Firmly in the black: The 2011/12 budget focuses on National Development Plan spending

Based on Ministry of Finance reports, Kuwait’s 2010/11 primary budget surplus registered approximately KD5.3bn ($19bn), capping off a decade of substantial surpluses. With oil prices trending towards record highs, the 2011/12 budget is also expected to remain firmly in the black, with the surplus estimated at between KD6bn ($21.6bn) and KD12bn ($43.3bn). Combined with the country’s low population and high national savings rate, these surpluses give Kuwait one of the healthiest macroeconomic environments in the world. However, the economy remains dependant on oil income, which in 2010/11 accounted for 93% of government revenue. Kuwait’s continued economic viability, therefore, is contingent upon the development of other sectors of the economy. The government demonstrated its commitment to doing so with the 2010 passage of the National Development Plan (NDP), which aims to transform the country’s economic makeup through targeted investments in infrastructure and services.

A GOOD YEAR: Like many of its neighbours, Kuwait consistently calculated the budget on lower-than-market oil prices. The 2010/11 budget was formed on the assumption that oil prices would average $43 per barrel for the year. With the final price of Kuwait Export Crude (KEC) averaging $82.50, revenue for the 2010/11 fiscal year stood at KD20.9bn ($75.3bn), more than double the government’s expected KD9.7bn ($35bn) and an 18% rise over 2009/10 revenue. Based on the government’s monthly statements, total expenditure stood at KD5.1bn ($18.2bn) as of September 2011, according to the Ministry of Finance. However, this will almost certainly be revised upwards, as expenditures are traditionally understated in monthly reports. Factoring in the KD1.1bn ($4bn) Independence Day Grant, an unexpected KD1000 ($3605) gift from the government to all citizens to commemorate the anniversary of the foundation of modern-day Kuwait in January 2011, NBK Capital estimated that total spending would reach about KD16.4bn ($59.1bn), up 46% over 2009/10. This would leave a surplus of approximately KD4.5bn ($16.2bn), down from KD8.2bn ($29.6bn) in 2009/10 but above the KD2.87bn ($10.2bn) recorded in the 2008/09 fiscal period.

NDP ROLE: Much of the rise in spending in the 2010/11 budget was related to the NDP, an effort by the government to promote economic growth and diversification through the provision of new infrastructure and services. Passed in February 2010, the spending plan represents a marked departure from Kuwait’s recent history of low capital investment. According to the Kuwait Financial Centre (Markaz), between 2004 and 2009 less than 1% of the federal budget was allocated to capital spending, by far the lowest in the region, despite historic fiscal surpluses during the period.

The NDP has already begun to reverse this trend, with capital spending up a staggering 36%, according to preliminary statements. The government allocated some 64% of its budget to spending in 2010/11, well above historic norms. Transfers and miscellaneous expenditures also grew substantially and above budget, with the Independence Day Grant contributing to a 71% overall growth in this area.

While the substantial spread between budgeted and actual oil prices was the primary contributor to the overall surplus, non-oil revenues also rose KD390m ($1.4bn) to KD1.4bn ($5bn), up 36% from the levels reached in 2009/10. However, this increase is somewhat misleading, as $590m of the increase came from the UN Compensation Commission (UNCC), rather than an expansion in non-oil economic activity. The UNCC is a fund set up to pay reparations for the 1990-91 Gulf War from the sale of Iraqi petroleum.

PROJECTS UPDATE: Approximately KD5bn ($18bn) was allocated to 884 projects related to the NDP in the 2010/11 fiscal year. However, the NDP’s semi-annual report issued in late-2010 stated that KD735m ($2.6bn), or some 15% of the allotted budget, had been allocated in the first half of the fiscal year. Such under-expenditure is common in Kuwait, though with government spending typically 5-10% below budgeted levels, according to NBK Capital. The higher rate of shortfall for NDP-related projects reflects the difficulty of getting approval from parliament for major spending measures.

