THE TIMES KUWAIT REPORT
In its latest Global Economic Prospects report the World Bank notes that following a strong rebound in 2021, the global economy is now entering a period of pronounced slowdown. The bank expects global growth to decelerate significantly from 5.5 percent in 2021 to 4.1 percent in 2022 and to 3.2 percent in 2023, as countries around the world wind up fiscal and monetary support measures, and pent-up demand, which fueled much of the growth witnessed in 2021, begins to dissipate.
The report also cautions that the slowdown will coincide with a widening divergence in growth rates between advanced economies and, emerging and developing economies. While advanced economies are expected to achieve full output recovery by 2023, the output in emerging and developing economies will remain 4 percent below its pre-pandemic level.
In what is construed as a high-note for Kuwait the bank report forecasts that in 2022 the country’s economy will register the largest growth among its peers in the six-nation Gulf Cooperation Council (GCC) bloc. The report expects real GDP growth in Kuwait this year to increase by about 5.3 percent, before declining to 3 percent in 2023. This seemingly glowing growth spurt needs to be tempered with the fact that the increase in GDP stems from the low base achieved in 2020, when GDP fell by 8.9 percent, and the relatively lethargic estimated growth of 2 percent in 2021. It needs to be pointed out that the fall in GDP in Kuwait during 2020 was the highest, and the subsequent growth in 2021 was the smallest, among the GCC states.
Of even greater significance to Kuwait than the GDP figures provided by the World Bank, are the comments made by the bank in the analytical section of its report, where it examines the implications of boom-and-bust cycles of commodity prices for emerging markets and developing economies that are heavily dependent on revenues from commodity exports.
The report finds that these boom-bust cycles were particularly intense in the past two years, when commodity prices collapsed with the arrival of COVID-19 in 2020 and then surged, in some cases to all time-highs last year, due in large measure to a spurt in demand that had been constrained during the pandemic period.
The report expects global macroeconomic developments and commodity supply factors to continue causing boom-bust cycles in commodity markets. The analysis also showed that commodity-price booms since the 1970s have tended to be larger than busts, creating significant opportunities for stronger and more sustainable growth in commodity-exporting countries, if they employ disciplined policies during booms to take advantage of windfalls to help them tide over bust cycles. Policymakers in Kuwait need to perk up and read, probably repeatedly, this conditional clause on the need to employ disciplined policies.
Besides implementing effective and systematic policies during boom cycles, another crucial factor that will allow GCC states to take advantage of opportunities during thriving periods, is having the necessary financial resources, as well as the foresight and leadership to employ the increase in revenues during boom phases to develop their hydrocarbon and non-oil assets so as to help tide over the lean periods. Underinvestment in the oil and gas sector, and the shelving or scrapping of many non-oil projects that happen during the bust phase, invariably limits the ability of countries to take full advantage of opportunities during the boom period.
Saudi Arabia, the UAE and Qatar have the financial resources and the leadership that can take visionary initiatives to take proactive measures that protect their economies during bust cycles. Oman and Bahrain do not have the same financial resources, but nevertheless they have the leadership with farsightedness to develop non-oil revenue sources during boom cycles, which enables them to overcome downturns and continue maintaining relatively steady growth and progress during the bust cycle.
Five of the six GCC states have also seized opportunities presented by economic upswings in the past, as well as continued to do so in 2021, by implementing long-term plans aimed at modernizing and diversifying their economies away from hydrocarbons. They have also been systematically introducing or extending long-term fiscal reforms and rationalizations strategies designed to enhance their business climate, attract foreign direct investment, and in general improve economic growth and development of their countries.
Although among the wealthiest of the GCC bloc and endowed with abundant oil wealth and financial reserves, authorities in Kuwait lack the ability to take quick, insightful and independent decisions. The government remains hampered in implementing plans and policies, and introducing essential reforms, due to the constant need to acquiesce to demands of a contentious and belligerent parliament, where some lawmakers remain at perpetual odds with the executive. No wonder then the country’s GDP fall in 2020 was the highest, or the expected economic revival and GDP growth in 2021is the smallest among the GCC states.
Rather than engaging in debate and approving decisions deemed crucial to reviving and rejuvenating the economy in 2021, the executive and legislative arms of the government squandered the last year by bickering and playing a game of political one-upmanship in parliament. The dilly dallying over obfuscatory demands, and frivolous grilling motions by the opposition in parliament, as well as evasive tactics employed by the government led to an entire year in parliament going to waste. In recent weeks, it has become quite apparent to most people that the impeding of parliamentary proceedings throughout 2021 by a handful of opposition members were nothing more than a charade.
The protests and accusations against the authorities were meant solely to achieve the narrow, sectional and parochial interests of a section of lawmakers. Eventually, their obstructionist tactics paid off, as they were able to achieve their real aim of getting the government to recommend an Amiri Amnesty for their dissident compatriots, who were in self-imposed exile abroad to avoid court-ordered jail sentences. The fact that the hampering of parliamentary sessions all through 2021 came at a high cost to the country’s economic revival and growth, and at the expense of progress and prosperity of its people, were apparently of least concern to the lawmakers.
The contentious relationship between government and some legislators in the National Assembly have also led to repeated downgrading of the country’s standing by international sovereign credit rating agencies. Last week, Standard & Poor’s Global Ratings affirmed its long- and short-term foreign- and local-currency sovereign credit ratings on Kuwait at ‘A+/A-1’, with a negative outlook. Clarifying its decision, the agency said, “The negative outlook primarily reflects risks over the next 12-24 months relating to the government’s ability to overcome the institutional roadblocks preventing it from implementing a financing strategy for future deficits.”
