THE TIMES KUWAIT REPORT
Elation among policymakers in Kuwait as international oil prices look poised to cross the US$100 per barrel milestone mark are understandable. With the draft budget for 2022-2023 based on an assumed oil price of $65 per barrel and a break-even price of $75 per barrel, the actual budget figure could turn into a surplus by the end of next fiscal, provided oil price maintains its current trajectory. While this is certainly good news that could encourage the government to loosen its purse strings on capital spending and other expenditures, the caveat of ‘if oil prices remain high’, once again underlines the overdependence of the economy on its hydrocarbon revenues.
The current upswing in the economy does nothing to hide the deep structural imbalances that exist in the country, and the need to rectify them as a matter of priority. The government needs to remain committed to its economic diversification plan, improve the business climate, encourage greater private sector participation in the economy, and prepare its citizens to successfully work in the private sector. The government has indeed made progress in improving the country’s business climate, ranking 83rd among 190 countries in the World Bank’s 2020 ‘Doing Business Report’.
But the government cannot claim a similar success story in its attempts to encourage young nationals to work in the private sector. More than enticements to lure youth to opt for a job in the private sector, the authorities probably need to work on changing social attitudes and mindsets of the young, if the country is to move forward on a more equitable and sustainable pathway. This need was driven home last week by the latest report from the Central Statistical Bureau (CSB) on the labor market, which revealed that young nationals account for nearly half of all workers in the public sector.
This large cohort of enthusiastic digitally connected youth, familiar with the latest information and communication tools and technologies, and endowed with fresh perspectives, creativity, and innovative ideas, would normally be considered an asset, as it could portend to a large pool of talent and leadership being available to the country in future. However, with the CSB data showing that 48.4 percent of nationals working in the government sector are below the age of 35, the youth bulge could also pose an additional challenge to the government.
The authorities, already struggling to absorb the thousands of young nationals newly entering the labor pool each year and seeking jobs in an overly bloated public sector, will be further constrained by the large pool of young employees currently in the workforce. More young government sector workers could mean there will be fewer citizens retiring in the near future, which would disrupt the natural employment churn rate, where each year retiring employees are replaced by new recruits.
Government attempts to shoehorn private businesses to employ more young nationals, as well as efforts to encourage and entice youth to work in the private sector, have both failed to dent the large number of young citizens making a beeline for government jobs each year. In Kuwait, public sector jobs are often created to meet the need for employing nationals, rather than to fulfill an existing vacancy. A more effective strategy for the authorities would be to encourage youth to seek self-employment and embolden them to strike out on their own by stimulating an entrepreneurial ecosystem, and providing them with requisite tools, training, funding and incentives to succeed.
An entrepreneurial pathway has been recommended by labor economists and international institutions as one of the ways for Kuwait to overcome its public sector employment crisis. During its annual Article IV consultations with concerned officials in Kuwait, the International Monetary Fund (IMF) has repeatedly stressed on the need to limit public sector employment growth as part of broader public sector reforms, and suggested the authorities should focus on efforts to boost private sector jobs and entrepreneurship opportunities for youth.
An attractive entrepreneurial environment could prove a win-win-win situation for the youth, the economy and the country. Entrepreneurs play a vital role in economic development of a country as they could serve as catalysts in creating job opportunities for young nationals, bring about greater private sector participation in the economy, and augment the country’s diversification plans that aim to wean the state away from its overdependence on oil revenues. The enthusiasm, creative flair and innovative ideas exhibited by many young entrepreneurs could also lead them to find and drive solutions to many of the seemingly intractable social, political, environmental and economic challenges that confront the country now and in future.
However, developing a spirit of entrepreneurship among youth is not something that happens by chance, it needs nurturing and has to start at a very early age right from the schooling days. To prepare youth for a labor market in a rapidly transforming world, the authorities will need to adapt the current education system by including entrepreneurial skills in the curriculum, or by offering training through online platforms. Undertaking this academic adaptation is not an insurmountable task provided there is a will to implement it, especially now, when information and communication technology advances can facilitate and speed up the process.
