Kuwait?s 2002-03 budget, published on 28 July in the official gazette Kuwait al-Yaum , reveals that the government is forecasting a KD2,259mn ($1=KD0.302) deficit, as revenues fall to KD3,521mn from the 2001-02 budget?s KD3,831mn and expenditure climbs 2.6% to KD5,428mn from KD5,274mn (see Table). The budget, which covers the 1 April-31 March fiscal year, includes the usual allocation for future generations, although at KD352mn this is down from the KD383mn in the previous budget.

Basing its budget estimate on a conservative oil price of $15/B, which is lower than most of the assumptions for other Middle East oil producing countries, the government is expecting that oil revenues will fall to KD2,969mn from the KD3,263mn forecast in the previous budget. As with the 2002-03 forecast, in previous years the government?s oil revenue projections have tended to be conservative. But barring a very unlikely scenario, the 2002-03 oil price is expected to average well above the $15/B used in the budget, according to National Bank of Kuwait?s Chief Economist Randa Azar-Khoury, who notes that the price averaged $24.2/B in the second quarter of this year. NBK?s most recent forecast suggests that oil prices will range from $21.8/B to $25.5/B during 2002-03 and as a result Kuwait will receive between KD1bn and KD1.8bn more in revenues than the budget projects, Dr Khoury says. If the price averages $21.8/B, the lower end of the NBK forecast range, the budget would result in a KD1,330mn deficit (including allocation for future generations), but if the price averaged $25.5/B, the deficit would fall to KD647mn. However, the above projections assume actual spending is in line with budgeted levels. If spending is 7-10% below budget (roughly KD380mn-540mn), which would be typical for Kuwait, the actual deficit could come in much lower, with the possibility of a minimal deficit under the higher price scenario.

For non-oil revenue the budget shows that for certain services income is projected to fall substantially, especially at the Ministry of Electricity and Water - MEW (down to KD79mn from KD108mn) and sale of state land and property (down to KD33.6mn from KD71mn). For the MEW, this appears to be a one-time reduction, says Dr Khoury, noting that in 2001-02, actual revenues were only 60% of budget projections. During the previous six years the highest level of actual revenue to budgeted revenue was 74% in 1999-2000, when the ministry cracked down on overdue bills, but in more recent years the rate has been 50-60%. The sale of property shows a similar pattern, where actual revenues have not matched budgeted projections. In the 2001-02 budget, KD71mn was expected from land sales, but actual revenues were under KD1mn, and consequently it is appropriate that this year?s projections are more conservative. 

On the expenditure side, this year?s 2.9% increase to KD5,428mn is below both last year?s 10% increase and the 11.5% increase the year before that, although Dr Khoury points out that the budgeted spending in the previous two years was in part making up for the spending cuts in 1998-99 and 1999-2000 when oil prices were low and the government was seeking to reduce the budget deficit. However, she notes that when compared to actual spending in 2001-02, planned expenditure for 2002-03 is up by over 14%. Nevertheless, as with previous years, the budget is unlikely to be spent in full, and NBK predicts spending will come in 7% under budget, compared to a 10% shortfall in 2001-02, translating into spending growth of 6.4%, notes Dr Khoury.

The government has been subject to criticism for its overly conservative spending, especially last year when it had seen potentially two years of healthy surplus (MEES, 27 August 2001). Reasons for spending coming in under budget have typically been over-budgeting and delays in implementation of plans, notes Dr Khoury. One criticism is that spending growth in recent budgets has appeared more substantial, in part due to items that do not actually entail ?real? spending on the part of the government. During the last two fiscal years, fuel costs (transfers between the Ministry of Electricity and Water and Kuwait Petroleum Corporation) and housing loan forgiveness made up nearly half of the increases in actual spending. Factoring out such spending in 2001-02 would reduce actual growth from 11.7% to 6.7% and in 2000-01 it would drop from 6% to 2.8%, notes Dr Khoury.

Kuwaiti Budget 2000-03

(KD'000)

Kuwaiti Budget 2000-03 (Cont?d)

(KD'000)

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Source: Kuwaiti Official Gazette, Kuwait al-Yaum (28 July 2002).

The budget shows that capital expenditure (construction projects, maintenance and acquisitions) amount to KD607mn, which is 12.3% of total expenditure. At KD607mn, capital spending is up 4.1% on the KD583mn earmarked in the 2001-02 budget. Of the KD607mn, KD311mn is allocated to the MEW, KD161mn is for public works, KD48.9mn is for the Ministry of Finance, KD 22mn for transport KD18.1mn for education, KD17mn for health and KD13mn for the Ministry of Oil. Most of the oil industry?s capital expenditure is included in the KPC 2002-03 budget, which also carries disaggregated figures on oil revenue (MEES, 12 August). The budget shows that salaries account for KD1,604bn or 29.6% of expenditure, with ?miscellaneous expenses and transfer payments? at KD2,513bn or 46.3%. Of this latter category around 80% represents salaries (particularly at the Ministry of Defense), with KD574mn accounted for by social security contributions. The transfers include those to public institutions to cover deficits. Dr Khoury notes that spending growth in the 2002-03 budget is promising, particularly for wages, salaries and capital spending. ?Such growth is key for the economy and can be expected to have a positive impact on economic growth in 2002 and 2003,? she said. ?If the government spends more than 90% of the budget as it did in 2001-02 the effects would be better still,? she notes.

Meanwhile, the budget was passed on 10 July by 38 votes to five, with one abstention, but many opposition MPs criticized the government for failing to implement economic reforms and diversify state revenues in order to reduce reliance on oil, which amounts to 84% of budgeted revenues, but probably ultimately has an impact on over 90% of the country?s budget (MEES, 15 July). There is growing concern that the government is dragging its feet on private sector and other types of development which could help stimulate the economy and therefore boost government revenues. For example, progress has stalled on Project Kuwait, the plan to develop the country?s northern oilfields (MEES, 4 February). Concern over the dwindling role played in the private sector has been the main driver for reform initiatives and while the government approved in 2001 a foreign direct investment law that removed restrictions on foreign investors having majority stakes in Kuwaiti companies, little has changed. There is also concern that the country?s welfare system will act as a drag on future budgets as the population expands.

However, rating agencies Moody?s Investors Service and Standard and Poor?s both upgraded Kuwait?s ratings earlier this year. (MEES, 20 May and 15 April). Moody?s noted that the upgrade was prompted by a decline in the government?s debt over the past few years and minimal likelihood of recourse to foreign debt accumulation due to the persistence of large budget surpluses (the coffer for which is the fund for future generations). Nevertheless, geopolitical risk remains a constraining factor for the country and a potential US strike on Iraq could have short-term repercussions which may include disrupting oil flows, Moody?s cautioned. Needless to say, this could have a far-reaching impact on Kuwait?s budget.

© Copyright MEES 2003.