Investment Monitor magazine has highlighted Kuwait’s struggle to attract foreign direct investments (FDI), attributing this challenge to various factors. One significant issue is Kuwait’s heavy dependence on oil, which has deterred potential investors. Furthermore, the decline in FDI flows over recent years is a result of a multitude of problems faced by the country.
Despite being one of the wealthiest nations globally with strong economic indicators such as low public debt levels and one of the highest GDP per capita rates, Kuwait has not been able to leverage its potential effectively to attract substantial FDI inflows. The General Investment Authority manages assets totaling approximately $800 billion, showcasing its financial strength.
Kuwait possesses several advantageous features, including a young and well-educated population, a robust banking and financial sector, and strategic geographic proximity to major markets like the UAE, Saudi Arabia, and Iran, positioning it as an ideal gateway to the Middle East.
However, the reality contrasts with these advantages, as evidenced by the meager $758 million in FDI inflows recorded in 2022. The World Investment Report 2023 by the United Nations Conference on Trade and Development (UNCTAD) provided this figure. The Direct Investment Promotion Authority (KDIPA) has made efforts to facilitate FDI; unfortunately, these initiatives have not translated into substantial inflows.
In 2022, FDI accounted for only 0.4 percent of Kuwait’s GDP, a rate considerably lower than most of the Middle East and North Africa region. Comparatively, Bahrain, despite its smaller population and economy, attracted about 4.5 percent of GDP in FDI in 2021.
Kuwait’s FDI shortfall can be primarily attributed to fundamental obstacles, including an excessive reliance on oil, an investment environment viewed as unwelcoming by some, and a domestic political landscape that impedes necessary reforms. These challenges collectively hinder Kuwait’s ability to effectively attract foreign investment.
The magazine emphasized that oil plays a dominant role in Kuwait’s foreign direct investment landscape. Kuwait possesses roughly 7 percent of the world’s oil reserves, and oil contributes to nearly half of the country’s gross domestic product (GDP), as well as 95 percent of exports and approximately 90 percent of government export revenues. Consequently, a substantial portion of inward FDI is directed towards extensive infrastructure projects within the oil and gas sector, frequently facilitated by government or quasi-government entities.
However, this heavy reliance on oil has become a problem for Kuwait. Even though the economy exhibited a recovery with an 8.2 percent growth in 2022 after years of poor performance, the real GDP is anticipated to grow modestly at about 0.1 percent in 2023 and 2.6 percent in 2024, as per the latest International Monetary Fund (IMF) report. The growth of Kuwait’s oil sector is predicted to decrease to 2.7 percent in the current year due to oil production cuts enforced by the “OPEC Plus” agreement in October 2022 and the subsequent announcement in April 2023, both according to the IMF.
Derek Silva, the Research Director at Market Securities, highlighted that despite Kuwait’s significant wealth, low debt-to-GDP ratio, and robust budget surpluses during high oil prices, the substantial public sector and consistent spending make the situation vulnerable during prolonged periods of low oil prices. He added that foreign investors are cautious due to this realization.
The magazine raised a critical question: Can Kuwait’s non-oil sectors provide opportunities? In contrast to the oil industry, Kuwait’s non-oil sectors are projected to grow by 3.8 percent in 2023, according to the IMF, indicating potential opportunities for foreign companies. Kuwait Vision 2035 aims to foster economic diversification by encouraging foreign direct investment in strategic industries like information and communications technology, renewable energy, electricity, water, tourism, health care, and education.
Junaid Ansari, the head of investment strategy and research at Kamco Invest, emphasized Kuwait’s untapped potential, particularly in research and development, medicine, science, technology, and education. The government offers favorable conditions and funding through various bodies, such as the Kuwait Institute for Scientific Research and funds dedicated to promoting new products, technology transfer, knowledge exchange, and enhancing entrepreneurial skills.
Assistant Professor of History at Kuwait University, Badr Al-Saif, suggested that foreign investors should focus on sectors like construction, transportation and logistics, and the hydrocarbon ecosystem. He pointed out key projects aligned with Vision 2035, including Port Mubarak and Al-Mutlaa, the largest residential city in Kuwait, as attractive prospects for foreign investment.
However, the magazine highlighted a hurdle in the form of an unfriendly business environment in Kuwait for foreign investors. Kuwait ranked 108th out of 186 countries in the 2023 Economic Freedom Index by the Heritage Foundation, indicating challenges related to the rule of law, government size, and oversight efficiency. High levels of bureaucracy, a complex legal system, a 15 percent corporate tax, and restrictions on ownership in local companies pose challenges for foreign companies.
Moreover, the government’s dominance in the economy, with operations primarily routed through the public sector, presents a barrier. Foreign investors must navigate a bureaucratic and anti-business government structure, requiring approvals from various entities, including the Direct Investment Promotion Authority and the Ministry of Trade and Industry.
To enhance foreign direct investment attractiveness, there’s a unanimous agreement that Kuwait needs to reorganize and diversify its economy, reducing reliance on oil, developing non-oil sectors, and minimizing government intervention in the economy. Alongside economic diversification, improving the business environment through legal and regulatory reforms is essential to attract foreign investors, similar to other business-friendly centers in the Middle East.
However, achieving these changes will largely depend on substantial political reforms at the local level, an undertaking unlikely in the near term unless prompted by a national consensus or extended periods of low oil prices. Consequently, Kuwait’s stagnant foreign direct investment landscape may persist, while neighboring countries advance.
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