Kuwait reducing costs by encouraging efficient consumption

Across the GCC, spending cuts have come to the forefront of fiscal discussions as hydrocarbons exports continue to fetch lower prices on global markets, resulting in decreased revenues. Subsidies, in particular, have been on the chopping block. In January 2016, Qatar announced plans to raise petrol prices by 30% to help address its expected budget deficit of $12.8bn for the 2016 fiscal year. Its state fuel company, Woqod, correspondingly announced price hikes from $0.27 to $0.36 per litre of high-octane fuel. The move was only the latest in measures taken across the region, announced just one week after neighbouring Bahrain and Oman announced similar measures. In the UAE as well, the authorities began adjusting petrol pricing policies in August 2015, lifting price ceilings to allow domestic fuel prices to rise in step with global prices, along with Saudi Arabia.

Best Foot Forward 

In Kuwait, meanwhile, parliament and the government continue to discuss the best way forward regarding the country’s subsidy policies. In light of falling oil export revenues, officials have so far opted for deficit spending to keep a bold set of projects in the oil and non-oil sectors moving ahead. Deficit spending is set to cover about half of the parliament-approved budget for the fiscal year 2015/16, amounting to over KD8.1bn ($26.8bn), Anas Khaled Al Saleh, the finance minister, said in August 2015. The idea seems to be maintaining major investments even in the face of lower oil prices. “We will continue to spend on our infrastructure projects as planned. We have never seen such high levels of capital expenditure,” Al Saleh said in March 2016. “We are focusing on infrastructure projects that work best and avoiding falling into the trap of economic stagnation because Kuwait’s economy depends on government expenditure.” Indeed, in 2015 over $30bn worth of new contracts were awarded. In order to maintain momentum for progress on its capital expenditures, the Kuwaiti government aims to make cuts elsewhere.

Tightening The Belt

In January 2016 the country’s emir, Sheikh Sabah Al Ahmed Al Jaber Al Sabah, underscored the importance of streamlining spending. He singled out government subsidies for review. “The government has to stop subsidies and raise the prices of fuels, electricity and water,” he told local daily Al Rai. The challenge, however, is trying to find a way to reduce subsidies without harming citizens’ livelihoods, Nizar Al Adsani, chief executive of the state-owned energy conglomerate Kuwait Petroleum Corporation (KPC), said in the same month.

Indeed, the introduction of subsidy cuts has in the past proved difficult. In January 2015 the government reduced diesel, kerosene and aviation fuel subsidies, a move that generated savings worth as much as 0.3% of the GDP for the year, the IMF said in November 2015. Members of the country’s parliament, however, criticised the move, urging the government to reinstate lower prices. Eventually, the subsidies were re-introduced but with the caveat that the subsidy support would be open to monthly review pending price fluctuations in the future. With crude prices stubbornly low, however, the government and legislators are continuing talks about subsidy cuts.

Subsidy Background

Government subsidies in Kuwait are nearly as old as the country itself. The structure of electricity prices serves well to illustrate the point. In 1966, just a few years after national independence, the government dropped electricity prices from KD0.027 ($0.09) to KD0.002 ($0.007) per KWh, where they have remained since. In general, consumers across the developed world tend to pay higher tariffs. Household consumers in the EU, for instance, paid an average of $0.23 per KWh in 2015.

When the Kuwaiti government set the electricity price ceiling in 1966, the country lacked widespread wealth and was just beginning to tap revenues from its newly started oil industry. Much has changed since then. Oil revenues, for instance, drastically increased average wealth levels in the country. By 2014 Kuwait’s GDP per capita was the fifth-highest in the world, according to the World Bank. Even as a growing number of consumers, industries and commercial establishments push utilities and fuel consumption rates higher, however, the price of electricity has remained the same. In addition to having one of the highest rates of electricity consumption in the world, Kuwait also ranked third in daily water consumption, despite having the second-smallest freshwater resources in the world, Mohammad Bushehri, undersecretary of the Ministry of Electricity and Water, said in April 2016. With the policies currently in place, however, the government continues to subsidise growing consumption, an increasingly costly system as the country’s population and demand continue to rise.

