In contrast to the country’s recent vocal commitment to economic reform, the Kuwaiti Government’s latest nine-month budget shows little deviation from its historical dependence on oil revenues and generous allocations to public sector salaries. The country’s 2000-2001 budget published in the 8 August issue of the Kuwaiti Official Gazette, Kuwait Al-Yaum , projects total revenues at KD2,306.5mn ($7,513.0mn) or 3.7% more than in the longer fiscal year of 1999-2000 – see table below. (Kuwait’s latest budget is for the nine-month period of 1 July 2000-31 March 2001. After this period, the country will adopt a full 12-month fiscal year running from 1 April to 31 March.) On an annualized basis, the revenue projection represents an increase of 38%. Oil revenues are projected to rise to KD1,927mn ($6,276.8mn) which, on an annualized basis, would represent a rise of 46% over the previous year. Last year the price of Kuwait’s crude averaged $11.8/B, according to the National Bank of Kuwait (NBK), and by 1Q 2000 it had risen to $22.9/B – a climb of 94%. And as NBK points out in its July Economic Brief , “it is very unlikely that crude prices will fall to the level assumed in the official budget projections.” 

Despite the projected rise in revenues, some analysts accuse the government of underestimating income in an attempt to lessen spending expectations and they say the $13/B oil price assumption in the 2000-2001 budget is too conservative. When preliminary numbers were first released in July Kuwaiti MP 'Abd al-Wahab al-Harun told Reuters that they were “not realistic...$13 a barrel and the oil production level used is too low.” The budget was reportedly based on the April-June OPEC quota production level for Kuwait of 1.98mn b/d although at the beginning of July, this was raised to 2.037mn b/d. According to MEES estimates, Kuwait’s OPEC production increased from 2mn bpd in April to 2.14mn b/d in July (MEES, 14 August).

Whatever production or price levels, it seems likely the country will achieve a fiscal surplus both in the current fiscal year (for which the budget predicts a deficit of KD1,517mn – $4,941) and in the preceding one. NBK’S latest Economic Brief (July) says that the price of Kuwaiti crude averaged $22.9/B in FY1999-2000, generating revenues of KD4.8bn ($15.6bn) – “more than double their level for the comparable period last year.” NBK predicts that total revenues for the past fiscal year will reach KD5.2bn ($16.9bn), with non-oil revenues at KD430mn ($1,400mn) or some 18% less than the previous year. The bank estimates that government spending for the year remained flat and that the final surplus for the year will be around KD1.2bn-1.3bn (compared to a budgeted level of KD2,248.4mn – $7,323.7mn). Moreover if oil prices average between $21-25/B for FY2000-2001, NBK sees a potential surplus of KD35mn-910mn ($113.7mn-$2,956mn). Sources in Kuwait told MEES that official figures for oil export revenues in August and July totaled KD967mn ($3,149.8mn) – almost 50% of the amount budgeted for the nine-month period (KD1,927mn – $6,276.8mn). (According to the Law Decree No 106 of 1976, a statutory 10% of annual government revenues should be allocated to the Reserve Fund for Future Generations, estimated to stand at $45-50bn – see MEES, 7 February for details.) At the end of the day, speculation about budget size is largely irrelevant since while the budget includes national external investment expenditures such as those managed by the Kuwait Investment Authority (KIA – within ministerial allocations) revenue projections exclude income generated by external assets. This revenue has historically ensured that the country never faces a real deficit problem.

Accusations that the government’s revenue estimates are conservative may be well-founded, therefore, but exaggerated concerns in this respect ignore more important structural issues. Kuwait, like most of its Gulf neighbors, has spent decades grappling with the question of how to diversify its revenue base away from oil. But the latest budgetary figures project that non-oil revenue (excluding investment income) will only constitute KD379.5mn ($1,236.2mn) or 16.5% of the total, compared with a projected 20.8% of the total last year and 22% in the actual turn-out in FY1998-1999. Kuwait’s economy is thus still more or less totally oil-dependent.

Equally stagnant is the effort to trim back public sector running costs. Total spending on public sector institutions has risen from KD4,191mn ($13,652mn) in FY1999-2000 to the annualized figure of KD4,665mn ($15,195.4mn), an increase of 11.3%. Significant winners include the Amiri Diwan which saw its annualized allocation rise by 44%, the Ministry of Justice, whose budget rose by 23%, the Ministry for Oil, which received a 108% raise, and the National Council for Culture, Arts and Literature, which was allocated a 30% increase. The Ministry of Electricity and Water and the Ministry of Public Works also received 50% and 30.5% increases in allocations respectively.

The Ministry of Defense received only an 8.4% increase in its total expenditure allocations, which may go some way to meeting recent criticism that it is one of the least transparent government entities, since it classifies the vast majority of its budgetary allocation under Chapter V (Unclassified Expenses and Transfer Payments). “Chapter V is a very vague category,” one source in Kuwait told MEES. “And the Ministry of Defense seems to get special treatment. If you look at the numbers for the Ministry of Interior – the two ministries are comparable in size – for the first three Chapters, their allocations are similar but there is a huge difference in Chapter V.” The Ministry of Defense is allocated KD375mn ($1,222mn) under this category, or 97% of its total budget, with only 2.7% going to salaries and wages, while the Ministry of the Interior is allocated KD0.64mn ($2.085mn) under this category, or 0.2% of its total expenditure allocation of KD342.8mn ($1,116.6mn).” 

