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Oil dependency risks drive fiscal reforms

Minister of Finance and Minister of State for Economic Affairs and Investments, Nora Al-Fassam revealed last week that the government is considering the introduction of several new taxes as part of wider tax reforms that seek to implement equitable tax practices, and position Kuwait as a jurisdiction that conforms to international tax laws.

Minister Fassam pointed out that decree into law 6/2024 on Exchange of Information for Tax Purposes, and decree-into-law 157/2024 on levying a 15 percent tax on large multinational enterprises were being implemented. In addition, the government is reviewing a new selective consumption tax (excise tax) targeting commodities harmful to health, such as sugary drinks, cigarettes, and other tobacco products.

Another major tax reported to be under purview by the finance ministry is one on imposing a corporate tax on all firms in Kuwait with annual revenues exceeding KD1.5 million. Transformations to Kuwait’s tax framework are aimed at broadening the tax base by increasing the number of companies subject to tax. Taxes on excise and on multinational firms are together expected to deliver nearly half a billion dinars annually to the state treasury in the form of non-oil revenues.

The commitment of the new government headed by His Highness the Prime Minister Sheikh Ahmad Al-Abdullah Al-Ahmad Al-Sabah to diversifying the economy and introducing far-reaching fiscal and structural reforms, reflects the growing realization that reforms are crucial to support a diversified and sustainable economy. The reforms are also seen as key to the country’s transformation into a regional financial and commercial hub in line with ‘Vision 2035’.

In this regard, the General Secretariat of the Supreme Council for Planning and Development, stated last week that various government entities were studying and preparing several draft laws on fiscal and structural reforms aimed at enhancing economic growth, and unlocking gridlocks that hamper the speedy implementation of developmental projects.

The General Secretariat stated that the Fatwa and Legislation Department has completed the review of approximately 20 draft laws and submitted them to the Council of Ministers for consideration. These include several draft laws to bring about fiscal and economic reforms, including one on the regulated withdrawal from the Future Generations Fund; the public debt bill; restructuring the public wage system; approving the GCC Agreement on Value Added Tax; repricing utility fees; establishing the Northern Economic Zone; and amending the import law. .

The government’s push to implement fiscal and structural reforms in a calibrated and prudent manner, highlight the cabinet’s strategic approach to fostering resilience and sustainable growth in the economy. Reforms are also pivotal to spur the country’s development plan, amid a projected slowdown in the global economy and a decline in oil prices.

Local economic analysts and international financial organizations, including the World Bank and International Monetary Fund, have long urged Kuwait to enact fiscal and structural reforms, and to diversify its oil-dependent economy. With oil and its derivatives accounting for more than half of Kuwait’s gross domestic production (GDP), around 90 percent of fiscal revenues, and nearly 95 percent of exports, experts have opined that reforms and economic diversification are vital to offset risks posed to Kuwait’s oil-reliant economy..

The overwhelming dependence on hydrocarbon revenues to fuel growth, and the slow pace in implementation of reforms and economic diversification, exposes Kuwait to a slew of potential risks. Among others, the economy remains vulnerable to prolonged periods of low global oil prices, as well as from the rising marginal cost of oil production, and the continued decline in demand for fossil fuels, as the world transitions to renewable forms of energy.

Revenues from the country’s large financial assets, including investment income from the copious sovereign wealth fund (SWF) and profit transfers from state-owned-enterprises (SOE), have in the past provided resilience to the Kuwaiti economy during low global oil price scenarios. However, unless urgent reforms and economic mitigatory measures are implemented, even Kuwait’s large fiscal assets will be insufficient to sustain long-term growth and cater to a growing population.

Undercurrents of risks to Kuwait’s economy are already becoming evident. The oil sector continued to remain in negative territory in the third-quarter of 2024, marking the sixth consecutive quarter of decline, amid reduced crude production due to compliance with supply cuts mandated by Organization of Petroleum Exporting Countries (OPEC) and its non-OPEC allies—together known as OPEC+.

Concerns over oil supply security amid evolving geopolitical situations around the world, and faltering global oil demand, caused international oil prices to fluctuate in 2024. According to the US Energy Information Agency (EIA) Brent crude averaged $80 per barrel (bbl) in 2024, marking the third consecutive annual decline—from $82/bbl in 2023 and $99/bbl in 2022.

Projections by the EIA for oil prices in 2025 also reveal that after an initial increase, oil prices could decline from mid-2025 through the end of 2026 as growth in global oil production outpaces growth in oil demand. The projections by EIA were corroborated in the latest economic analysis by the National Bank of Kuwait (NBK), which projected oil to remain at the lower end of the current trading range in 2025, averaging around $70/bbl.

The bank observed that a combination of softer global oil demand growth and higher supplies from oil producers outside the OPEC+ group could lead to a supply overhang in the international oil market. OPEC+ is likely to extend already-delayed production rises beyond the first-quarter of 2025 or risk downward price pressures, opined NBK. It added that any attempt by OPEC+ to increase its supply to recapture market share from non-OPEC+ countries could drive oil prices even further down.

Larger-than-expected weakness in the Chinese economy, as well as a global fall-out from a potential hike in trade tariffs by the US, and higher oil supply growth under the pro-energy agenda of President Trump could further derail oil prices in 2025,, said NBK. Supporting the bank’s assessment of a global supply overhang this year, the Paris-based International Energy Agency (IEA)—the leading intergovernmental agency on the global energy sector— indicated in its latest report that after years of high oil prices, 2025 would likely witness a moderation in international oil prices.

The IEA report showed that world oil demand growth is set to accelerate from 840,000 barrels per day in 2024 to 1.1 million barrels per day (mb/d) in 2025, and raise global consumption to 103.9 mb/d this year. However, this increased demand is tempered by an increase in oil supplies by 630,000 b/d in 2024 and by 1.9 mb/d in 2025, to reach 104.8 mb/d this year, leading to a supply overhang of 950,000 barrels per day in 2025.Unwinding of production cuts by OPEC+ in March 2025 would increase the supply overhang to 1.4 mb/d and further dampen oil prices.

The Agency stressed that despite the latest decision by OPEC+ to delay the unwinding of their additional voluntary production cuts by another three months and extend the ramp-up period by nine months through September 2026, persistent overproduction from some members within the group, as well as robust supply growth from outside OPEC+ countries and the relatively modest global oil demand growth, leaves the oil market looking comfortably supplied in 2025.

Policymakers in Kuwait will need to read and heed the multiple reports that point to oil’s prospects in the year ahead and beyond. The reports also highlight the urgency in implementing the fiscal and structural reforms that are vital for Kuwait to ensure a vibrant and sustainable future.



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