In addition to requisite education, appropriate apprenticeship and job training to gain practical entrepreneurial experience, youth will also have to enhance their interpersonal, management and communication skills, as well as hone their analytical and critical thinking abilities to prepare themselves for an entrepreneurial career. The state will also need to invest directly in viable start-up projects by nationals through launching a dedicated investment fund that could replace, or work in concert with the current National Fund for Small and Medium Enterprises.
The National Fund for Small and Medium Enterprises (SME) Development that came to be known as the SME Fund or the National Fund was established in April 2013 through Law No.98. The fund was set up with the aim of combating unemployment, supporting the young national cadre, and enabling the private sector to drive economic growth. The fund, set up as an independent public corporation with a corpus of KD2 billion, is empowered to finance up to 80 percent of capital for feasible small and medium projects submitted by citizens.
Though the ostensible focus of the fund is, as it claims, to build an ‘inclusive, collaborative, and innovative ecosystem for entrepreneurs to lay the foundation for economic opportunities in the country’, it has largely failed to deliver on the ambitious targets it aims to achieve. Since its establishment the National Fund has proven to be largely ineffectual in promoting an entrepreneurial spirit among youth, or lending adequate support for small and medium enterprises.
The inability of the fund to fulfill the objectives behind its establishment can in large measure be attributed to the lack of public trust in the fund’s accountability and governance systems, as well as the institution’s lack of autonomy. Despite being an independent public entity the fund has had to comply with the numerous often onerous and interwoven regulatory frameworks and superfluous institutional responsibilities that hamper its efficient functioning.
Moreover, as with other parastatals in the state, the fund has been hindered in attempts to execute its remit by the constant need to cater to the conflicting interests of the executive and legislative arms of government. The duality of pressures pulling the fund in opposite directions, the frequent changes to the lineup of its board of directors, and abrupt policy and priority shifts, have all combined to limit the functioning of the fund, eroded public trust in it, and adversely impacted entrepreneurs and the viability of their enterprises.
The fund defines an enterprise as an SME if it employs from 1 up to 50 Kuwaiti workers and requires less than KD500,000 in financing. By this standard and according to a report in 2016 by the World Bank, despite the state’s efforts to boost their growth, SMEs accounted for only 3 percent of Kuwait’s GDP and employed 23 percent of the workforce. In comparison, in many developed and emerging economies SMEs contribute around half of the country’s GDP, and provide employment opportunities to nearly half the workforce.
Also, the World Bank’s employment figure needs a caveat here; many among the 23 percent employed by SMEs are expatriates and not nationals, thus defeating one of the main aims of the government in setting up the fund, to generate employment opportunities for nationals. Though the bank’s figures could have changed in the intervening six years, it is unlikely to have gone up significantly, especially considering the large number of SMEs that had to shut down permanently due to the economic pressures brought on by the global pandemic in 2020. On a related note it needs emphasizing that in Kuwait the entrepreneurial path chosen by some citizens is by most accounts quite unique.
In addition to those who become entrepreneurs because of inherent entrepreneurial inclination or an independent streak, entrepreneurs generally fall in the category of either ‘necessity entrepreneur’ or ‘opportunity entrepreneur’. The former results when a person needs to engage in an entrepreneurial venture to make a living, due to the lack of alternative opportunities. This is the case in many places where youth unemployment is rife. On the other hand, opportunity entrepreneurs are usually spurred by an apparent business opportunity that emerges from a change in external circumstances, such as during this pandemic.
However, in Kuwait, we also encounter a separate category of entrepreneur, who for want of a better term could be called a ‘rentier entrepreneur’. In line with many other so-called Kuwaiti business people, the rentier entrepreneur is in effect just a purveyor of a license. The entire SME business would be owned and operated by expatriates for an annual fee paid to the Kuwaiti, for doing nothing more than providing a license and being the ubiquitous ‘kafeel’.
