Rising oil revenue enables Kuwait's diversification efforts

Kuwait’s economy has long been underpinned by the production and export of crude oil. Although the rise in oil prices in 2021-22 boosted government revenue and macroeconomic stability, the Covid-19 pandemic – which preceded the commodity price boom – also underscored the risks of overreliance on an industry subject to fluctuating global demand. This has created a fresh impetus for economic diversification, with the government hoping that robust public finances – and a new Cabinet and elected legislature – will drive policy changes and infrastructure projects, unlocking investment and private sector growth.

Government Bodies

The country is home to one of the most open political systems in the Gulf, under which the royal family appoints the government and a 50-member Parliament is democratically elected. The emir of Kuwait selects a prime minister, who in turn recommends a Council of Ministers, or Cabinet, 15 of whom sit in Parliament. While Parliament can debate policies and pass laws, the emir must give his consent for new legislation to come into effect. Parliament also has the ability to call a vote of no confidence in ministers and cross-examine their policy choices.

This system has seen some difficulties in terms of the legislature and executive agreeing on legislation. For example, Prime Minister Sheikh Ahmad Nawaf Al Ahmad Al Sabah resigned in April 2022 after his government was unable to advance economic reforms or pass a budget due to parliamentary opposition.

In FY 2020/21 Kuwait reported a record budget deficit of KD10.8bn ($35.5bn), prompting close scrutiny of the public sector wage bill that accounted for 75% of the total budget. In September 2022 the lengthy gridlock prompted Crown Prince Sheikh Mishal Al Ahmad Al Jaber Al Sabah to dissolve Parliament and order fresh elections. Votes counted in October 2022 returned two female representatives to Parliament and the same number of opposition members as the previous Parliament. It is hoped that the new legislature will be able to work effectively with the executive. Following the election, Sheikh Meshal reappointed Sheikh Ahmad as prime minister, along with new heads of the Ministry of Oil, Ministry of Finance (MoF) and Ministry of Foreign Affairs in an effort to build bridges with the legislature.

The new government will be tasked with implementing a value-added tax, which is mandated as part of an agreement between Kuwait and the GCC. The government is also expected to consider a selective excise tax regime. Under the latest proposals, an excise tax of 10-25% would be imposed on tobacco products, carbonated and sweetened drinks, and luxury goods such as jewellery, luxury cars and yachts. Such reforms could bolster public finances in a country that does not impose taxes on personal income or Kuwaiti companies. However, majority foreign-owned companies are subject to a corporate income tax of 15%.

The executive is also keen to remove the existing obstacles to a new debt law – under discussion since 2017 – that would permit the issuance of international bonds to finance budget deficits. Excess financing requirements are met by drawing on the General Reserve Fund (GRF), a multibillion-dollar oil export fund overseen by the Kuwait Investment Authority (KIA). The KIA also manages the Future Generations Fund (FGF), a portfolio with over $700bn created to preserve oil wealth for future generations. It invests primarily outside of Kuwait and cannot be tapped for financing the budget unless there is a change in the law.

The GRF is markedly smaller than the FGF, hence the urgency with which the government is seeking to pass a debt law. According to the credit ratings agency Fitch, the debt law’s passage would likely raise the debtto-GDP ratio from 10% in early 2022 to 50% over the medium term, in line with its forecast that the budget deficit will widen in the years to come as oil prices fall.

Performance

Kuwait is an oil and government-dominated economy, with the Supreme Petroleum Council the primary government body overseeing the sector. Crude oil reserves are estimated at nearly 101.5bn barrels, or approximately 7% of the global total. The hydrocarbons industry accounts for more than half of GDP and 85% of government revenue, while oil refining and downstream petrochemical processing are the main industries. Manufacturing is centred around switchgear for power substations and factories for building materials, furniture and food packaging.

