Kuwait’s economic outlook shows reforms, challenges and signs of optimism

The Kuwaiti government is actively implementing a series of urgent structural reforms to tackle long-standing economic challenges, particularly its recurring fiscal deficit. According to “The Banker” magazine, Kuwait has been grappling with budget shortfalls since the 2015/2016 financial year, with the only exception being 2022/2023, when soaring oil prices that were driven by the Russian invasion of Ukraine, temporarily resulted in a surplus.

The Banker magazine reported that Kuwait’s economy is showing positive momentum, highlighted by a surge in new construction contracts totaling KWD 2.7 billion in 2024, the highest level since 2017. It also noted growing optimism about Kuwait’s potential to boost non-oil revenues in the medium term.

Niranjan Sarangi, Senior Economic Affairs Officer and Fiscal Policy and Debt Expert at the United Nations Economic and Social Commission for Western Asia (ESCWA), expressed that Kuwait’s financial situation is unsustainable. He emphasizes that the country’s heavy dependence on oil revenues, coupled with high public spending, could lead to a fiscal crisis if oil revenues decline, as non-oil revenues remain insufficient to cover expenditures.

ESCWA’s analysis highlights the severity of Kuwait’s fiscal challenges between 2015 and 2023, with the cumulative net budget deficit reaching KWD 28 billion ($91 billion). Since 2017, the absence of a public debt law has prevented the government from issuing bonds to finance the deficit, compelling it to rely on withdrawals from the General Reserve Fund.

Furthermore, ESCWA data shows that in the 2023/2024 budget, current expenditures made up 92.6% of total spending, with the majority allocated to salaries and subsidies, leaving limited funds for infrastructure and public services.

Niranjan Sarangi highlights that a key challenge for the government is the decline in non-oil revenues, driven by weak tax compliance and exemptions for certain companies. Non-oil revenues fell from 14% of non-oil GDP in 2013 to just 8% in 2023, signaling that ineffective tax policies and exemptions are obstructing revenue growth.

OPEC+ decisions to gradually raise oil production from April 2025 mark a shift from the cuts implemented since late 2022 to stabilize prices. While higher output may boost Kuwait’s economy, anticipated declines in oil prices are expected to widen the country’s budget deficit, adding to its fiscal challenges in the coming year.

Tianxin Ping, an economist at Oxford Economics for the Middle East and North Africa, explains that in their baseline scenario, the adverse effects of declining oil prices will outweigh the benefits of higher production. However, the anticipated public debt law could unlock billions of dollars, providing crucial support for Kuwait’s economic diversification efforts.

Moreover, Tianxin Ping added that following the OPEC+ announcement, the budget deficit to widen to 13.8% of GDP, compared to the previous forecast of 12.7%.

The Banker magazine report highlighted increasing optimism about Kuwait’s potential to boost non-oil revenues in the medium term. A key reform in this direction is the long-awaited public debt law, which Finance Minister Noura Al-Fassam stated in February was in its “final stages.” Once enacted, the law will allow the government to issue sovereign bonds for the first time since 2017.

Additionally, Kuwait took a significant step toward revenue diversification by imposing a 15% corporate tax on multinational corporations in January 2024, a move expected to generate approximately KWD 250 million annually.

Importantly, Niranjan Sarangi acknowledged the introduction of the corporate tax as a positive step but emphasized that significant efforts are still needed to enhance Kuwait’s tax system for sustainable revenue growth.

Kuwait is also gearing up to introduce its first Excise Tax, aligning with other Gulf nations that signed a joint agreement on the measure in 2016. Fitch forecasts that the tax will be implemented during the 2025/26 fiscal year, marking a significant step toward diversifying government revenues.