There have also been several unfortunate instances where the rentier entrepreneur uses his license to engage in the lucrative visa trade. Several of these cases came to the limelight in 2020 when the government imposed an extended period of business shut-down as a precautionary measure against the global pandemic. Many expatriate workers left without any work, income or a livelihood, and unable to renew their expired visas due to the disappearance of the ‘rentier entrepreneur’, complained to the authorities and admitted paying large sums to procure their so-called ‘free-work visa’, which enabled them to seek work with other companies.
Though the new Companies Law promulgated in 2016 revamped and simplified several processes in registering and setting up a new company in Kuwait, it still maintains that a Kuwaiti, or a national of one of the other five GCC states, should own at least 51 percent of a local company. Even if the entire business operation is owned, fully funded and operated by an expatriate, in the eyes of the law the foreigner is only at best be a 49 percent owner of a business, and usually responsible for 100 percent liability in case the operation goes bankrupt.
It is evident that besides building up entrepreneurial skill sets among young nationals, the SME fund will also have to work to change the mindset among some entrepreneurs. Additionally, the fund will have to regain the trust that it eroded over the years and work to fulfill the promises it held out to the youth at the time of its inception. In order to rekindle trust and build a favorable attitude towards entrepreneurship among youth, the state will also have to do its part by granting full autonomy to the fund, and stopping unwarranted interference in its working.
If revamping the existing SME Fund proves unviable, then it would be best to shut it down and launch a new autonomous entity dedicated to independently promoting entrepreneurship and entrepreneurs in the country. To begin with, the new fund could provide potential entrepreneurs with necessary training and access to risk capital, market research, and knowledge institutions. For instance, entrepreneurs could be linked to innovative research conducted by the Kuwait Institute for Scientific Research (KISR), which is reportedly considering forming a company to consolidate and market its innovative products and research activities.
The new fund could also link entrepreneurs with local business incubators, financing programs, and networking events that promote entrepreneurship. For their part, policymakers could reduce and simplify many of the regulatory frameworks and address the legislative impediments that delay the processes involved in launching SMEs. The authorities could leverage the existing Sahel app, which provides online access to many government services, to reduce the regulatory burden on entrepreneurs, and speed up the processes involved in establishing SMEs. This could make the new fund more efficacious and encourage more youth to pursue an entrepreneurial career.
Also, the new bankruptcy law that Kuwait promulgated in October 2020, which no longer makes it a criminal offense when someone fails to meet debt obligations, unless it is fraudulent activity, will help embolden entrepreneurs to take calculated risks with borrowed investments. Until mid-2020, bankruptcy in the country was governed under Law No. 68 of 1980, which did not meet international standards in restructuring debt, and could result in bankrupt individuals being incarcerated. In the case of nationals, a bankruptcy declaration could also limit their political rights, and their ability to serve on company boards.
The new law goes a long way to destigmatize bankruptcy and provides debtors with the option of settling a new repayment mode and time-frame with creditors. Or the debtors could engage in a restructuring plan under the supervision of a financial restructuring committee. The committee would facilitate consensual restructuring arrangements between debtors and creditors and oversee the management of restructuring procedures.
In addition, for the first time in Kuwait, the new law calls for establishing a specialized bankruptcy court mandated to issue judgments that cannot be disputed, or its implementation suspended, without a ruling issued by the Court of Appeal. It is hoped the new law will lead to the promotion of a more robust legal framework for entrepreneurs and an enhanced business and investment climate for investors.
The revamped bankruptcy law should encourage young entrepreneurs and give them the confidence to test out new ideas, initiatives and projects without the fear of ending up in prison, or having to pay hefty fines on their debt obligations. Where genuine entrepreneurship flourishes, employment opportunities, innovation and investment are bound to follow. Let us cross our fingers and hope this will at some stage be the future that Kuwait chooses for itself.
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