Low oil prices and its worst balance sheet in decades have compelled Kuwait to wake up from its prolonged hibernation and introduce much-needed economic reforms.
With oil accounting for over 92 percent of its revenues and a recent statement from the finance ministry that falling oil income would result in a deficit of $40.2 billion in the 2016-17 budget – nearly 50 percent higher than previous estimates – the government is introducing a slew of reforms designed to revamp its antiquated business laws and make the country more attractive to investors
Parliament last year ratified a new Capital Markets Authority law that allows greater foreign ownership, increases transparency and brings regulations more into line with international standards. The corporate tax system is also being significantly reshaped in a bid to encourage more foreign investment. The government is seeking 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 over $2.5 billion.
Kuwait also is planning to turn five of its islands into investment havens by establishing free trade zones that would allow 100 percent foreign ownership, as well as tax exemptions. If approved, the private sector would be asked to finance, execute and operate the free zones, Announcing the plan in December, the government said the zones “would act as an economic and cultural gateway for the northern Gulf region and Kuwait, and would support the Kuwaiti economy – thus raising its regional and international competitiveness. With global players such as Huawei, GE and IBM making recent forays into the Kuwait market, the government is also keen to make the country attractive to foreign hi-tech firms.
However, while welcoming the government recent initiatives, analysts say that if the wheels of reform are to maintain its momentum smoothly, it will require further greasing by the government. They point out that Kuwait continues to remain a complex market place with a relatively tough operating environment for businesses.
According to the World Bank's 'Ease of Doing Business Index', Kuwait is ranked 101, the lowest compared to other GCC countries such as UAE, which is ranked 31. For instance, an entrepreneur has to deal with 11 government interfaces to start a business, while other GCC peers have interfaces ranging from four to seven. This has deterred substantial inflows of foreign direct investments into the country.
As part of its economic reforms and to buttress falling revenues, the government is aiming to cut its substantial subsidies and adjust its burgeoning salary bill. While continuing to budget for $9.6 billion worth of subsidies, including for fuel, electricity and water, the ministry of finance disclosed that revenues for 2016-17 would cover only 71 percent of the over $34 billion needed to fund state salaries and associated costs.
Kuwait is the last of the GCC states to reduce or remove subsidies, although the government appears to be heading in that direction, with multiple discussions taking place with various stakeholders in an attempt to reach a consensus. Any reduction in subsidies is unlikely to affect nationals and the authorities have repeatedly emphasized that low-income earners would be exempt.
Reducing subsidies also would make state-owned utilities more attractive to private investors, as the government considers setting up a new state-owned fund that would manage as much as $100 billion in local assets with the goal of selling them in five to seven years.
The national strategy aims, among other things, to leverage the country’s strategic location and establish Kuwait as a commercial hub for the northern Gulf, with a number of major investments in transport and logistics infrastructure including seaports, airports and road and rail networks. The spending spree pivots around the Kuwait Development Plan for 2015-2020.
Approved in January 2015, the Plan is linked to $116 billion worth of projects the government has said it would implement during the five-year period. Among the more than 500 projects are a new port worth nearly $8 billion, a desperately needed $19.2 billion expansion of the international airport and a metro. In addition, the Kuwait Authority of Partnership Projects (KAPP) is expected to award contracts for public-private partnership (PPP) projects worth nearly $7 billion in 2016.
As they say, better late than never. With executive and legislative working in a rare mood of cooperation, the government has the unique opportunity to push much-needed economic reforms through parliament. However, to win support for the laws and to ensure its smooth implementation, the government will also have to gain the confidence of the public, and that, given the present circumstances, is not an assured.
- Staff Report