Oil revenues support efforts to diversify growth

A major global oil producer, Kuwait has come a long way in recent decades to overcome several key financial and political challenges. The country is one of the most politically dynamic among the GCC, which has afforded it strong foundations to help tackle recent issues concerning parliamentary elections and accountability. By continuing with efforts to diversify the national economy and reduce dependence on oil revenues, the country is also adding increased momentum to several large infrastructure projects and to integrate itself further into the global economy.

Development

Kuwait’s economic fortunes are derived from its oil reserves, which amount to more than 100bn barrels, with the government setting a production target of 4m barrels per day (bpd) by 2020, up from current levels of 3m bpd (see Energy chapter). Oil has fuelled development in Kuwait since the Second World War, and production took on a central role in the economy after nationalisation of the industry in 1975.

Accounting for more than 65% of GDP and 95% of exports, according to Kuwait’s Central Statistical Bureau, the country’s oil revenues have delivered strong public finances, consecutive annual budget surpluses and funded the development of a generous welfare system. Although the private sector has taken a limited role in the economy over the past four decades, Kuwait has produced globally successful firms, such as telecoms giant Zain and low-cost carrier Jazeera Airways.

Kuwait is now pursuing a programme of economic diversification that is set to re-energise the private sector. Approved by parliament in February 2010, the 20-year, KD30bn ($105.4bn) National Development Plan (NDP) is the blueprint for the country’s role as a banking, trade and services hub for the Gulf by 2030.

With plans for new transport networks, upgraded infrastructure, increased oil production and improved services, more than 800 projects have been nominated under the NDP as growth catalysts to restore the balance between Kuwait’s public and private sectors, and accommodate the demands of its growing population. While implementation of the NDP has been delayed by disputes between the nation’s parliament and cabinet, new elections – following the overturning of December 2012 and July 2013 election results – may provide sufficient stability to resume work; however, some analysts have suggested that political impasse may continue for some time to come.

History

Kuwait’s archaeological record begins in the second millennium BCE with the colonisation of an outlying island, Failaka, by the Mesopotamians and later by the Greeks. The region came under the Islamic caliphate during Arab expansions throughout the Arabian Peninsula. Permanently settled in the 17th century by the Bani Khalid tribe, the region prospered as a key trading hub on the silk route between India, Central Asia, Arabia and Europe. As its wealth grew, the city was fortified, which gave Kuwait its name, a diminutive of an Arabic word meaning “fortress built near water”. Faced with imperial interests from the Ottoman empire in the 19th century, Kuwait’s ruling Al Sabah family courted British favour and formally agreed to become a protectorate in 1899. Formally declared an independent principality during the Second World War under British protection, Kuwait remained allied to the British until it received independence.

Kuwait’s economic wealth and regional bonds grew in the second part of the 20th century, and it became a founding member of the GCC in 1981 alongside the UAE, Bahrain, Saudi Arabia, Oman and Qatar. However, its history in the latter part of the century was defined by Iraqi occupation in 1990-91, during which time some 749 oil wells were destroyed by Iraqi forces.

Kuwait made a strong recovery, but its economic agenda thereafter was largely focused on stability rather than development until the 2003 occupation of Iraq by coalition forces that used Kuwait as a base. After the occupation, Kuwait enhanced political and economic ties with the West and continues to serve as an key US military base. At the same time, Kuwait’s commercial focus has increasingly shifted to Asia’s emerging giants. “Strategic bilateral ties can play a big part in boosting the economy of Kuwait, which is why we are opening up commercial offices in countries such as China, India and Iraq,” Abdulaziz Khaleji, under-secretary of the Ministry of Commerce and Industry, told OBG.

Recent Growth

Kuwait’s economy has been largely state-led since the nationalisation of the oil and gas industry in 1975 and the sector now accounts for over 65% of national GDP and 95% of exports. While this led to a golden era for Kuwait, security soon took precedence over economic development during the 1980 Iran-Iraq War and also during the Iraqi occupation of Kuwait in 1990-91. While the two decades since have seen considerable stability and growing prosperity, economic and industrial development remains state-led.

