A white paper on policy recommendations submitted for consideration to the Cabinet last week reportedly calls for, among others, boosting economic policies aimed at attracting international investment in the productive sectors, so as to diversify the economy and provide employment opportunities for young nationals.
Some would argue that there is nothing new or imaginative in the proposal that the Cabinet is not already aware of. However, the fact that yet another document underlined the need to revive Foreign Direct Investment (FDI) in order to meet the country’s aspirations going forward, is indicative that finding solutions to the challenges in attracting international investments continue to elude the country.
The annual World Investment Report (WIR) by the United Nations Conference on Trade and Development (UNCTAD) poignantly reveals the state’s weakness in attracting FDI. Of the total USD37 billion in foreign direct investments that flowed to the West Asia region last year, less than $100 million made its way to Kuwait. The major chunk of $20 billion in FDI to the region went to the UAE, with a further $5.5 billion going to Saudi Arabia.
Of the smaller economies among the six-nation Gulf Cooperation Council (GCC) states, a relatively high $4.1 billion in investments went to Oman, and a little over $1 billion to Bahrain.
The two remaining GCC member states, Qatar and Kuwait, registered negative FDI inflows, meaning that disinvestment by foreign investors was higher than the capital newly invested in the country. In its commentary on the WIR to the region, the Economic Intelligence Unit (EIU), the research and analysis division of the UK-based Economic Times, attributed Qatar’s negative inflows to withdrawals triggered by the recently ended economic boycott by several regional states. The EIU added that negative foreign investment flows to Kuwait were due to its highly unattractive investment environment that routinely attracted very low levels of FDI.
Kuwait has been experimenting with FDI for nearly a decade now. While there were rudimentary laws governing foreign investments such as Company Law of 1980 that limited foreign participation in any business to 49 percent of the company’s equity, these were considered too restrictive to attract foreign investment. Kuwait began to fully embrace the concept of Foreign Direct Investment (FDI) only in 2013 by enacting the ‘Foreign Direct Investment’ Law 116 of 2013, which provided inter alia a loophole for investors from the restrictions imposed by the archaic Company Law.
In line with the new law, the government set up Kuwait Direct Investment Promotion Authority (KDIPA), a public entity with financial and administrative independence, authorized to grant licenses enabling foreign individuals or enterprises to own up to 100 percent equity in a company. The first foreign investment under the new law was promising, and made by no less than the American multinational technology conglomerate IBM. The entry of IBM was heralded with great fanfare and gave rise to speculation that the country was finally about to turn a new chapter in attracting international investments. But, since then, progress in this field has been less than stellar, even by regional standards, as shown by the latest UNCTAD report.
Marred by the global pandemic, FDI flows to most regions across the globe witnessed a decline in 2020. An anomaly to this decline was Asia, in particular the GCC area saw FDI inflows increase by 12.4 percent on an annual basis. It is unfortunate that even in this attractive investment climate, the inflows to Kuwait were negative. Notwithstanding the figures published in the annual WIR, media reports last week on the performance of KDIPA painted a rosy picture of foreign investments in Kuwait. The reports highlighted how the investment promoter successfully attracted more than 42 foreign companies and 11 representative offices to Kuwait.
The report went on to note that technology stalwarts stepping in with foreign investments included American firms Microsoft, Honeywell Process Solutions, EZ Energy Services, and General Electric, as well as the Chinese multinational Huawei Technologies. These companies, said the report, offered training opportunities for Kuwaiti citizens in the use of modern technology and techniques. While no one doubts the capability of these companies in their respective domains and their ability to provide training to national youth, what went unsaid in the report was the number of investments cited represented the total FDI stock since 2015.
The law establishing KDIPA in 2013 mandated it to attract, promote, and encourage foreign investment, as well as review and evaluate applications in their potential to provide value added and innovation based direct investment into Kuwait. Among the four main criteria used by KDIPA in evaluating investor applications is their potential to train, educate and create job opportunities for national manpower; transfer of technology, know-how, and innovative processes; diversify the state’s economic base; and, utilize local products and services.
The Authority has also been authorized to accord investors with attractive incentives, including exemptions from tax and customs duties for up to ten years and access to land on subsidized terms. The granting of investment license and incentives were at the discretion of KDIPA based on a Public Scoring Mechanism (PSM) set up in 2016 and amended in 2019. Under the amended decision, KDIPA introduced sustainable development as a fifth criteria in its evaluation process, and introduced a total of 15 sub-criteria in assessing whether to reject or accept an application and what incentives were to be applicable.
As per the KDIPA’s amended decision 329 of 2019, investment application that do not meet with at least 5 sub-criteria out of the 15 will not be accepted; applications that comply with 5 to 8 sub-criteria will be given an investment license without any incentives; investors that meet 9-12 sub-criteria will be entitled to an investment license plus one of the incentives — exemption from paying customs duty or income tax, or receiving subsidized land. Applications that fulfill 13 or more of the sub-criteria will be granted all applicable incentives.
