Kuwait: Investing in the future

The government has announced plans to increase allocations to a key investment fund although there are still questions on how this move will affect state spending at home. The decision to strengthen the investment fund comes at a time when the government is also seeking to boost the domestic economy through its latest five-year National Development Plan (NDP).

On September 17, the Kuwaiti government revealed it is planning to more than double the percentage of state revenues placed in the Future Generations Fund, raising the contribution from 10% to 25% of state revenues for the 2012/13 fiscal year.

Managed by the Kuwait Investment Authority – the country’s sovereign wealth fund – the Future Generations Fund is used for offshore investments intended to generate long-term income. The fund is part of the government’s strategy of providing revenue to support Kuwaiti society when the oil reserves are depleted to the point where they can no longer meet the fiscal requirements of the state.

According to Nayef Al Hajraf, the finance minister, the cabinet determined the increase in the fund’s allocation as part of wider deliberations on the economy.

Rola Dashti, the state minister for development affairs, later told local media that increasing the allocation to the Future Generations Fund would help balance government expenditure and investment. It would also prevent excessive spending and depletion of the state’s oil revenue, she told the daily Al Rai on September 19.

While measures to curb excessive spending may be welcome, there have been some concerns raised that the shift in fiscal focus could mean the government would scale back its domestic investment programme, as set out in the NDP. This long-term economic strategy, unveiled in 2010, foresees expenditure of more than $100bn to expand transport, utilities and communications infrastructure, strengthen the oil industry, reinforce education and health services and increase employment opportunities for Kuwaitis. A number of these projects are running behind schedule, with some big-ticket developments having been delayed by parliament.

On September 18, the finance minister moved to allay these concerns, saying that the increased allocation would not come at the expense of other investment. The move was aimed at encouraging savings and the plan would not distract the government from dealing with problems in the economy, Al Hajraf said.

One question the minister did not answer was whether the increase in the allocation to the Future Generations Fund was a one-off, or would be a permanent part of Kuwait’s budgetary planning. Al Hajraf did give a clue, however, saying that he hoped the increased contribution would continue into the following fiscal year.

Such increased commitments might mean that the government could struggle to keep to its domestic investment schedule, especially if oil prices dip below present levels, eating into the budgetary surplus, which amounted to $47bn for the 2011/12 fiscal year that ended on March 31.

One proponent of the move to bolster foreign investments is Bader Al Humaidi, a former finance minister, who told Reuters on September 18 that the cabinet decision indicated a shift in state policy.

“This move shows the state is aware of the need to put financial surpluses into reserves rather than having increases in salaries and handouts,” Al Humaidi said.

This view was echoed by Mohammad Al Saqqa, a professor of economics at Kuwait University, who sees higher spending on salaries, allowances and state support eating into funds that could otherwise be allocated to investments in income-generating assets for the future.

“We have clearly failed to turn our oil revenues into frameworks and infrastructure that would support a productive prosperous economy,” he said in an interview with KUNA on September 23. “The current generation is largely embracing aggressive recreational spending and giving in to boasting so that our oil is turned into luxurious cars, trips and vacations abroad, and high-end luxury goods.”

Describing the government’s decision to raise the allocation to the Future Generations Fund as prudent, Al Saqqa said that Kuwaitis should be better educated to guarantee wiser and more productive spending rather than abuse any budgetary surplus.

With some of the details of the new arrangements for the Future Generations Fund unclear, it is hard to say what the short- or long-term impact of the government’s policy shift will be. However, the government does appear to be banking on oil revenue remaining high enough to keep its domestic development scheme afloat while also topping up its overseas asset fund.