Launched in 2010, the NDP was a substantial achievement for the government, uniting both the legislature and executive in a common goal. Almost 800 projects are tabled to upgrade transport modalities, infrastructure, increase oil production and improve services that are intended to re-energise the private sector. While progress with a number of the projects has been a challenge following delays to political decision-making in parliament, the government continues to invest heavily in key infrastructure spending. Indeed, government expenditure rose 8% in the first 10 months of fiscal year 2013/14 (see Economy chapter).

Hydrocarbons revenues have enabled a universal and comprehensive welfare system to be established. This brings with it a number of challenges that the authorities are now seeking to address, not least of which is the issue of inflation driven by government spending. The growing burden on the state is also of concern, with the IMF warning in 2012 that revenues would be entirely committed by 2017 on current spending projections, and this would prevent any future savings.

Moreover, as Kuwait has embraced more liberal Western socio-political concepts, including universal female suffrage in 2005, universal representation has become a focal point of contention, particularly among Kuwait’s post-liberation generation. At the forefront of this challenge are Bidoon, or stateless people, who number 105,000 in the country. While about 200,000 tribal and Bedouin people were granted nationality in the 1960s and 1970s, in some cases citizenship has not been extended to the second and third generations. Excluded from political, economic and social participation, the tribal groups now operate as powerful para-political structures, and demonstrations have continued against the government’s failure to recognise them.

Politics

Agreement between Kuwait’s government, parliament and opposition blocs has been somewhat volatile, and the contemporary political landscape is symptomatic of that relationship. The principal prerogative of Kuwait’s parliament remains the oversight of ministerial policy and conduct. However, it is also able to exercise power over legislation that is not afforded to neighbouring national assemblies, such as the ratification and vetoing of laws proposed by the executive. Formal inquiries and questioning of ministers has often been the precursor to votes of no confidence, the strongest measure available for parliament to hold government accountable, although a declaration of “non-cooperation” by either party requires the Emir to dissolve the legislature or executive.

Kuwait’s parliamentarians have historically pursued these responsibilities with conviction, which brought them into confrontation with the government in 2009 when parliament summoned then-Prime Minister (PM) Sheikh Nasser Mohammed Al Ahmed Al Sabah.

Between 2009 and 2011 parliament forced Sheikh Nasser to resign four times over corruption allegations, but he was re-appointed by the Emir in all four cases. However, Sheikh Nasser was ultimately replaced by the incumbent PM Jaber Al Mubarak Al Hamad Al Sabah in December 2011, thereby reinforcing the constitutional integrity of Kuwait’s checks and balances.

The Emir’s dissolution of parliament precipitated national elections that were held in February 2012. The elections heralded a new parliament that embodied Kuwait’s disparate groupings. Adjourned in June 2012 when it called the ministers of finance and labour for questioning, the Constitutional Court (CC) ruled in the same month that the Emir’s 2011 dissolution of parliament was unconstitutional, rendering the February 2012 elections null and void.

Constitutional Constructs

While the CC’s June 2012 ruling remains, outwardly, a reinforcement of the judiciary’s impartiality, the ramifications were less clear. The recall of the 2011 parliament, which was seen as pro-government, was only avoided because many parliamentarians declined to return to office. However, the CC’s impartiality was reinforced in August 2012 when a government motion opposing electoral reforms that had reduced the number of voting districts from 25 to five, was rejected. Opposition groups hailed the decision, having been critical of the 25-district framework, alleging that it was more open to abuse.

The key challenge for the CC and Kuwait’s imminent political fortunes came in June 2013 when the court ruled on the legitimacy of the Emir’s October 2012 emergency decree that reduced the number of votes per person from four to one. While this had brought Kuwait into line with international norms, opposition groups condemned the move. The previous four-vote system had enabled voters to lend their support to disparate ballots, advantageous in a system without political parties, and to opposition groups that have long sought to break out from the back benches.

In June 2013, Kuwait’s top court dissolved parliament and called for new elections, which were held on July 27, for the second time in eight months. The country’s Emir, Sheikh Sabah Al Ahmad Al Sabah, reappointed Sheikh Jaber Al Mubarak Al Hamad as PM and tasked him with forming a new cabinet. While the government and the parliament continue to work toward resolving their differences, in May 2014, five members of parliament (MPs) resigned in the wake of the chamber refusing to question the PM about allegations of corruption and mismanagement.

