The government’s reported plans to gradually cut subsidies so as to remove them totally by 2020, hit a snag this week in Parliament with members calling for a rollback of earlier subsidy cuts that had been approved by the previous parliament.
Like its other oil producing Gulf Cooperation Council (GCC) neighbors, low oil prices in recent years have adversely affected Kuwait’s fiscal accounts and the country had to post its first budget deficit of KD4.6 billion in the fiscal year 2015/16 which ended on 31 March, 2016.
Public subsidies account for nearly five percent of Kuwait’s spending and totaled over US$3 billion in 2016. Despite the profligacy in providing utilities and other essentials at highly subsidized rates, the government had been reluctant to introduce much needed subsidy reforms and was the last among GCC countries to implement fuel price hikes.
However persisting lower oil prices in last couple of years and runaway expenses that led to budget deficits prompted the government to do a rethink on cutting subsidies and streamlining expenses. It was earlier reported that a committee set up by the finance ministry to review subsidies and other social support schemes had recommended the removal of all subsidies by 2020, though the ministry of finance denied such reports.
In January 2015, prodded by fiscal pressures, the government lifted subsidies on diesel and kerosene price by more than threefold from 55 fils a liter to 170 fils a liter. However, barely a month later, following price increases in the market and political opposition, Kuwait National Petroleum Corporation (KNPC), the state’s arm for downstream oil operations, lowered the price of these two commodities to110 fils per liter.
The authorities made another attempt to cut fuel subsidies by imposing new tariffs on petrol in September. The fuel price hikes, ranging from 40 to 80 percent based on the grade of petrol used, caused severe public dissent and eventually led to the dissolution of the parliament.
The new parliament, with a strong contingent of opposition candidates who now make up nearly half the elected members in parliament, has vowed to restrict the government’s ability to impose new fees on citizens and cut subsidies.
On Tuesday, Safa al-Hashem, a spokesperson for the National Assembly's financial and economic committee, said members of parliament had proposed cancelling a law passed by the previous assembly which ratified a rise in electricity and water tariffs. MPs also proposed a measure confirming the right of the National Assembly to regulate and approve any move by the government to impose fees.
The government however has the leeway to work its way around budget deficits and can afford to drag its feet on subsidy reforms, mainly because it has huge foreign assets, which are among the largest for any sovereign wealth fund and is favored with a low debt to GDP ratio. Moreover, although the 2016/17 budget envisions a deficit of KD9.7 billion, this does not paint a true picture as it understates Kuwait’s fiscal balance. In its annual budget, the government regularly posts the amount it moves to its Fund for Future Generations (FFG) as an expense, and it also does not include the billions its earns from its investments as an income. Adding these two items at an assumed average oil price of $40 per barrel leads to a small surplus of KD700 million, or 1.9 percent of GDP, but clearly not a deficit for the current fiscal year.