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Kuwait’s economy heading to a crossroad
October 10, 2015, 6:01 pm
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Revisiting Kuwait’s budget for fiscal year 2014/15 (FY14/15) reveal gaps that the government will find hard to patch up. Despite its best intentions and effort the government’s budget deficit is set to continue and even get larger in this fiscal year, say analysts. They warn that the country is headed to a financial crossroad and unless stringent measures are urgently implemented, expenditures could continue to rise while revenues decline, making budget deficits the norm in the coming years.

Kuwait government figures reveal that the budget surplus of KD3.5 billion for the fiscal year 2014/15 (FY14/15), which runs from April to March, becomes a deficit of KD2.7 billion, once deductions for the Reserve Fund for Future Generations (RFFG) are taken into consideration.

The government’s RFFG set aside a part of its revenues into a specialized account for the benefit of future generation so as to ensure that no generation enjoys the country’s resources at the expense of another. The RFFG, which usually represents 10 percent of total revenue, in FY14/15 amounted to an exceptional to 25 percent of revenue.

Lower oil prices since mid-2014 have also meant that even before the transfer to the RFFG, the surplus was 73 percent lower than last year’s. The budget surplus narrowed to an estimated 7.5 percent of GDP, compared to an average of 24 percent of GDP during the previous five years. The consolation is that during FY14/15, oil prices averaged US$84 per barrel as against the $75 per barrel assumed in the budget.

Revenues declined by 22 percent in FY14/15 to settle at KD24.9 billion, down from KD31.8 billion in fiscal 2013/14. In the wake of oil prices that have tumbled since the second half of 2014, oil revenue, which accounts for 90 percent of the government’s income, dropped by 23 percent to KD22.5 billion. The oil revenue in FY14/15 was 48 percent of GDP, the lowest recorded in a decade.

The average oil production in Kuwait stood at 2.87 million barrels a day in 2014, down from 2.93 million in 2013. The oil sector accounts for 90 percent of total exports, 80 percent of state revenues and 60 percent of the nominal GDP. Of all GCC states, Kuwait is the most dependent on oil, and therefore has the least diversified economy.

Meanwhile, non-oil revenues rose by 4 percent but remained a small share of total revenues. Income tax revenues, encompassing tax on non-oil foreign companies and corporate income tax, each grew by 15 percent year on year, though they still represented no more than 5 percent of non-oil revenues.

Despite the lower oil price environment, spending remained strong at 13.3 percent, with expenditure rising to KD21.4 billion in FY14/15. Current expenditures represented 91 percent of total spending and was responsible for most of the growth in spending. Growth came primarily from a 26 percent increase in ‘miscellaneous & transfers’ which, among other things, is comprised of military salaries, transfers to the social security fund, fuel subsidies and transfers abroad. Domestic transfers increased by KD1.4 billion or 20 percent, primarily due to a doubling in general subsidies which reached KD1.5 billion in FY14/15.

As per the budget figures for FY14/15, more than 50 percent of subsidies were allocated to funding fuel for power generation plants and refined hydrocarbon products. Another 10 percent was for supporting national labor working in the private sector. Meanwhile, subsidies for reducing the cost of living do not represent more than 4 percent of the total subsidies. Transfers abroad witnessed a hike of 133 percent, reaching KD1.4 billion, of which KD 1 billion was for humanitarian aid.

Civilian wages and salaries rose by 5.3 percent, reaching KD5.3 billion or nearly a quarter of all spending, which is an almost threefold increase from the wage bill a decade ago. The increases in wages and salaries during the last two years were relatively small compared to the double-digit growth posted in FY08/09, FY11/12 and FY12/13. In these years, growth in the wage bill averaged 20 percent per annum and led to efforts to restrain that growth.

Meanwhile, though still under control, inflation has been edging upwards due to localized reasons. The International Monetary Fund (IMF) puts inflation at 3.3 percent in July, up from an average of 3 percent in 2014. The spike relates mainly to housing rent increases.

The combined challenges of inflation and the decline in oil production are partly responsible for absence of real GDP growth in 2014. According to the IMF, real GDP rate — adjusted for inflation — stood at zero in 2014.

 

 

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