Population

Pressures from Kuwait’s population growth are adding to the need for greater economic diversification and development. While the nation’s population growth averaged 3.1% annually between 2000 and 2012, according to the IMF, the Public Authority for Civil Information (PACI) reported that 57% of Kuwaitis are currently under the age of 25. Furthermore, the IMF predicts that between 74,000 and 112,000 Kuwaitis will enter the local labour market between 2012 and 2016. Kuwait’s current population is approximately 3.97m, according to the PACI, with 69% of this number foreign nationals, who originate largely from MENA and South Asia. Expatriate staff are estimated to account for 84% of the labour market, but in a pragmatic reversal of policy Kuwait is set to reduce the number of foreign workers by 1m from 2013 to 2023 at a rate of 100,000 per year. This will create market and labour opportunities for Kuwait’s youth and provide necessary economic stimulus for further expansion. At present, some 42% of Kuwaitis are under the age of 15.

Religion & Culture

Islam is the official state religion, but freedom of worship is enshrined in Kuwait’s constitution, and the country has sizeable Christian, Hindu and Buddhist communities. Kuwait’s majority religious demographic is Sunni, but its Shia minority, at around 30% of the population, are well integrated.

Sharia law is one of the key sources of legislation, but government regulations remain largely secular. While Kuwait’s adherence to Islamic strictures is strict in some respects (for example, a total ban on alcohol), the country granted universal suffrage in 2005 and female MPs were elected in both 2009 and late 2012.

Language

Kuwait’s official language is Arabic, in which all government announcements and documentation are issued. However, English is widely spoken, especially within business and academia. The Kuwait Times and the Arab Times are the country’s two main English-language newspapers, while regional English-language publications including Gulf News, Gulf Times and Arabian Business also provide coverage.

Education

Schooling is compulsory for all children between the ages of six and 14. Considerable budget surpluses have enabled Kuwait to develop a comprehensive education system, and it has achieved over 100% enrolment in primary and secondary schooling across both genders. The education system, divided into three tiers (elementary, intermediate and secondary), is overseen by the Ministry of Education, while postsecondary schooling is handled by the Ministry of Higher Education. Domestic enrolment is notably lower at the tertiary level, as many Kuwaitis choose to study abroad. At all tiers, public schools are segregated by gender but are free of charge for nationals.

Pressure to reform the education system to be more in line with current economic needs is building, which has been manifest in part by the growing popularity of international schools providing Western curricula. Catering to the domestic market, Kuwait University remains the country’s only public higher education institution. The government broke ground in 2012 on a new $3.5bn campus outside Kuwait City that will eventually house 30,000 full-time students. Private tertiary institutes including Gulf Institute of Science and Technology, the American University of Kuwait, the Arab Open University, Kuwait Asia University, and the Australian College of Kuwait also cater to private education demand.

Geography & Climate

At 17,818 sq km Kuwait remains one of the smallest countries in the world, but it is significantly larger than several of its GCC neighbours. Boubyan Island, north of Kuwait City and site of the Mubarak Al Kabir port, which is currently under development, is larger than Bahrain at low-tide. Kuwait City is based on a natural deepwater port, but extensive dredging works have been undertaken to deepen maritime access to other port facilities. Kuwait is predominantly a desert plain with a maximum elevation of 306 metres and shares land borders with Saudi Arabia and Iraq, as well as a maritime border with Iran.

The southern portion of the country is a neutral zone shared with Saudi Arabia, which is now under joint administration and an important oil-producing region. Oilfields straddling Kuwait’s northern borders with Iraq are expected to undergo joint redevelopment in the near term as relations between the two countries improve.

Kuwait’s desert climate, with average temperatures reaching as high as 48° Celsius in summer, makes most of the country unsuitable for cultivation. Just 20% of Kuwait is inhabited and most settlements are located along the 500-km coastline, with 98% of the population residing in urban areas. Annual rainfall is negligible and 90% of Kuwait’s current water requirements are met by desalinisation plants.

Natural Resources

Kuwait’s oil reserves remain abundant, but as its oilfields age, they have become harder to access. Current output levels have tapered, putting pressure on the economy, but increasing production from 3m barrels per day (bpd) to 4m bpd by 2020 is part of the NDP, requiring substantial infrastructure upgrades. Kuwait is also host to a number of cement manufacturers that use local resources, but these continue to have difficulty competing with cheaper imports from other GCC member. The country’s coastal waters also support a small fishing industry.