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Kuwait speeds up reforms to counter falling oil income
February 6, 2016, 6:24 pm
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In late January, Kuwait’s finance ministry forecast that, based on falling crude oil prices, it expected a deficit of KD12.2 billion in its 2016-17 draft budget. Earlier, Finance Minister Anas al-Saleh had said that he expected the price of oil for the 2016/17 budget to be set at around $25 per barrel.

In its statement, the ministry further noted that the deficit for the next fiscal year, which runs from April1 to end of March, projected revenues at KD7.4 billion, while expenditures would be KD19.6 billion, including KD700 million to be set aside for the Future Generations Fund. The projected deficit is significantly higher than the KD8.18 billion deficit envisaged in the 2015/16 budget that parliament approved last July.

The ministry warned that revenues would only be sufficient to cover 71 percent of state salaries and associated costs, which are estimated at KD10.4 billion. In addition, the budget will need to set aside KD2.9 billion to provide for state subsidies, and KD3.3 billion or 17 percent of the budget for capital expenditures. The finance ministry statement did not clarify how the deficit would be financed but it is expected the government would most likely resort to borrowing from state reserve funds.

Oil accounts for nearly 93 percent of Kuwait’s annual income, an income that has been decimated by the fall in oil prices since mid-2014.  Despite Kuwait having the lowest break-even oil price of the six GCC states, at an estimated cost of $50 per barrel, currently oil prices are less than half this amount.

But this has not stopped Kuwait’s plans to ramp up its production from the current level of three million barrels per day to four million barrels by 2020. The state-owned Kuwait Petroleum Corporation recently announced that it was considering selling bonds to help pay for a planned investment of around KD30 billion over the next five years to boost oil output, including a KD3 billion loan to expand refineries to make cleaner-burning fuels.

With oil expected to retain its dominance in the country’s economy in the near future and Kuwait in a relatively better economic position than other oil producers in the region,  there is growing realization on the need to diversify the economy and reduce its profligate subsidy programs.

The government, which continues to budget for KD2.9 billion worth of subsidies for items including petrol, power and water, is currently an outlier among GCC states having failed so far to implement any subsidy cuts. Nevertheless, the government appears to be headed in that direction with multiple discussions on subsidies being held with various stakeholders.

Reducing subsidies will not only assist the government in reducing deficits, but will also make state-owned utilities more attractive to private investors, as the government considers setting up a new state-owned fund to manage as much as KD30 billion in public assets with the aim of selling them in five to seven years.

In a bid to wean its economy away from its focus on oil, Kuwait is also reported to be studying the prospect of turning some of the islands off its coast into Free-Trade zones. The official news agency, KUNA, reported in mid-January that the Supreme Council for Planning and Development had presented plans to develop the islands of Boubyan, Failaka, Warba, Miskan and Awha into Free-Trade areas, to His Highness the Amir for approval.

The free-trade zone plans will be based on international models and will depend on foreign investment to bring to fruition, the report added. While the exact details of the development plans or possible costs and timelines were not made public, the report said it was part of the Amir’s aim to boost Kuwait’s regional and international competitiveness and transform Kuwait into a financial and trade hub of the region.

In other moves to make Kuwait more investor-friendly, the country is also revamping its outdated corporate tax system.  The government seeks to implement a flat 10 percent corporate tax to replace the current imbalance that taxes foreign companies by 15 percent of their profits, while local firms are charged various fees of up to 5 percent. The adjustment is expected to see tax revenue soar from as low as $330 million annually to around $2.5 billion. The tax reform bill is expected to be pushed through parliament in time to be implemented by start of 2017.

However, investment flows into the country are hampered by a tough operating environment for business. According to World Economic Forum’s Global Competitiveness Index 2015–2016 rankings Kuwait remains 34th in the world, up from 40 the previous year, but nonetheless lagging behind regional states, including Qatar in 14th, UAE in 17th and Saudi Arabia 25th.

Kuwait also fares poorly in Ease of Doing Business rankings and is the lowest among GCC countries, at 101, compared to UAE, which features as the best in the rankings at 31. For instance, to start a business in Kuwait, an entrepreneur has to deal with 11 government interfaces, while other GCC countries have between four to seven interfaces. The number of interfaces has a visible correlation with the number of days to complete the procedure of setting up a business.


 

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