In a statement issued last week, following a visit by its staff to Kuwait, the International Monetary Fund (IMF) noted that high oil production and prices throughout 2022 has helped Kuwait’s economy recover from its pandemic era lows. The country’s fiscal and external balances have been strengthened, inflation has been contained, and financial stability has been maintained, said the Fund.
Other positive indicators of Kuwait’s economic recovery emphasized in the IMF statement included, GDP growth that soared to 8.2 percent in 2022, up from 1.3 percent in 2021, driven mainly by higher international oil prices and increased oil output as the Organization of Petroleum Exporting Countries (OPEC) and its allies in non-OPEC oil-producing nations (now together dubbed as OPEC+) eased production cuts. Non-oil sector also witnessed brisk growth last year on the back of strong domestic demand, growing from 3.4 percent in 2021 to 4 percent last year.
Inflation has been contained, largely due to measures undertaken by the government to limit higher global food and energy prices filtering down to consumers through price regulations and increased subsidies. Additionally, monetary policy tightening by the Central Bank of Kuwait, in line with similar action by major central banks around the world, helped keep inflation in check. Annual headline consumer price index inflation that peaked at 4.7 percent in April 2022 eased down to reach 3.7 percent by April 2023.
The IMF also noted that higher oil revenues helped strengthen both fiscal and external balances, with fiscal surplus surging to 22.5 percent of GDP in 2022, up from 6.4 percent of GDP in 2021, while current account surplus is estimated to have risen to 33 percent of GDP in 2022, up from 26.6 percent of GDP in 2021. Moreover, official reserve assets increased to US$48.2 billion by the end of 2022, which adequately covers balance of payments financing risks.
Nevertheless, the IMF statement, which was released on 5 June as part of the Fund’s annual Article IV consultative meetings in Kuwait, cautioned that the dominance of oil in the economy, coupled with global decarbonization trends necessitated that the country initiate long-pending fiscal and structural reforms to reinforce sustainability, and boost non-oil private sector-led growth.
Volatility in international oil prices and in oil production cuts are two-sided risks to growth and inflation over which Kuwait has little control, but which directly impacts the country’s fiscal and external balances. Oil industry analysts point out that disquiet in recent months over global economic growth in 2023 forced oil prices down, which then led OPEC+ members to agree to further production cuts over and above those approved last October.
In early April, several OPEC+ countries, including Kuwait, Saudi Arabia and the UAE, announced additional, voluntary production cuts totaling around 1.2 million barrels per day (mb/d) effective May and to continue to December 2023. For Kuwait, the production reduction amounts to 128,000 barrels per day, which results in daily output falling to 2.55 mb/d — a drop of nearly 4.8 percent from its earlier production quota of 2,68 mb/d.
Underscoring the risks from lower oil production and subsequent fall in revenues, the IMF statement said that fiscal expansion outlined in the draft 2023/24 budget, could result in the country’s overall fiscal and current account surpluses falling in 2023. The statement also pointed out that risk factors on the domestic front include delays in implementing necessary fiscal and structural reforms, and a procyclical fiscal policy — increased spending in ‘good times’ and expenditure cuts during ‘bad times’ — that impedes Kuwait’s progress towards diversifying the economy, undermines competitiveness, and dampens investor confidence.
The government’s inclination towards procyclical policies is evident in the draft expansionary budget for the current fiscal year (FY2023/24). The budget, which awaits parliamentary approval, envisages a deficit of KD6.8 billion, with expenditures increasing from the previous budget by 12 percent to reach KD26.3 billion, even as revenues are expected to decline by 17 percent to KD19.5 billion — based on an average conservative oil price figure of $70 per barrel.
While a policy of fiscal expansion is welcome, the fact that the higher current spending is concentrated primarily on non-productive public sector wage bill increases of 13 percent, and on a 34 percent hike in subsidies and social benefits, is certainly concerning. The improvident spending policy is projected to drag down the overall fiscal surplus to 6.9 percent of GDP in 2023, and cause it steadily drop thereafter into deficit over the medium term.
To reverse the projected fiscal surplus weakening beyond 2023/24, and to ensure long-term fiscal sustainability as well as support intergenerational equity, the IMF statement recommended several measures that Kuwait could implement to ensure fiscal consolidation. These include reducing current spending by rationalizing the public-sector wage bill, as well as gradually phasing out large energy subsidies, and replacing them with targeted income support to vulnerable households.
