Kuwait to diversify economy away from hydrocarbons in move towards greater global integration

As a member of both the Organisation of the Petroleum Exporting Countries (OPEC) and the GCC, Kuwait has various strategic ties. Additionally, the country is arguably the most politically dynamic in the Gulf, which has afforded it strong foundations to help tackle recent issues regarding parliamentary elections and accountability.

By continuing with economic diversification efforts and reducing dependence on oil revenue, Kuwait is also adding momentum to several large infrastructure projects. The tabled projects are set to further integrate Kuwait into the global economy.

Development

Kuwait’s economic strength largely comes from its substantial oil reserves, which are equivalent to more than 101.5bn barrels, with the government setting a production target of 4m barrels per day (bpd) by 2020, up from the current level of 2.83m bpd (see Energy chapter). Oil has fuelled development since the Second World War, and production took on a central role in the economy after it was nationalised in 1975. Accounting for more than 60% of GDP and 95% of exports, according to Kuwait’s Central Statistical Bureau (CSB), oil revenue has contributed to strong public finances, consecutive annual budget surpluses and the development of a generous welfare system.

Although the private sector played a somewhat limited role in economic expansion in the late 1900s and early 2000s, Kuwait has produced a number of globally successful firms, such as telecoms giant Zain and low-cost air carrier Jazeera Airways. Kuwait has also been pursuing a programme of economic diversification to jump-start the private sector via a boost in infrastructure projects.

Approved by Parliament in February 2015, the five-year, $155bn Kuwait Development Plan (KDP) is the government’s blueprint to enhance the country’s role as a banking, trade and services centre within the Gulf by 2020. With plans for upgraded infrastructure, expanded utilities and housing investment, the government has seen more than 500 projects nominated under the KDP. This can act as a catalyst to restore the balance between the public and private sectors, as well as accommodate the demands of a growing population. Given the lower oil prices seen in recent years, the initiatives outlined by the KDP also come at a critical time in terms of enhancing the state’s competitiveness as a destination for foreign direct investment.

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 its expansion throughout the Arabian Peninsula in the 7th century CE. Permanently settled in the 17th century by the Bani Khalid tribe, the area prospered as a key trading hub on the silk route between India, Central Asia, the Middle East and Europe. As its wealth grew, the city 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. Declared an independent principality under British protection during the Second World War, Kuwait remained allied to the British until it declared independence in 1961. Kuwait’s economic wealth and regional ties grew in the second half of the 20th century, as it became a founding member of the GCC in 1981 alongside Bahrain, Oman, Qatar, Saudi Arabia and the UAE. However, its history in the latter part of the century was defined by Iraqi occupation in 1990-91, during which some 749 oil wells were set alight and destroyed by occupying forces. Kuwait made a strong recovery, though its economic agenda in the aftermath was largely focused on rebuilding the country. In subsequent years the focus has shifted towards diversification and sustainable economic development, as the nation aims to avoid reliance on a single source of income.

Recent Growth

The economy has been largely driven by the government since the nationalisation of the oil and gas industry in 1975, with the sector accounting for over 60% of GDP and 95% of exports in 2018. While this led to a golden era for the country, security soon took precedence over economic development during the Iran-Iraq War in 1980-88 and the Iraqi occupation in 1990-91. While the two decades since these conflicts have seen considerable stability and growing prosperity, economic and industrial development remains largely state-led. Launched in 2015, the KDP follows the National Development Plan (NDP) 2010-14, which had more than 500 projects tabled to upgrade infrastructure, utilities and housing while improving other services intended to re-energise the private sector.

Although progressing major plans has been a challenge in the past, with 421 projects carried over from the previous NDP, the government has continued to invest heavily in key infrastructure projects. Hydrocarbons revenue has enabled the establishment of a universal and comprehensive welfare system. This brings a number of challenges that the authorities are seeking to address, not least of which is inflation driven by government spending. The growing public debt burden is also of concern, with the IMF warning in 2012 that based on spending projections, revenue would be entirely committed by 2017, preventing any future savings.

Population & Demographics

The CSB estimated that Kuwait had 4.23m inhabitants at the beginning of 2018. The latest figures from the CSB with demographic breakdowns show that expatriates comprised the majority of the 4.08m-strong population in 2017, with 53.4% of people living in the country being non-citizens at that time. Driven by the high numbers of male immigrants seeking work in the country, Kuwait has a somewhat male-dominated populace, with 60.1% of the total population and 64.8% of expatriates being men. Meanwhile, the youth cohort is robust: 32.1% of inhabitants were 24 years of age or younger in 2017. With 98% of the population living in cities, Kuwait also has a very high rate of urbanisation, largely due to the somewhat extreme climate.