Kuwait has been both criticised and lauded for its robust culture of parliamentary debate. However, tensions between parliament and the government have also been blamed for hampering much-needed investment in the country’s infrastructure and services. The February 2010 passage of the NDP was seen by many as proof of the government’s commitment to transcending political differences for the sake of the country’s economic development, yet disagreements between the bodies are still frequent. On March 31, 2011 the government headed by Prime Minister Sheikh Nasser Al Mohammed Al Sabah was dissolved for the sixth time since 2006, delaying approval of contracts. However, while the situation appeared to be improving as of mid-2011, with parliament approving a $14.5bn plan to build the country’s fourth refinery at Al Zour, the government resigned on November 28, 2011 due to increasing pressure from parliament. Immediately following that, on December 6, the Emir, Sheikh Sabah Al Ahmed Al Jaber Al Sabah dissolved parliament. Controversy surrounds the grounds for dissolution, however, with resolution not expected until after the February 2012 elections.

WEALTH FUND: With state income heavily dependent on oil prices, one of Kuwait’s primary guarantors of stability is its sovereign wealth fund, the Kuwait Investment Authority (KIA). Though full details are not publicly disclosed, it is estimated to control over $200bn in investments. On June 7, 2011 MP Waleed Al Tabtabaei told reporters that the KIA assets stood at KD81bn ($296bn). The KIA is divided between two state-owned funds, the Reserve Fund for Future Generations (RFFG) and the State General Reserve Fund (SGRF). In addition to income from investments, the RFFG is topped up with 10% of the state’s income every year, regardless of whether the budget is in surplus or in deficit.

The KIA has gained a reputation for shrewd investments, including the high-profile acquisition and sale of a stake in Citibank in 2008 and 2009, respectively. The fund made a $1.1bn profit on the sale, for a return on investment of 37%. Investment income and oil sales were the primary drivers of an increase in Kuwait’s current surplus to KD10.6bn ($38.2bn), or 29% of GDP.

EXPENDITURE: Kuwait’s projected spending according to the 2011/12 budget is due to reach an all-time high of KD19.44bn ($70.1bn), up 11.1% over the levels reached in 2010/11. With oil prices budgeted at $60 per barrel, revenues are predicted to reach KD13.45bn ($48.5bn), leaving a KD6bn ($21.6bn) deficit. However, with the price of Kuwaiti crude averaging $111.10 per barrel in the first three months of 2011/12, and expected to climb higher as demand continues to increase and production remains steady, the projected deficit looks, as usual, unlikely.

As of the end of October 2011, the average oil price of $40 per barrel would be enough to close the projected deficit, according to KIPCO Asset Management Company (KAMCO). According to NBK Capital, however, oil prices are expected to average 32-50% higher than in 2010. An oil price of $109-124 per barrel would yield a budget surplus of between KD6bn ($21.6bn) and KD12bn ($43.3bn) for 2011/12.

Again, allocations related to the NDP are a factor in the year’s increase in spending. However, a large increase in expenditure on salaries (budgeted at KD4.43bn [$16bn], compared to KD2.5bn [$9bn] in 2011/12) represents another important factor. The 77% jump in wages can be seen as a natural way for the government to distribute its oil wealth to its citizens, 80% of whom are employed by the public sector.

Yet, according to a report that was released by KAMCO in July 2011, this over-reliant dependence on government money “is not sustainable on a long-term basis and gives rise to concern on the future strains that these expenditures will cause on the budget if the government fails to achieve its goal of growing the private sector to ease its employment burden”.

In addition to the KD4.43bn ($16bn) that has been allocated to salaries, budgeted expenditure includes some KD3.04bn ($11bn) on commodities and services; KD385m ($1.4bn) on transport, machinery and equipment; a substantial allocation of KD2.43bn ($8.8bn) on construction, maintenance and public acquisitions; and around KD9.16bn ($33bn) on miscellaneous expenditures and transfer payments. The allocated portion of expenditure that is related to the NDP once again came in at approximately KD5bn ($18bn).