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Kuwait’s oil-based economic model no longer sustainable
May 6, 2017, 3:05 pm
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Kuwait’s overwhelming reliance on hydrocarbons to drive its economy is a model that is no longer sustainable, says the country’s finance minister.

With oil prices hovering in the $55 range, a traditional low breakeven cost of around $45 per barrel, and proven oil reserves of over 100 billion barrels, as well as nearly $600 billion stashed abroad with its sovereign wealth fund, Kuwait is far better-off than many other oil-exporting countries.

Nevertheless, the country, which depends on oil for nearly 90 percent of its revenue, saw its income tumble when oil prices began its slide in mid-2014. For the first time since 1999, Kuwait tabled a budget deficit of KD4.6 billion in fiscal year 2015-16, which then nearly doubled by 2016-17. Though OPEC’s decision to cut oil production in late 2016 has helped boost oil prices, Kuwait still projects a budget deficit of KD6.6 billion for fiscal year 2017-18. According to the International Monetary Fund (IMF), Kuwait would need around KD35 billion to fund its deficits over the next six years. 

In a recent interview with UAE-based online publication ArabianBusiness.com, Kuwait’s Finance Minister and Deputy Prime Minister Anas Khaled Al-Saleh said he was worried about the economy’s overwhelming dependence on oil income, and about the sustainability of this approach. Hinting that the country’s huge oil reserves and large oil revenues in the past, has led previous governments to neglect structural imbalances in the economy, Al Saleh stressed he was determined to tackle this issue, “even if oil reaches $100 per barrel.”

“As a minister of finance there are two main challenges I have to deal with every day. The first is the short-term challenge, to close down the deficit, and the other is the medium to long-term one, diversifying the economy,” said Al Saleh.

The government’s Fiscal and Economic Sustainability (FES) program, which was published in March 2016, includes measures to bring down the deficit by trimming subsidies and reducing government expenditure. The five-year plan sets out reforms categorized into four areas: improving government efficiency by cutting public spending while prioritizing capital spending; reducing expenditure by capping departmental budgets and rationalizing subsidies; shrinking the public sector wage bill; and diversifying public revenues by growing the private sector.

Measures in the FES program to increase the role of private sector in the economy include public-private-partnerships (PPPs) in energy, infrastructure and health sectors among others, as well as a privatization strategy that could see the privatization of several state assets this year. The government is also intent on selling to the private sector minority stakes in several units of state oil producer Kuwait Petroleum Corporation.

In a bid to improve efficiencies and enhance the business environment, the authorities plan to launch a revised FES that would include an insolvency law, remove capital requirements for new businesses and slash fees for corporate licensing renewals. However, the government’s reform plans, especially its privatization drive and subsidy cuts on petrol, electricity and water, are thorny issue within the country.

The subsidy cuts were controversial enough to lead to the dissolution of the last parliament. But legislators in the new assembly have continued to clamor for rolling back the price hikes and citizens have challenged the decision in court. In late April, the country’s Appeals Court ruled that hiking oil prices was within the prerogative of the government and in line with the country’s constitution. But this has not quieted opposition to the government’s subsidy reforms.

The finance minister, who has been in charge of the country’s finances since 2014, said he remains committed to the fiscal reform packages. He stressed that, while there are no plans to extend controversial subsidy cuts, “there can be no backtracking; the reforms are going ahead.”

Meanwhile, the country is also looking at alternative means of raising finance. In March, Kuwait floated its debut $8 billion international bond issue that garnered nearly $30 billion in orders from international investors. Al Saleh, who is also optimistic about boosting foreign investments in Kuwait, said that high level of demand for Kuwait’s recent bond sale is further evidence of investor interest in the country. Last year, total FDI flow into Kuwait was $1.18 billion, an increase of 29 percent increase from the $920 million in 2015.

“We are doing everything possible to enhance our ranking in the World Bank’s Ease of Doing Business report,” said the finance minister. Kuwait was ranked 102 in the World Bank’s ‘Ease of Doing Business’ index in 2017, the lowest among GCC states and a sharp drop from the 40th ranking it had in 2008.

 

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