The agency pointed out that despite higher oil prices and production levels, Kuwait’s central government deficits are set to average 12 percent of Gross Domestic Product (GDP) through 2025, among the highest of all rated sovereigns. “The government has almost exhausted the General Reserve Fund’s liquidity, having yet to reach an agreement with the parliament on a comprehensive fiscal funding strategy, which presents financing risks for the state, particularly if oil prices decline,” the agency added.
While Kuwait’s chosen path of a democratic parliamentary style of governance results in a dithering of its economic prospects, other states in the region that are more nimble and astute in decision-making have introduced policies and implemented sustainable measures to enhance their economic prospects. A new report by the Oxford Business Group, a global research and advisory company, shows that foreign direct investments (FDI) flowing to the GCC have shown a preference for countries that introduced or improved the investment climate. In this regard, FDI that had been making a beeline to Saudi Arabia in the last couple of years is likely to redouble following the launch of the kingdom’s National Investment Strategy in October.
The National Investment Strategy, which has the ambitious goal of attracting $100 billion in FDI annually by 2030, includes measures to develop special economic zones, a program to transfer key supply chains to the country and a diversification of financing options for private sector operations. These initiatives are being accompanied by efforts to improve the general business environment, such as a new law allowing specialised foreign professionals to obtain Saudi citizenship, and a new platform easing the process of setting up a business for foreign investors.
In the UAE, another major magnet for FDI to the region, the authorities have implemented a number of impressive reforms to encourage foreign investment. In June of 2021 the country amended laws to allow 100 percent foreign ownership of Emirati companies in all but a few restricted sectors, and in November the country introduced a slew of legal reforms, all of which were designed to attract and sustain investments and enhance the economy.
Another fiscal reform adopted by most states in the region include the introduction of a Value-Added Tax (VAT), as part of the bloc’s Unified Agreement for VAT that was signed by the GCC member states in June 2016. Although the six signatories to the agreement had pledged to implement the surcharge in 2018, the implementation of VAT has been mixed, at least in the early stages. While Saudi Arabia, the UAE and Bahrain signed on and readily implemented the surcharge, Oman, which had been hesitant earlier, also decided to implement a 5 percent VAT in April 2021.
The introduction of VAT in Oman is expected to help ease pressure on the country’s economy by adding around US$1 billion, or roughly 1.5 percent of its GDP, to the treasury annually. In the same vein, and as part of its strategy to bring the budget back to surplus in 2024, Bahrain recently announced that it would double its VAT rate to 10 percent in 2022. Saudi Arabia had already tripled its VAT from 5 percent to 15 percent to offset the impact of lower oil revenue on state finances during the height of the pandemic in July 2020. While the UAE continues to levy its initial 5 percent VAT, it continues to utilize the additional income from VAT to provide high-quality public services to citizens and residents.
Of the two remaining states in the GCC that have so far remained reluctant to implement VAT, Qatar announced in late November 2021 that it would implement VAT as soon as legislation on the matter was completed. Meanwhile, in Kuwait, there has been no commitment to introducing VAT, as opposition to tax among lawmakers in parliament makes the prospect of implementing this surcharge yet another hurdle for the government to overcome.
To lend a better perspective on the GDP figures and provide a more detailed insight into economic outlook for the region, it is worth looking at some of the charts provided in the World Bank’s latest Global Economic Prospects report. The figures show the annual percentage change in GDP for all six GCC states, and range from the real GDP numbers in 2020 to the estimated figures for 2021, and the forecast numbers for 2022 and 2023.
The charts reveal that amid the pandemic induced global recession in 2020, all GCC states suffered setbacks to their GDP to varying levels. Consequently, the recovery witnessed in 2021 was also widely diverging. In addition to the 8.9 percent GDP drop in Kuwait in 2020, Bahrain’s GDP fell by 5.1 percent, Oman (-2.8%), Qatar (-3.6%), Saudi Arabia (-4.1%) and the UAE (-6.1%). The estimated recovery in 2021 was also mixed with Bahrain’s GDP reviving by 3.5 percent, Oman and Qatar’s GDP by 3 percent, the Saudi GDP by 2.4 percent and the UAE by 2.7 percent.
Forecast growth in 2022 and 2023 also varies widely. Bahrain’s GDP growth is expected to be 3.2 percent in 2022, before declining to about 2.9 percent in 2023; Oman’s output growth will be 3.4 percent this year and 4.1 percent next year; Qatar will record an output growth of 4.8 percent in 2022 and 4.9 percent next year. Meanwhile, the Saudi economy will register 4.9 percent this year and a milder 2.3 percent growth next year; while the UAE GDP is likely to grow by 4.6 percent this year and 2.9 percent in 2023.
In December last year the World Bank estimated that GCC states would record an aggregate growth rate of 2.6 percent for 2021. In its latest analysis the bank notes that the average level of real GDP in the GCC states is expected to grow by about 4.7 percent this year, and 3 percent next year. A key factor in this expected growth is the rise in oil prices since 2021. After starting last year at just over $50 a barrel, the price of oil increased to yearly highs of more than $85 in October, before closing out 2021 at around $77 a barrel. However, with the Omicron variant proving to be less lethal than previous variants, prices rallied at the start of the new year and are once again hovering around the $85 mark in the second week of 2022.
Experts opine that unless vaccinations become ubiquitous among people everywhere, the world will continue to witness repeated outbreaks of infection from mutant strains of the virus. Repercussions from an infection onslaught, or the potential for the emergence of another viral epidemic, could dampen prospects of revival and sustained growth worldwide.
The rapid spread of Omicron in many countries has already undermined global demand and this could lead to a retrenchment in oil prices, which will again undermine growth among oil-exporters in the region. The prevailing high price of oil notwithstanding, Kuwait clearly needs to get its priorities right, both with regard to its politics and to its economic prospects for the sake of the country and for that of its people.
