Like other oil producing countries, Kuwait’s fiscal accounts have been adversely affected by lower oil prices. However, Kuwait has been slower than its peers in the Gulf Cooperation Council to develop its non-oil sectors, and was the last to implement fuel subsidy reforms.
Fuel price increases were approved by Kuwait’s cabinet only on 1 August, 2016, long after such measures had been enacted in the UAE, Saudi Arabia and Qatar. This delay in reacting to lower oil prices was for two main reasons.
Firstly, Kuwait has ample fiscal space, which has reduced pressures to make rapid adjustments. Its net foreign assets are among the largest of any sovereign and the debt-to-GDP ratio is among the lowest.
Furthermore, although the 2016/17 budget showed a deficit of KD9.7 billion ($31.7 billion), this understates Kuwait’s fiscal balance, because it treats KD1 billion ($3.26 billion) worth of payments to its intergenerational Fund for Future Generations as an expense and excludes an estimated KD7 billion ($22.85 billion) of investment income. Adding these two items at an assumed average oil price of $40 per barrel leads to a small surplus of KD700m ($2.28 billion), or 1.9 percent of GDP.
Secondly, the government faces immense difficulties in building political consensus on reform. Kuwait’s National Assembly has the most powers of any elected body in the Gulf region. Open public discourse is the norm and Kuwaitis are extremely defensive of their democracy.
The August decision to raise fuel prices was implemented in September, hiking the cost of petrol by up to 80 percent. Although the members of the National Assembly at the time were widely regarded as pro-government, three requests were filed to grill ministers about the price rises.
This pressure from the legislature in turn led to action by the government and on 16 October, the H.H. Amir of Kuwait Sheikh Sabah Al Ahmad Al Sabah exercised his authority to dissolve the National Assembly.
Following a boycott in the last elections of 2012, most of the opposition groups returned to participate in the latest elections, held on November 26.
Less than 40 percent of the old members of the National Assembly were re-elected in a process that saw nearly 70 percent of voters turnover. Moreover, one-third of the elected candidates are newcomers and young faces. The result is a clear message of opposition to the austerity measures of the government by the electorate.
Opposition parliamentarians have taken the position that government should first trim other costs, including what they call “wasted expenses”, such as the overseas medical allowance. These costs alone are estimated at $2.5 billion (KD 760 million) a year, which many see as being used to line the pockets of people with ties to government.
As part of the new cabinet, which was formed on December 10, Finance Minister Anas Al Saleh was reappointed. He has been spearheading the austerity measures of the government and is widely seen as a driving force behind the reforms. In addition, his ministry is responsible for planning the roll out of the value-added tax (VAT), as part of an overall GCC programme, as well as the introduction of a local income tax.
Moreover, Al Saleh is pivotal in overseeing the controversial reform of public sector wages. His re-appointment is a clear signal that the government will continue to strongly pursue fiscal and subsidy reform.
A slowdown in Kuwait’s investment programme by the new government is not expected. Strong project awards in 2015 and 2016 should still lead to a pickup in real non-oil GDP in 2017 as projects are implemented.
Kuwait has announced plans to invest KD4.8 billion ($15.68 billion) in its 2017-2018 development plan. The IMF projects that Kuwait’s non-oil GDP growth is expected to rise to 3 percent in 2017 and 4 percent thereafter.
However, Kuwait’s domestic politics risks falling back into a phase where the grilling of government ministers and the blocking of reform legislation overrides the importance of boosting the economy.
In the short term this could negatively affect government investments and hamper growth in 2017. In the long run, it could yet once again delay necessary fiscal and subsidy reforms that are so essential to ensure a stable future.
We will have to see how wise the government and the members of the National Assembly will deal with these matters.
In any event 2017 will be an interesting year.
Abdul Aziz Al Yaqout, Vice-Chairman, Al-Yaqout Group
Source: Arabian Business