With state revenues significantly impacted by lower global oil prices, the Kuwaiti government has intensified efforts to enact reforms aimed at increasing foreign investment, supporting economic diversification and reducing state subsidies.
Though the budget deficit is projected to hit record levels in March, solid growth from key non-oil sectors like construction, as well as an uptick in oil prices heading into 2017, should help the government bring the shortfall under control.
Prior to mid-2014 – when crude prices averaged around $115 per barrel – an estimated 95% of Kuwait’s export revenue was generated through oil. However, the lower oil-price environment that followed had a dramatic effect on revenues, which dropped from $97bn in FY 2013/14 to just $40bn in FY 2015/16.
The budget deficit soared as a result; the Ministry of Finance (MoF) estimated it would reach a record KD12.2bn ($39.7bn) in FY 2016/17 – an increase of almost 50% from the previous year.
Economic reforms are a high priority, and in February Anas Khaled Al Saleh, minister of finance, unveiled a six-pronged strategy to reduce spending and boost non-oil growth.
Al Saleh, who also served as acting oil minister until November 2016, told media the plan aimed to prioritise financial reforms, modify the state’s role in the economy, bolster private sector involvement, increase project ownership among citizens, reform the labour market, and promote legislative and administrative changes.
Subsidy rationalisation has long been a goal for policymakers, with World Bank estimates putting subsidies for health care, housing, fuel and electricity at as much as 5.7% of GDP per year.
In June 2016 the National Assembly’s budget committee announced the government would reduce budgetary allocations for fuel and gas subsidies to KD238m ($790m) in FY 2016/17, significantly lower than the estimated KD4bn ($13.3bn) spent in previous years.
While many believe the cuts are necessary, some observers cited political tension caused by these and other austerity measures as the reason behind a cabinet decision to dissolve Parliament in mid-October.
An early general election was held at the end of November, with opposition candidates winning 24 of the 50 seats in the National Assembly and only 20 of the 42 members of Parliament seeking re-election retaining their seats.
The non-oil economy remained a bright spot in 2016, particularly Kuwait’s construction sector, which has benefitted from sustained government spending despite the economic slowdown.
In November MEED reported that KD1bn ($3.3bn) of construction contracts were awarded in the third quarter – a 14.8% increase over the previous three months – bringing the total value of contracts to KD3.6bn ($11.7bn) year-to-date.
By year’s end this was projected to reach KD5.9bn ($19.2bn), growing to a record KD11.5bn ($37.5bn) in 2017, which would surpass the previous high of KD10bn ($32.6bn) in 2015.
In December National Bank of Kuwait (NBK) also reported strong profit growth for non-oil corporates through to September, with basic materials and technology companies listed on Boursa Kuwait, the country’s stock exchange, recording the strongest year-on-year increases, at 112.5% and 105.9%, respectively.
Oil prices rebounded late in the year following an announcement from the Organisation of the Petroleum Exporting Countries (OPEC) in November 2016 that it would reduce production by 1.2m barrels per day (bpd) to 32.5m bpd – the first production cut in eight years.
Brent crude prices rallied to $50.50 per barrel immediately after the news, hitting $54.50 days later – the highest level in more than 14 months.
Resurgent prices could also alleviate pressure on Kuwait’s fiscal balance, with the country well placed to benefit relative to many others in the region. In October the IMF announced that Kuwait was the only MENA country with a breakeven oil price below $50, at $47.80 per barrel.
While the non-oil sector’s contribution to GDP is expected to expand – with NBK forecasting in mid-September that non-oil growth would increase almost three percentage points to 4% in 2016, rising to 4.5% in 2017 – oil growth is also set to resume in 2017 as production is stored at fields jointly owned by Saudi Arabia and Kuwait .
Disruption in the area between the two countries, known as the Neutral Zone, began when Saudi Arabia shut down the Khafji oil field in late 2014 for environmental reasons, cutting off the field’s 280,000-300,000 bpd of shared output.
Resolution of a two-year long dispute over operations rights came in December and should contribute to the 2% increase in oil production forecast by NBK for 2017.
The bank predicts GDP growth will rise to 3.1% this year, up from 2.9% in 2016. These figures are slightly higher than IMF projections, which put GDP expansion at 2.48% in 2016 and at 2.62% this year.
Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.
Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.
Register Here×Once again signalling the government’s intent to realign the local labour market, officials announced on February 8 that the Kuwaiti Manpower Restructuring Programme has targeted the placement of...
With efforts to accelerate the pace of economic growth and boost domestic employment taking centre stage under the new government of Prime Minister Marouf Bakhit, a new law is under discussion...
The Turkish Prime Minister Bulent Ecevit has spent the last week in the US hoping to garner support for economic reforms at home and trade concessions for Turkish exports to the US.
