Kuwait targets subsidy reforms

Plummeting oil prices have brought renewed calls for Kuwait to deepen its focus on diversifying its economy and reducing hydrocarbon dependency.

While a budget deficit is not on the cards, the IMF believes a shortfall to be inevitable in the medium term if Kuwait maintains current expenditure levels.

A call to reduce spending on oil and subsidies was made at the highest level during the opening of the new parliamentary term on October 27, when the Emir Sheikh Sabah Al Ahmed Al Jaber Al Sabah, highlighted the need to stem the impact of lower oil prices on the economy.

“Here again, we are witnessing another cycle of sliding oil prices as a result of economic and political factors hitting the global economy, which is negatively affecting the national economy,” he said in remarks carried by the state-owned Kuwait News Agency (KUNA).  “You are responsible for stopping squandering of resources and rationalising spending, as well as to direct subsidies to those who deserve it without undermining the basic needs of citizens or affecting the standard of living.”

The Emir’s words echo the growing calls for reforms from both domestic and international stakeholders, many of whom have long claimed that Kuwait needs to curb its spending if it is to retain its annual budget surpluses.

Spotlight on subsidies

About 76% of Kuwaiti workers are employed in the public sector, with employees benefitting from an annual salary increase of 25% in 2012. In addition to free health care and education, Kuwaitis are entitled to a host of onetime grants, including marriage and housing payments, while all residents enjoy subsidised electricity, water and fuel.

The head of parliament's budget committee, Adnan Abdul Samad, was quoted by local media saying the average monthly salary for Kuwaitis employed in the government sector was $4,500, while in the oil sector it was more than $19,400,.

Public spending has tripled in Kuwait during the past seven years. In the 2014/15 draft budget, spending is forecast to rise by 3% year-on-year, driven by a KD19.6bn ($67.82bn), or 7% increase in current expenditure. Fuel and energy subsidies are expected to cost KD5.11bn ($17.68bn) in the same period, while independent ratings agency Capital Standards reported that energy subsidies alone would cost the government KD9bn ($31.14bn) by 2030.

Mid-term problems

While the state has consistently set oil prices for budgetary projections well below market rates − resulting in yearly billion-dollar surpluses − the latest market trends are expected to weigh on fiscal planning. Oil minister Ali Al-Omair told KUNA in October that oil prices were unlikely to adversely affect the state’s development plan.

Yet the IMF warns that the state is more vulnerable to sliding oil prices than in previous years. “A $20 decline in oil prices ... would result in (a) reversing of the fiscal position from a surplus to a deficit in the medium term,” the fund said in its latest report on Kuwait, which has posted 15 consecutive years of budget surpluses, worth a total of KD92.5bn ($320.1bn) according to official data compiled by AFP. 

The fund expects the surpluses to drop by 19% between 2012 and 2018, double the rate forecast for the wider GCC. At the same time, Kuwait’s fiscal breakeven oil price is forecast to reach an estimated $75 per barrel during 2014/15 if current expenditure levels remain the same. Kuwaiti oil averaged $103 per barrel during the fiscal year, while slipping to $75.8 on November 6 according to a KUNA report.

Cost-cutting measures suggested by the IMF include limiting public sector jobs, phasing out subsidies worth billions of dollars, introducing a corporate tax for Kuwaiti companies and revising the fees charged for public services.

Focus on reform

Kuwait has already increased its focus on subsidy reforms, with the finance minister, Anas Al Saleh, making it a key issue since his appointment late last year. In June, the government announced plans to eliminate diesel fuel subsidies, which are expected to save the country about $1bn, or 0.5% of GDP, per year.

There have also been further reforms to cut subsidies on kerosene and jet fuel and the government is studying raising electricity and water costs that would have a much bigger impact, according to a local media report.

While subsidy reductions remain a challenge, the fall in oil prices has also highlighted the need for Kuwait to up the tempo of its diversification efforts. The Emir told parliament that the private sector had a critical role to play in its long-term bid to reduce hydrocarbon reliance.