The latest Economic Insight: Middle East report for the second quarter of 2021 from Oxford Economics, commissioned by ICAEW, found that Kuwait’s GDP growth was forecast to be 2.5% in 2021, and will be driven by expansion of its non-oil sector. This growth follows the unprecedented decline in GDP seen in 2020, estimated to be 8%, the steepest decline since the 1991 war and the worst performance in the GCC region.
With oil output expected to rise only marginally this year, Kuwait’s oil sector growth will be limited to just 0.9%. Since the oil sector represents around 50% of overall GDP, Kuwait’s economic recovery will be hampered until the OPEC+ agreement expires in April 2022.
While non-oil GDP is gradually recovering, it is unlikely to return to its pre-pandemic level until 2022. The Economic Insight report notes that the recent end to the coronavirus-related curfew should allow more businesses to reopen, including indoor dining, which should boost household spending. However, with many activities remaining off limits, such as in-person teaching not expected to restart until September, the pandemic still poses ongoing challenges to business activity. Oxford Economics estimates non-oil growth will reach 3.1% in 2021 and 4.7% in 2022.
Kuwait’s vaccine roll-out is impacting consumer and business confidence in the recovery. Although the vaccination rate has accelerated recently, Kuwait still lags behind many of its neighbouring countries, with only around a third of the population of the population having received at least one jab. However, the recent decision to ban travel for unvaccinated citizens and their immediate relatives should encourage the uptake of the vaccine among locals, offering optimism that herd immunity could be achieved before the end of this year.
Also impacting growth is the decline in Kuwait’s expat population, reported to have dropped by 4% in 2020 as the pandemic hit hiring activity in key sectors, especially construction, real estate, and manufacturing. The Economic Insight predicted that there will not be a significant rebound in the near-term, especially as Kuwait adopts increasingly nationalistic immigration policies, with the government aiming to reduce the share of expat population to 30% from the current 65%. Such an approach will weigh on recovery and diversification, limiting both actual and potential growth, and contrasts with the policies and reforms introduced by the UAE and Qatar, which are embracing foreign contribution to steer growth.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “Kuwait’s dependence on oil at a time of such volatility will certainly hinder its diversification efforts. How well the government is able to boost its non-oil sector activity over the coming months will determine how quickly Kuwait is able to recover and realise its ambitions under Kuwait Vision 2035 to become a financial and trade hub regionally and internationally.”
Budget constraints are also weighing on growth prospects. According to the report, Kuwait’s budget deficit widened to almost 29% of GDP, one of the biggest globally, as oil receipts plummeted by over 32%. The recovery in oil prices closer to Kuwait’s budget breakeven levels should support budget receipts and narrow the gap this year, but the balance will remain in deep deficit of about 16% of GDP.
Scott Livermore, ICAEW Economic Advisor and Chief Economist at Oxford Economics, said: “Kuwait’s economic prospects are slowly improving, following the dual shock of the coronavirus pandemic and low oil prices, which put severe pressure on an already strained government balance sheet in 2020. However, another critical issue is Kuwait’s inability to borrow after its debt law expired in 2017. How and when the government tackles the debt legislation crisis will dictate the extent to which Kuwait can stimulate the recovery this year and beyond.”
The report also notes Kuwait has ample savings estimated at around 435% of GDP, but they are legally earmarked for future use and are inaccessible to meet current needs. In a matter of months, the government may face a shortage of cash to pay wages and salaries, which alone account for around 75% of total government spending.
© Press Release 2021