THE TIMES KUWAIT REPORT
Following the snap elections on 6 June, and the formation of a new government and National Assembly, members of the executive and legislative arms of parliament have been working together in rare unanimity and a shared vision to push forward the development agenda, as well as enact laws and policies that are, for a change, in the interests of the people and the country. The thaw in relations and apparent camaraderie in parliament bodes well for the nation, especially if this collaboration can continue for the rest of the parliamentary term, and beyond.
Since the start of the first ordinary session of the National Assembly on 20 June, parliament has passed several new laws and amendments, including laws related to health insurance for Kuwaiti retirees, and the formation of private construction firms in developing new residential areas. The government has also given its nod to amendments in legislation pertaining to the constitutional court, and to introducing controversial new electoral laws. Parliament has also ratified the closing accounts for fiscal year 2022-23, (FY22/23), and the draft budget for FY23/24.
Cooperation and consensus on key issues and compromises on others are critical to the functioning of parliamentary democracies. A willingness to make concessions, and to ‘give and take’ in political discussions, as well as a readiness to accept victories and defeats as two faces of democratic processes, are the pillars on which democracies are built and thrive.
However, when the ruling or opposing factions in parliament use their brute majority to push through laws and policies that only further their self-interests or the narrow parochial interests of their supporters, the functioning of democratic institutions and processes become deformed, and democracy itself gets derailed.
Citizens owe it to themselves and to the future of their country to ensure that this does not happen in Kuwait. The consensus witnessed over the past two months in parliament has resulted in more ‘gives’ on the part of the government,and not much to show by way of ‘take’. Probably the government is counting on its initial pliability to render the opposition amenable to passing some of the more contentious laws and reforms in upcoming sessions of the National Assembly.
Many of these controversial laws and planned reforms need to be openly discussed and deliberated by legislators, so as to reach mutually acceptable terms under which they can be ratified by parliament, And there is no dearth of such long-pending issues that need parliamentary approval, including passage of the much-needed debt bill that has not made any headway since it was first tabled in parliament in 2017. There are also several crucial fiscal and structural reforms that have been labeled unpalatable to lawmakers and shelved for far too long,
Unfortunately, despite the criticality of these long unresolved issues to the economic and social development of the country, they are unlikely to be addressed by parliament any time soon. On the contrary, the prevailing cordiality in parliament notwithstanding, there are indications that the government could face strong headwinds in upcoming sessions of parliament.
For instance, shortly after the Speaker announced the end of the first ordinary session of the 17th legislative term on 3 August, strident calls rose from certain quarters to increase many of the State’s welfare policies. And, there has been no shortage in these welfare proposals, at last count there were more than a dozen such ideas, all aimed at further enhancing the already prodigious welfare being provided to citizens by the state.
A recent economic analysis by the National Bank of Kuwait (NBK), the country’s premier private lender, noted that of particular concern to the government is that some of these demands to loosen the purse-strings come under the recurring current expenses portfolio, which could have a significant negative impact on future budgets. The increased spending envisioned in most of the proposals also run counter to the goals of the government’s work-plan, especially those related to financial stability and private sector employment.
Among the more controversial submissions being aired by legislators and their supporters, is one that calls for the ‘writing-off citizen loans’. It is worth noting that it was this same demand, made to the previous government headed by Prime Minister Sheikh Ahmed al Nawaf that culminated in the cabinet tendering its resignation to His Highness the Crown Prince in late January of this year.
Some of the other legislative proposals that have apparently found support among sections of Kuwaiti society, include increasing the already bloated public sector wages by KD400, raising child and student allowances, reversing a previous round of fuel price increases, capping further electricity rate hikes, and enhancing existing subsidies for construction materials for citizens. All of these proposals would entail significantly increasing the expenditure column in the annual budget.
One proposal that stood out, if not for anything but its sheer brazenness, was a call to distribute 20 percent of returns from the Future Generations Fund (FGF) to citizens. Incidentally, the FGF or Kuwait’s Sovereign Wealth Fund, managed by Kuwait Investment Authority (KIA), is not available for the government to manipulate at its will. The KIA is mandated by law to ensure that the investment gains from the FGF are reinvested only in the Fund, except in national emergencies.