In October 2022 the IMF forecast that Kuwait’s real GDP is set to grow by 8.7% in 2022, before falling to 2.6% in 2023 as oil prices moderate. This reflects a strong recovery after growth contracted by roughly 8.9% in 2020 due to the challenges posed by the pandemic. Consumer price inflation is expected to remain relatively stable at 4.3% in 2022. The World Bank’s October 2022 “Gulf Economic Update” report included a similar forecast, with GDP growth expected to be 8.5% in 2022 and 2.5% in 2023, and inflation projected to reach 4% in 2022 before falling to 2.5% in 2023.

The Central Bank of Kuwait aims to foster a stable monetary policy environment amenable to enhancing social and economic progress, and growing national income. In December 2022 the key policy rate was raised to 3.5%, and its raises throughout 2022 mirrored similar moves by the US Federal Reserve – though to a less aggressive extent. Kuwait pegs the Kuwaiti dinar to a basket of currencies, unlike many GCC peers that have a direct peg with the US dollar. For the GCC as a whole, the World Bank forecasts growth of 6.9% in 2022, moderating to 3.7% and 2.4% in 2023 and 2024, driven by a buoyant hydrocarbons sector and rapidly developing non-hydrocarbons industries.

Indeed, oil prices in 2022 have run markedly higher than the $65-per-barrel average anticipated in the 2022 budget, surpassing the government revenue of KD18.8bn ($61.9bn) initially forecast in the budget for FY 2022/23. In November 2022 Kuwait-based financial advisory firm AlShall Consulting estimated that total revenue would reach KD31.8bn ($104.7bn) by the end of the fiscal year in March 2023 if production levels and prices remain unchanged.

Despite previous fears of a debt crunch, government debt remains relatively small as a proportion of GDP, at 7.1% in 2022, and is forecast to comprise 6.9% of the total in 2023. Moreover, as of November 2022 Kuwait maintained robust credit ratings, including an “AA-” from Fitch and an “A1” from Moody’s.

Trade

Kuwait is a major oil exporter and traditionally runs a robust current account surplus. The year 2022 will be no exception, with the surplus projected to reach 28.6% of GDP that year, according to the World Bank. The country benefits from membership in the GCC’s Customs union, which charges a 5% duty on goods at the point of entry to the six-country bloc and allows free movement thereafter. In 2021 almost half of all imports originated from China, the US, the UAE, Japan and Saudi Arabia. The top-five non-oil export markets were the UAE, Saudi Arabia, China, India and Iraq.

International investors have the ability to access opportunities through the Kuwait Direct Investment Promotion Authority (KDIPA), which is tasked with approving new investments, offering a one-stop shop for licensing, legal guidance and related information.

Kuwait maintains bilateral agreements with a number of countries. As such, the KDIPA has signed memoranda of understanding (MoUs) with Abu Dhabi, Saudi Arabia, Qatar, Egypt, South Korea, China, the US, Turkey, Morocco, Jordan, Tunisia and Lebanon to promote direct investment in the country. In 2021 the KDIPA supervised foreign direct investment of KD1.2bn ($3.9bn), with the top-three sectors receiving funding being ICT, oil and gas, and construction. The Netherlands, China and the British Virgin Islands were the leading sources of inward investment.

National Economic Planning

The Supreme Council for Planning and Development (SCPD) designs and coordinates the implementation of the Kuwait National Development Plan (KNDP). Kuwait is in the third iteration of a five-year plan, the KNDP 2020-25, as it works to meet the goals of New Kuwait 2035. Under the plan, Kuwait aims to become a diversified, sustainable, knowledge-based and private-sector-led economy, as well as a financial and trade leader in the region. It also wants to be among the world’s top-35 countries for a variety of development indicators.

Although many of the projects and objectives of the KNDP 2015-20, which focused on infrastructure, have yet to be fulfilled, significant efforts and investment towards meeting these goals highlight the segment’s progress. Moreover, in 2021 the government allocated $65bn for infrastructure, health, environment and power projects for FY 2021/22, with 5% of the figure earmarked for public-private partnerships (PPPs).