More importantly, the breakdown of expenditures in the budget favors current rather than capital expenditure, with current expenditure taking a full 32% of total allocations (see table below) and capital-based expenditure – construction projects and maintenance – contributing only 9.7% of the total. This is despite the fact that, as Al Shall points out, “this increase if properly allocated and controlled, will have a deeper relative impact on re-activating the economy compared to other items.” In its latest sovereign report on the country dated 16 August, ratings agency Fitch IBCA accuses the public sector of being large and inefficient, providing overly generous social transfers, subsidizing public utilities and virtually guaranteeing Kuwaitis citizens employment. “Government initiatives to reduce the size of the public sector, encourage Kuwaitis to seek private sector employment, increase non-oil revenues and decrease various subsidies are proceeding very slowly,” the report says, due in part to healthy open debate. “Open, intense debate between the government and National Assembly – one of Kuwait’s political strengths – prevents rapid reform.” The agency goes on to explain that “few of the initiatives have been approved, however, as relations between the National Assembly, which must pass associated legislation, and the government are not particularly expeditious to reform.”

Kuwaiti Budget Expenditures (2000-2001): Sectoral Allocations Within Line-Items

(KD Mn)

Source: Kuwaiti Official Gazette, Kuwait Al-Yaum , (8 August).

The lack of any radical new fiscal direction or reform drive is perhaps less of a worry in Kuwait than it is in other GCC states. Kuwait, notwithstanding issues of labor market rigidity, has yet to suffer from the same kind of demographic pressures as its Saudi neighbors – its population numbers only 2.2mn, with the Kuwaiti component only 826,000, or 37% of the total. Although according to Al Shall this percentage is growing at a rate of 3.5%, per capita GDP stands at around $15,000 and proven oil reserves at 96.5bn barrels, suggesting that Kuwait still has more than enough resources to go round.

The International Monetary Fund (IMF) recently hailed Kuwait’s economic strengths and expressed satisfaction with the macroeconomic situation in the country in general and with the fiscal position, bank prudential regulations and a growth in assets in particular (MEES, 17 April). It did note however, that “little progress has been made in approving...reforms. The distortion in allocations for spending is not necessarily a disaster – increased wages can boost economic activity through increased consumer demand (although the latest experiments in Japan in this respect have proved less than fruitful). And in any case, the country’s huge foreign assets distort revenue levels. Some analysts project that the Kuwait Investment Authority (KIA), which manages some $45-50bn worth of external assets (which also maintain its higher than average external credit ratings status), brings some $3bn into the country annually (MEES, 7 February). “Kuwait basically operates as a multinational corporation – this economy is well hedged against security risk,” one economist told MEES, “the two axis around which the system revolves are based on how much to spend and how much to save.” Keeping oil revenue projections low is probably wise if the government is to continue (or perhaps even properly start) its reforms. Higher prices and lower subsidies are difficult to sell at a time of exceptional windfalls through oil exports, and if the pledge to change the economy’s structure is to maintain momentum, downplaying oil revenues would seem prudent.

The issue of privatization in Kuwait, and notably the divestment of Kuwait Airways Corporation (KAC), may have lost momentum. KAC announced losses of KD73.8mn on 1 April for the year 1998-1999, and subsequently an investigation into the financial status of the company was ordered by the Minister of Finance, Shaikh Ahmad Abd Allah al-Sabah. But this is not to say that Kuwait’s reform drive is entirely dead and buried. The Kuwaiti parliament on 20 August approved foreign ownership of shares listed on the Kuwait Stock Exchange (KSE), and the KSE responded accordingly, closing at 1,433 points – a 1.7% rise for the week and a 7.3% gain over the preceding three weeks. (Analysts also believe that the end of the difficult debt program boosted the bourse.) Project Kuwait – which will allow foreign oil companies access to Kuwait’s upstream sector – is also moving ahead, with prospective foreign operators now having been short-listed. According to the Ministry of Finance, a draft taxation bill will be presented to parliament when it reconvenes in October. And new areas are coming under the reform umbrella. On 6 September, the government’s social security department, which is running a deficit of KD3.9bn ($12.7bn) in the current financial year, said it could face eventual bankruptcy unless the country’s retirement laws are reformed rapidly. The head of the Public Institution for Social Security, Mr Fahd al-Raj'an, told the Kuwaiti daily Al-Qabas that without rapid reforms the deficit could reach KD12.7bn ($41.4bn) by 2015.

Kuwaiti Budget 1997-2001

(KD ’000)

Kuwaiti Budget 1997-2001 (Cont’)

(KD ’000)

Note: Figures may not add due to rounding.

Source: Kuwaiti Official Gazette, Kuwait Al-Yaum , (8 August).

© Copyright MEES 2003.