As Kuwait has embraced more liberal socio-political concepts, including universal female suffrage in 2005, representation has become a point of contention, particularly among the state’s post-liberation generation. At the forefront of this are the 105,000 Bidoon, or stateless people, in the country. Additionally, while around 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 operate as para-political structures, and they have consistently demonstrated against the government’s policies towards them.

Parliament & Politics

Agreements between the government, Parliament and opposition blocs have at times been somewhat volatile, and the contemporary political landscape is symptomatic of that relationship. The principal prerogative of Parliament is to oversee and maintain the quality of ministerial policy and conduct. However, it can also exercise power that is not afforded to neighbouring national assemblies, such as the ratification and vetoing of laws proposed by the executive branch. Formal inquiries and questioning of ministers have been a precursor to votes of no confidence, which is the strongest tool available for Parliament to ensure government accountability; however, 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 and certainty, which brought them into confrontation with the government in 2009, when Parliament summoned then-Prime Minister (PM) Sheikh Nasser Al Mohammed Al Ahmad Al Sabah. Between 2009 and 2011 Parliament forced Sheikh Nasser to resign four times, but in all four cases he was reappointed by the emir. However, Sheikh Nasser was ultimately replaced by PM Sheikh Jaber Al Mubarak Al Hamad Al Sabah in December 2011, 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 groups. Adjourned in June 2012 when it called in the ministers of finance and labour for questioning, the Constitutional Court (CC) ruled in the same month that the 2011 dissolution of Parliament was unconstitutional, rendering the February 2012 elections null and void, and a new Parliament was elected in 2013. Parliament was dissolved by the emir in October 2016, and a general election was held on November 26, 2016, with voter turnout of around 70%. Opposition candidates took the lead in the results, winning 24 out of 50 seats, while 20 incumbents were re-elected.

Constitutional Constructs

While the CC’s June 2012 ruling outwardly reinforces the judiciary’s impartiality, the ramifications were less obvious. The recall of the 2011 Parliament, seen as a pro-government move, was only avoided because many officials declined to return to office. However, the CC reinforced its impartiality in August 2012, when it upheld – against government wishes – the motion to cut the number of voting districts from 25 to five.

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 brought Kuwait in line with international norms, opposition groups condemned the move, as the previous four-vote system enabled voters to lend their support to disparate ballots. Sharia law is a primary source of legislation, but law and government regulations remain largely secular. While adherence to Islamic strictures is strict in some respects – for example, there is a total ban on alcohol – the country granted universal suffrage in 2005, and female MPs were elected in both 2009 and 2013.

Language

Kuwait’s official language is Arabic, in which all government announcements and documents are issued. However, English is widely spoken, especially within business and academia. The Kuwait Times and Arab Times are the two main newspapers, and are written in English, while other publications – including Gulf News, Gulf Times and Arabian

Education

Schooling is compulsory between the ages of six and 14. Budget surpluses have supported the development of a comprehensive education system, and the country has achieved a 100% enrolment rate in primary and secondary schooling for both boys and girls. The compulsory education system is divided into three tiers: elementary, intermediate and secondary. It is overseen by the Ministry of Education, while post-secondary schooling is handled by the Ministry of Higher Education. Domestic enrolment is notably lower at the tertiary level, partially because many Kuwaitis choose to study abroad. All public schools are segregated by gender and are free of charge for nationals.

Pressure to reform the education system to align it with economic needs is increasing, which has seen the growing popularity of international schools offering Western curricula. Catering to the domestic market, Kuwait University remains the country’s sole public higher-education institution. Private tertiary institutions – including the 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 unmet demand in the education sector.

Geography & Climate

Kuwait’s landmass covers an area of 17,818 sq km. Its territory includes nine islands off its coast, the largest of which is Boubyan Island, north of Kuwait City and the site of Mubarak Al Kabeer Port, which is currently under development. Kuwait City is based on a natural deepwater port, but extensive dredging works have been undertaken to extend access to other port facilities.

Kuwait is predominantly a desert plain, with a maximum elevation of 306 metres, and it shares land borders with Saudi Arabia and Iraq, in addition to a maritime border with Iran. An important oil-producing area, the southern region is a neutral zone shared with Saudi Arabia, which is under joint administration. The 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.

The desert climate, with average temperatures reaching as high as 48°C in summer, makes most of the country unsuitable for typical cultivation practices. Just 20% of Kuwait is inhabited, and the majority of settlements are located along the 500-km coastline. Annual rainfall is negligible, with 90% of the country’s water requirements met through the use of desalination plants.

Natural Resources

While Kuwait’s oil reserves remain abundant, as its oilfields have matured they have become harder to access. Output levels have tapered, putting pressure on the economy. However, plans to increase production to 4m bpd by 2020 will require substantial infrastructure upgrades – a central aspect of the KDP. Kuwait is also host to a number of cement manufacturers that use local resources, and the coastal waters successfully support the relatively small local fishing industry.