Kuwait: Keeping on

While the world economy is still plagued by uncertainty, Kuwait’s continues to grow, supporting the country’s medium-term development plans. In September, the International Monetary Fund (IMF) lowered its forecast for 2011 global growth to 4%, taking into account the eurozone crisis and US debt, but announced that it expected 5.7% growth in Kuwait.

While this is a generous estimate, with some international press reports suggesting a rate of around 4.5%, it seems likely that Kuwait will outperform much of the rest of the world, particularly the developed markets of Europe and North America, as a result of substantial public investments.

Indeed, the country’s budget surplus for the first five months of its 2011/12 fiscal year reached KD8.1bn ($29.4bn), accounting for 22% of OPEC’s GDP, according to an October Reuters report. Kuwait’s surplus stood at KD4.6bn (16.7bn) in the same period last year.

The emirate is using its substantial oil wealth to enhance infrastructure and services, as well as to raise living standards, particularly for the less affluent. In response to the international economic situation, and the need for increasing domestic investment, government spending rose an estimated 21.5% in the fiscal year 2010/11, excluding energy-related subsidies and the recapitalisation of the Public Institution for Social Security.

Kuwait is benefitting from the four-year KD30bn ($108.2bn) development plan launched last year, which is expected to be the first of several consecutive schemes running to 2035. Upgrading transport infrastructure, education and health care are all priorities. Kuwait also aims to enhance its business environment to promote private-sector-led growth by cutting red tape and investment restrictions, enhancing competition legislation, freeing up land for private investment and developing the labour pool to suit a knowledge economy.

In its public information notice following a consultation with Kuwait in July, the IMF remarked that the plan “rightly targets much needed investment, including in human capital, with a view to better preparing Kuwaiti nationals for private sector employment”.

The fund’s representatives urged Kuwait to implement the development plan carefully, ensuring that projects are viable and the institutions involved have the capacity to execute them.

As well as the “currently accommodative mix of macroeconomic policies”, the fund noted that Kuwait also benefits from a sound financial system, and that banks strengthened capital adequacy and enjoyed greater profitability in 2010.

With a great deal of public spending coming on-stream, and the effects of the substantial “Amiri” grant of KD1000 ($3605) awarded to every Kuwaiti, inflationary pressure is a concern. However, inflation dropped to an 11-month low of 4.6% in July, the last month for which figures were available, and the rate is expected to average 4.7% for full-year 2011, according to international press reports using figures from Kuwait’s Central Statistics Office.

Food price inflation, at 9.7%, was worryingly high, but is likely to abate over the remainder of the year as international prices fall. Increases in housing costs – the biggest single component of Kuwait’s consumer price index (CPI) – are also cooling off, as much-needed new supply becomes available.

Though Kuwait’s expected growth this year is enviable, its economic expansion has been the most modest among GCC member countries over the last five years, the IMF noted. GDP expanded an average 2.6% per year, below the UAE’s 4.2%, Bahrain’s 5.7% and Qatar’s 18%.

There are certainly risks to Kuwait’s growth, most notably any sharp deterioration in the global economy, which would cut export earnings and foreign investment. Conversely, if the international situation were to improve, inflation may rise.

The baseline and most likely scenario though, is for a highly respectable performance. Kuwait has ample resources to invest in infrastructure and public transfers and to support its citizens’ incomes at a time when many countries are facing both fiscal cutbacks and slowing growth. Public outlays are already bearing fruit, which, in addition to pro-business reforms, could place the emirate in an enviable position.