The Kuwait Authority for Partnership Projects (KAPP) is the body responsible for implementing PPP projects. While progress on PPPs has been uneven, in December 2019 the KAPP oversaw the first successful public listing of a PPP project when it listed its 50% stake in Shamal Al Zour Al-Oula Power and Water Company, the operator of the Al Zour North One 1500-MW power and water plant. The listing was part of efforts to include citizens in the ownership of public infrastructure. In the future, PPP opportunities are expected in fields such as power, water and wastewater, education, health care, transport, real estate and solid waste management. 

Infrastructure

Key infrastructure projects in the pipeline include the 250-sq-km Silk City mega-development, a decade-old vision to galvanise diversification through improved trade and transport links with China, Iran and Iraq. The proposed free zone encompasses five islands and a northern territory linked to the capital by the $2.3bn Sheikh Jaber Al Ahmad Al Sabah Causeway, a China-led Belt and Road Initiative (BRI) project that opened in 2019. As of June 2022 a ministerial committee was working on a framework to prepare the zone for investment under the yet-to-be-approved budget ahead of planned implementation in 2025.

In April 2021 it was reported that the first four berths of the new Mubarak Al Kabeer Port on Boubyan Island had been completed, with an annual capacity of 2.5m containers. Work to connect the port to the road network is ongoing ahead of the planned construction of an additional 56 berths over four phases. Concerns have been raised over potential competition with another port facility being built in Iraq, but there are reasons to believe the two sides can cooperate. In December 2021 Iraq made its final $44m reparations payment to Kuwait for the Iraqi occupation in 1990-91, which could help ease the friction between the two.

A third mega-project is the Al Zour refinery, which will have a capacity of 615,000 barrels per day (bpd) of crude. The project is a primary means through which Kuwait intends to raise its refining capacity and export revenue. The first of three phases were operational as of September 2022, with the final two scheduled to come on-line in 2023, bolstering Kuwait’s oil export revenue. The refinery also boasts six trains of the world’s largest atmospheric residue desulfurisation units.

The work on the Mina Al Ahmadi and Mina Abdullah refineries, including upgrades to reduce emissions and pollutants, finished in 2021. Kuwait aims to raise its oil production from 3.2m bpd in mid-2022 to 4.8m bpd by 2040, investing heavily in downstream operations.

In June 2022 the government announced that work on the $4bn Terminal 2 project at Kuwait International Airport, which will help to accommodate an additional 25m passengers annually, was 61.8% complete. The government has also earmarked significant expenditure for new hospitals; and housing, entertainment and power generation facilities. New liquefied natural gas import facilities are planned for after the first port terminal to serve Al Zour opened in 2021. The building of the Kuwait Metro and a national railway network, slated for 2024 and 2026, respectively, are expected to provide additional avenues for foreign investment, and improve the country’s productivity and quality of life.

Untapped Potential

Kuwait targets renewable power generation capacity of 15% of total output by 2030, and the renewables segment offers significant untapped potential. In 2021 the government pledged to cut greenhouse gas emissions by 7.4% by 2035 under a business-as-usual scenario. This will be accomplished through oil-to-gas substitution in energy production, new combined cycle gas turbine power plants, energy efficiency measures and renewables projects.

There remains maneouverable space to tap Kuwait’s vast solar resources and to explore the largely untapped 63trn cu feet of natural gas reserves that lie within its borders. As it stands, plans to expand the initially successful Al Shagaya mixed wind and solar project have stalled amid political uncertainty and legal disputes.

Progress could be spurred by the extreme effects of climate change that are becoming apparent in Kuwait and other Gulf countries. The government has been paying particular attention to sustainability issues as it grapples with how to bring Kuwait in line with global environmental, social and governance (ESG) standards.

