years were lapped up, and bidding was overwhelmingly over-subscribed.

The government would like to push through a financial reform package that would allow it to issue debt instruments on terms that would attract even more investors, especially global pension and insurance funds that are on the lookout for longer-term papers. The government has proposed a bill to extend its borrowing limits from the current KD10 billion to KD25 billion and raise the maturity period of its debt instruments to 30 years from the maximum of 10 years at present.

But parliament in its infinite wisdom has balked at the move and has so far denied the government the luxury of these market-oriented financial reforms. Attempts by the government to introduce a law that would allow the state to issue sukuk — Islamic bonds structured to generate returns to investors without infringing Islamic law — have also still not taken off.  The current legal framework does not allow the government to raise financing through Islamic bonds.

In September 2017, it was reported that the parliament was close to approving the draft law that would allow the government to extend borrowing limits and raise the maturity period of its debt instruments. The fact that the finance minister was still urging lawmakers last week to accept their “shared responsibility” and approve the government’s proposed reform plans, speaks volumes of the difficulty in getting things passed through the country’s often contentious parliament.

Voicing concern over the delay in getting parliamentary approval for the reform package, the finance minister said, “The objective behind the bond issuance bill is to maintain the state’s financial condition and economic stability, as Kuwait suffers from some real challenges and structural problems that needed to be addressed rapidly before they worsen”. He also clarified that approving the proposal did not mean that the government would rush out and start issuing bonds. “Entering international stock markets is studied carefully and there is good governance and a wise administration to manage the bond issuance.”

To gain wider acceptance among lawmakers for the financial reforms, the finance minister added that along with the reform package the government would also introduce its national program for economic and financial sustainability that aimed to promote the private sector and diversify the economy by encouraging the non-oil sector. In addition, he promised that the government would continue to ensure that the state’s subsidies would reach to the people who really deserved them.

It remains to be seen whether Minister Al-Hajraf’s latest stark warnings or carrots will move the parliamentarians to act any more quickly or decisively. Apparently, what the lawmakers who often hinder implementation of reforms for political reasons fail to realize is that in financial markets the window of opportunity in never left open permanently. “We believe time is a very important aspect... and, as we all know there are windows in the market, warned Abdulaziz Al-Mulla, head of the debt management department at the ministry of finance, during the recent Euromoney conference in Kuwait. That window could be closing even as the lawmakers continue to douse and debate the issue, and that would be yet another missed opportunity for Kuwait.


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