A Growing Gap

Government subsidies make up a significant portion of Kuwait’s state spending. Subsidy spending made up 7-8% of GDP as of November 2015, according to Ministry of Finance data. Between 2012 and 2014, total annual subsidy spending hovered between KD3.5bn ($11.6bn) and KD4bn ($13.2bn), before easing to KD2.7bn ($8.9bn) in 2015. Around 70% of subsidy spending pays for electricity and petrol subsidies, Al Saleh said in March 2016. IMF estimates put the amount spent on electricity and water subsidies in 2015 alone at KD1.98bn ($6.5bn).

The gap between revenues and costs is large and expanding rapidly. Between 2004 and 2014, fuel costs for electrical power stations and water distillation operations rose over fivefold, from KD532m ($1.8bn) to KD2.86bn ($9.5bn), according to the Ministry of Electricity and Water. Total revenues, meanwhile, grew from KD60.7m ($200.8m) to KD182m ($602m). The result has been a widening difference between revenues and fuel costs, translating to a larger burden on state coffers. That gap widened from KD471m ($1.6bn) to KD2.68bn ($8.9bn) between 2004 and 2014, growing to a significant portion of total spending of KD23.2bn ($76.7bn) for the 2014/15 fiscal year.

Finding Consensus

Kuwait has not rolled out subsidy reform as quickly as its Gulf allies in part because of its political system, which is unique in the region. Its parliament is invested with more power than legislative bodies in neighbouring countries, so the political system requires more time for consensus-building, especially with sensitive issues like subsidy reform. “The real challenge is passing the reforms through parliament and winning public support,” Razan Nasser, senior MENA economist at HSBC Holdings’ Dubai office, told Bloomberg. “The reversal of fuel subsidy reforms [in 2015] highlights the difficulty of implementing such unpopular reform measures.”

Still, the government’s different parts have been working together to amend the system. In the first half of 2016 the government and legislators were discussing options for subsidy reform. Ali Saleh Al Omair, the public works minister, briefed members of parliament in February 2016, outlining a plan to raise electricity charges from KD0.002 ($0.007) per KWh to a graduated system that encourages less consumption. The price would rise to KD0.005 ($0.02) per KWh for consumption up to 3000 KWh, KD0.010 ($0.03) up to 6000 KWh, and KD0.015 ($0.05) for any consumption above 6000 KWh. The system should encourage consumers to maximise efficiency and minimise waste. Under the plan, fuel prices would also rise, parliament member Yousef Al Zalzalah told local daily Al Anba.

Unlike those for electricity and water, petrol prices are open to increases without parliamentary approval, offering the government a way to generate savings without lengthy negotiations. In April 2016 officials were mulling this option as a way to maintain Kuwait’s sovereign credit rating, according to local daily Kuwait Times. Rather than taking unilateral action, however, the government seems to be aiming for a concerted approach, working with parliament to raise both utilities and fuel prices simultaneously. They hope the changes could signal that the state is working to rationalise the state’s fiscal situation.

How the government will proceed remains to be seen. What seems certain, however, is its commitment to moving slowly and carefully. Adjusting the subsidy system could raise costs not only for consumers but also for businesses, especially industries that have long relied on cheap utilities. Lifting subsidies, for instance, could raise the price of feedstock for Kuwait’s petrochemicals sector, removing one of its advantages compared to international competition, according to a February 2016 report by business intelligence firm Marmore MENA. As a result, delays in implementing subsidy reform could turn out to be a blessing in disguise. Indeed, although Kuwait may be the last among GCC states to introduce major changes to its subsidy structure, the country’s gradual approach has provided time for officials to discuss ways to tweak the system, and consumers and businesses to adjust their habits. This sort of measured pace could make subsidy spending more sustainable.