“Sustainability is now a cross-cutting theme increasingly adopted in leading government authorities like the KDIPA,” Mona Salim Bseiso, economic consultant at the KDIPA, told OBG. “The General Secretariat of the Supreme Council for Planning and Development, along with the Civil Service Commission, have issued pilot national guidelines for a governance framework based on international principles,” she said. To that end, many government departments, including the MoF, have moved away from paper-based documentation to digital. In addition, some have opened public-facing and intergovernmental online portals to improve engagement and transparency.

As for female representation, women occupy approximately 17% of leadership positions in the public sector, suggesting room for improvement. To advance female empowerment, the World Bank Kuwait Country Engagement Framework, approved by the government in August 2021, includes the region’s first standalone Gender Engagement Framework, which is intended to encourage an environment that is conducive to women’s employment, entrepreneurship and leadership. 

Private Sector Development

While the KNDP 2020-25 focuses on promoting private sector engagement and initiatives, the pandemic and political impasses have led to implementation delays. Despite these challenges, the authorities have taken steps to meet these goals. The Supreme Council for Privatisation (SCP) is pursuing a plan that aims to privatise multiple government entities and allow them to launch commercial operations. The plan leverages the success of Boursa Kuwait, the operator of the Kuwait Stock Exchange, which became a private operation in 2019.

The KNDP 2020-25 is pushing for the privatisation of power, water, telecoms and international communications holdings to improve their effectiveness and profitability, envisioning the creation of new regulatory agencies and a stronger regulatory framework for businesses. To this end, in 2020 the government enacted the new Kuwait Competition Law to facilitate free competition and protect the market from monopolies and unfair competition (see Legal chapter).

In addition, Law No. 71 of 2020 was recently enacted. The law strengthens the mechanisms in place to help companies avoid insolvency, removing provisions that could see business owners jailed for unpaid debts. This change is expected to help improve the environment for small and medium-sized enterprises (SMEs). Kuwait is also keen to promote innovation, expanding the scope of the National Fund for SME Development, which signed an MoU with the US Chamber of Commerce in September 2022 to increase the economic participation of entrepreneurs and start-ups.

The private sector has traditionally been underpinned by family firms, many of which are experiencing generational changes in leadership. “Kuwait’s business culture is determined by its demographics, and today we see private wealth being passed on to a new generation of business leaders,” Ali Khalil, CEO of Kuwait Financial Centre, told OBG. “There is a substantial change in mentality happening, with a greater focus on investing to meet the country’s diversification needs,” he said.

Kuwaitisation

According to the National Bank of Kuwait, the population rose by 1.8% between the end of 2021 and June 2022, representing the first increase in the labour force since the onset of the pandemic. The number of expatriates in 2022 was 11.4% less than it was in 2019, helping to lower unemployment among Kuwaitis to 5.2%, the lowest rate since 2016. This change is due to both the growth in the private sector and reduced competition from foreign workers.

In an effort to promote job opportunities for citizens and reduce its reliance on foreign workers, the government is pursuing a Kuwaitisation policy across the labour market. Government departments and specific industries are given official targets to reach for the share of Kuwaitis in the workforce. In 2021 Kuwaitis comprised 78.3% of the public and 4.7% of the private sector workforce, up from 76.6% and 4.3%, respectively, in 2020. One challenge to increasing the employment of Kuwaitis in the private sector is that companies find it difficult to compete with the generous salaries and benefits offered by public sector entities.

The Silk City project is set to create 200,000 jobs, absorbing new entrants to the labour market who may find it difficult to enter an overstaffed public sector.

Outlook

The rise in global crude oil prices in 2021-22 has given the country’s policymakers breathing space as they pursue an ambitious and multi-pronged effort to expand and diversify the economy. Recently completed and new refining projects are expected to increase export revenue, which should help finance infrastructure projects and the Silk City development. That said, Kuwait will remain vulnerable to budget pressures should oil prices decline. It is hoped that the formation of a new government will provide the regulatory certainty investors need to commit to major projects. It will be important for the SCP and the SCPD to sucessfully guide the execution of the KNDP 2020-25 and effectively stimulate private-sector development.