Other remedial measures include raising non-oil revenue by introducing a 5 percent value-added tax (VAT), and levying excise taxes on tobacco and sugary drinks, as agreed by GCC countries in 2015-16, but which Kuwait has so far not implemented. In addition, the prevailing 15 percent corporate income tax should be expanded to cover domestic firms, which would bring Kuwait into conformity with the OECD-led global minimum corporate tax agreement for multinationals.
On the structural side, the IMF called for implementing a comprehensive package of well-sequenced reforms that promote strong and sustainable growth while enhancing labor productivity and diversifying the economy away from oil. These include labor market reforms needed to incentivize nationals to seek private sector employment, by gradually aligning compensation and working conditions across the public and private sectors.
Additional reforms suggested ranged from providing enhanced training programs to empower youth with necessary skills and expertise, as well as harmonizing labor market policies between nationals and expatriates. Other reforms, to make the business environment more conducive to private sector development, as well as to strengthen competition and promote investment, included relaxing foreign ownership restrictions on firms, enhancing public land allocation for commercial development, and longer lease terms.
The fiscal consolidation and reforms called for by the IMF statement reiterate what the World Bank, rating agencies, and local economic experts have been urging for ages without avail. However, it is not just the lack of fiscal and structural reforms that hamper Kuwait’s growth story, there are also several institutional weaknesses that have gone unaddressed for far too long. Some of these weaknesses can be attributed to the insignificance, noncompliance and instability of many state institutions. For instance, there are many public entities that have become in most part irrelevant as they do not have the authority or capacity to implement changes even if they wanted to.
Furthermore, the presence of political and social actors who do not believe in complying with institutional rules and regulations weakens and impedes the effectiveness of many institutions. Adding to these institutional woes are instabilities arising from various factors, including indecisiveness by decision-makers that delay appointments to top posts, policy uncertainties due to parliamentary tussles, and political precariousness of repeated governments.
Inability to institute fiscal and structural reforms as well as institutional shortcomings have over the years hindered economic and social development in Kuwait and impinged on economic freedoms of citizens and residents alike. The combined impact of these economic limitations was highlighted in the latest iteration of the global index on economic freedom.
Published annually by the daily Wall Street Journal and the Heritage Foundation — a leading Conservative advocacy think-tank in the United States — the 2023 Index on Economic Freedom, reveals Kuwait in the 108th position among 182 countries reviewed by the index last year. Kuwait, which attained a total score of 56.7 out of a possible 100, not only scored below the global average of 59.3, but was also the only country among the six Gulf Cooperation Council (GCC) states to drop in its scores from the 2022 Index.
Economic freedom as defined by the Index is the fundamental right of every human being to have the freedom to control their own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. Also, in economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.
The Index on Economic Freedom, which has been published annually since 1995, measures economic freedom based on 12 quantitative and qualitative factors, grouped into four broad pillars of economic freedom: Rule of Law (property rights, government integrity, judicial effectiveness); Government Size (government spending, tax burden, fiscal health); Regulatory Efficiency (business freedom, labor freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom).
It is commendable that Kuwait improved its scorings from a year earlier in certain metrics of the index, including in property rights and business freedom, and scored a blisteringly high 99.7 in tax burden, as well as maintained its relatively high scores in being an open market, However, it fared less well in other metrics of economic freedom, most notably in labor freedom due to lack of flexibility in labor regulations, and monetary freedom arising from the government’s numerous profligate subsidies, as well as its role in controlling prices through state-owned utilities and enterprises.
In its overview on Kuwait, the Economic Freedom Index noted that while there have been efforts to enhance the efficiency of the business regulatory framework, overall progress has been mixed. In addition, the lack of institutional capacity to defend property rights effectively, and the fact that corruption, despite some progress, continues to undermine prospects for long-term economic development, have been identified in the report as among institutional weaknesses that curtail the country’s prospects for economic growth and development.
There is no denying that sustained policy weaknesses, a sluggish bureaucracy, and political gridlocks in parliament, have in the past thwarted attempts at any reforms, deterred investors and slowed down the stream of public-private partnership projects. Despite these bureaucratic and political obstacles, the IMF in its concluding statement suggested that with the economy currently in a stronger position, now would be an apt time to push through the much-needed fiscal and structural reforms.
But, with results from the snap general elections held on 6 June indicating that the status quo in friction between the executive and legislature is likely to continue, hopes of implementing the necessary economic reforms looks as distant as ever.