Foreign Investment experts say that while KDIPA needs to bring in more clarity on a number of issues related to its FDI policies and incentives, other areas that need to be strengthened to attract more investments to the country include improving transparency in functioning of institutional frameworks, enhancing market access, and lowering comparative costs. However, arguably what deters foreign investments the most has to be the prevailing political instability brought on by the contentious relations between the executive and legislative branches of government.
In a reflection on this ongoing belligerence, last week His Highness the Amir Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah instructed the executive and legislative to hold a national dialogue. He urged both sides to put aside their differences and pool their efforts and resources towards resolving all problems facing citizens and the country so as to push forward along the path of growth and development. Much like most of its brotherly states in the GCC, Kuwait has ambitious strategic plans to achieve progress moving ahead, but it is in the implementation phase that Kuwait flounders and leaves much to be desired.
The late Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah envisaged the country’s future through his Vision 2035 – New Kuwait, which aims to transform Kuwait into a financial and trade hub in the region that is attractive to investors, and where the private sector leads the economy. To further this vision, the National Development Plan, which sets the country’s long-term development priorities, has made developing a prosperous diversified economy that relies less on oil revenues a priority, sought to bring about greater private sector participation in the economy, provide gainful employment opportunities for national youth, and make the country more attractive to investors.
Despite the desire to attract FDI to the country, UNCTAD data shows FDI plays a relatively small role in Kuwait’s economy. One reason is the presence of oil which accounts for nearly half of the country’s GDP and almost 90 percent of its export revenues. Generations in Kuwait, deluded by the assumption that their country sits on a never-ending supply of ‘black gold’ and complacent in the knowledge that the nation is among the largest producers and exporters of oil in the world, have grown up with a sense of entitlement based on the notion that the good times would continue to roll forever.
Mild and severe jolts to this blissful fallacy during the Souk Manakh mess in the 1980s, the Iraqi invasion and its aftermath in the 1990s, the financial crisis in 2008, or regional turmoils two years later did nothing to deter this premise among most people. It was only following the precipitous fall in oil prices in mid-2014 that at least some people began to wake up to the idea that the days of easy money were drawing to a close. The sharp fall in oil revenues coming on the heels of economic and political upheavals during the period, did if nothing else, jostle the government out of its stupor. The growing realization that cash reserves in the treasury were depleting faster than they could be replenished, and a budget deficit was looming ahead, forced the authorities to seriously consider generating other sources of income.
With the budget bill for the fiscal year 2021-22 approved by parliament in June predicting a budget deficit of around KD12 billion, economic diversification, resource collateralization for debt financing, greater private-sector participation, and Kuwaitization of jobs stopped being mere catch-phrases and began to be pursued in earnest by the authorities. Adding to the sentiment to diversify income was the pursuit of Foreign Direct Investment (FDI). However, inflow of FDI to the country has persistently dropped each year since 2016, when it was $419 million, to reach the dismal negative inflow of $319 million in 2020.
In the meantime, total FDI stock — the cumulative value of capital and reserves in the economy attributable to FDI — stood at around $14 billion, equivalent to 13 percent of the country’s GDP in 2020. In contrast, during 2020, FDI stock represented nearly 94 percent of GDP in Bahrain in 2020, 56 percent in Oman, 42.6 percent in the UAE, 34.5 percent in Saudi Arabia, and 19.6 percent of GDP in Qatar.
While the yearly value of FDI flows are important, the positive FDI stock matters more as it generates new FDI capital that flows to the country, through reinvestment of earnings and sequential flows to FDI. It also matters more, for the specialization and deepening global integration that it brings through production networks and for generating the benefits associated with FDI.
As the report on KDIPA this week revealed, nearly all of the FDI flows and stocks in Kuwait were in the services sector. Information systems accounted for 37.3 percent of investments, while 24.5 percent were in oil and gas services, and 20.4 percent in health, energy, water and training services. Experts remain ambiguous on the merits of investments in the services sector to the country; what Kuwait needs is more investments in the manufacturing sector. In particular, investments through public private partnerships in state-of-art, sustainable manufacturing processes and industries capable of transforming the country’s hydrocarbon extracts to high-value finished goods that are in global demand.
In addition to diversifying the country’s exports and income revenues, employment in these high-tech industries through training and education of youth will also meet a major goal outlined by Vision 2035, as well as assist the government in providing job opportunities for young nationals. Recurring budget deficits and reserve depletions in the treasury have brought Kuwait to an inflection point where to meet its long-term objectives the country will need to gain a greater share of the shrinking global FDI market, in competition or in cooperation with regional neighbors.
Kuwait has several attributes that make it an attractive destination for foreign investments, a copious wealth fund, high per capita income, prudent monetary policies, a stable banking system, a vibrant stock market and a technologically savvy youth demographic that accounts for over 60 percent of the population. Success in leveraging these components to draw in investments could very well determine the country’s future trajectory.
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