The presumptive nature of some of these proposals and its potential to derail prevailing parliamentary bonhomie notwithstanding, even the thought of passing some of the more serious proposals would most likely evince strong opposition from the government. In addition there could be several legal challenges and administrative hassles involved in implementing some of the proposals.
Nevertheless, the passage of the closing accounts for the previous fiscal, and the budget for FY23/24 is certainly a relief to the government. In particular, the budget ratification provides the authorities with the fiscal room to push ahead with the strategic projects that are integral to the government’s four-year work-plan. An overview of the closing account and budget provides a better perspective on their implications for the government’s work-plan.
The closing accounts for fiscal year FY22/23 presented by the finance ministry in July, recorded KD28.8 billion in revenue,and KD22.4 billion in expenditure, to end the fiscal year on a surplus of KD6.4 billion — the first such surplus since 2014. The windfall surplus also came as a boon to the state treasury, the General Reserve Fund (GRF), which had neared depletion from funding the state’s recurring budget deficits over the past eight years.
In early August, parliament also approved the draft budget for FY23/24. The budget envisions total spending of KD26.3 billion against an estimated total revenue of KD19.5 billion, for a return to deficit of KD6.8 billion in the current fiscal. Surprisingly, the return to a deficit budget in FY23/24, after registering a huge surplus in the previous fiscal, did not raise any significant opposition in parliament.
Despite the government’s promise to rein-in expenditure and rationalize spending, the relatively few legislators voicing concern over the budget’s hike in expenditure, was probably the result of the ongoing conviviality in parliament. Moreover, most of the budgeted expenses are for increased salaries and subsidies to citizens, a promise made by many lawmakers to their constituencies during election rallies.
The ambitious 4-year work-plan presented to parliament during its first session, was part of the government’s comprehensive revamp of its policies and processes since taking office in June of this year. The work-plan renews the government’s commitment towards fiscal reforms and the completion of Vision 2035-linked infrastructure projects.
The plan, which was delayed from last year, contains six main pillars and over 100 projects, and is centered on fiscal reform, economic development and diversification, restructuring of government ministries and realigning welfare to make it sustainable. At least on paper, the planned fiscal reforms are aimed at promoting prudent fiscal management and maintaining a greater degree of control over spending.
Analysts say that although the projected rise in spending envisioned in the budget will help fund strategic projects in the work-plan and support demand in the economy in the near term, it also adds to longer-term fiscal sustainability. This is especially so given the country’s continued over-reliance on volatile oil revenues, limited non-oil revenue streams, and a slow reform progress.
According to the International Monetary Fund (IMF) and several global sovereign risk rating agencies, the continued lack of financing options, a potential renewed erosion of the GRF and the high dependence on oil revenues pose an ongoing downside risk to Kuwait’s sovereign credit rating. This downgrade could come despite the country’s relatively low public debt levels of around 3 percent of GDP, and the state’s strong external reserves, estimated at more than $850billion.
In its credit analysis report on Kuwait published in July, Moody’s Investors Service, the global sovereign credit rating and risk assessment firm, noted that despite two severe oil price shocks since 2015, the Kuwaiti government has shown limited ability to control or reduce spending to curb the fiscal deficit. The agency added that the government’s unwieldy spending structure and parliamentary opposition to new measures to increase revenues has left Kuwait trailing other Gulf Cooperation Council (GCC) states in fiscal reforms and enhancing non-oil revenues.
The agency pointed out that the government’s attempts to introduce a 5 percent value-added tax (VAT), as agreed upon by the GCC states in 2015, has faltered in the National Assembly, as legislators have still not ratified the GCC agreement. Without parliamentary go-ahead the government cannot proceed with any legislation on a value-added tax. And, with oil prices currently on an upswing, it is also highly unlikely that the government will push for VAT any time in the near future.
One relatively less controversial avenue that the government is reportedly pursuing to increase non-oil revenue is imposing selective taxes on sweetened drinks and tobacco. But this could at best only increase non-oil revenues by about 25 percent of the revenues that the authorities could have collected through the application of a value-added tax.
The agency also noted that although the government has pledged various fiscal reforms and development projects in its new four-year plan, implementation remains a challenge due to political instability and opposition to many of these measures in parliament, both of which increases the country’s downside risks to future fiscal sustainability. A sobering thought no doubt to ponder upon in the days ahead.