Kuwait’s Emir Sheikh Nawaf Al Ahmed Al Sabah issued a robust warning to the emirate’s political class during his 15 December address to the new parliament’s first session. “There is no longer time for wasting effort on fabricating crises and conflicts” the Emir warned as he called for a comprehensive reform program to resolve Kuwait’s severe economic problems.
In some ways this is a new political era in Kuwait. There is a new emir, following the death in September of his predecessor Sheikh Sabah Al Ahmed Al Sabah (MEES, 2 October), a new parliament was brought in through the 5 December elections (MEES, 11 December) and Prime Minister Sheikh Sabah Al Khaled Al Sabah has reshuffled his cabinet.
Yet despite the major economic challenges facing Kuwait, few observers expect a breakthrough. Even if an agreement is reached to alleviate the immediate pressures, the underlying issues that have caused the current crisis will likely remain unaddressed.
“Irrespective of who is in government and parliament, the system is broken,” Ali al-Salim of Gulf-focused investment managers Arkan Partners told MEES. “It doesn’t matter who is in or out, it’s just rearranging deckchairs on the Titanic.” For Mr Salim, despite the scale of the economic challenges Kuwait is facing, politicians have yet to discuss the root causes. “These are band-aid conversations and in reality we need to talk about surgery. The longer you delay addressing these issues, the more narrow the paths that you can take become.”
The immediate crisis Kuwait’s government faces is that the oil price crash means that revenues no longer come close to matching outgoings. The government has been drawing on the General Reserve Fund (GRF) to cover the deficit, but then-finance minister Barak al-Sheetan warned in August that this was only a temporary measure and that it could soon “run out of liquidity” (MEES, 21 August).
The previous government sought to push a new debt law through parliament to enable it to meet the deficit through borrowing, but failed to secure its passage. Daniel Tavana of the Council on Middle East Studies (CMES) says that the government’s failure to provide MPs with assurances as to where the finances raised would be spent was a key factor behind opposition to it by the previous parliament. With MPs accusing ministers of inefficient spending at best, and outright corruption at worst, they have been unwilling to give the executive carte blanche to raise vast sums.
The cash crunch is undoubtedly a serious economic crisis, but while debate has focused on the debt law, politicians are unwilling to examine the underlying factors that have given rise to it.
DIVERSIFICATION URGENTLY NEEDED
Central to Kuwait’s travails is a dependence on oil revenues that is high even by regional standards. Oil revenues account for nearly 90% of government revenues, and Kuwait has failed to increase non-oil revenues even since oil prices dropped in 2014. The amended 2020-21 budget (year ending 31 March 2021) envisaged oil revenues falling to 75% of the total, but this was purely because of the collapse in oil prices rather than the growth of alternatives (see chart).
This is in stark contrast to Saudi Arabia, where the government expects oil revenues to account for 53.5% of total revenues this year, down from 87.8% in 2014 (MEES, 18 December). While this is partly due to declining oil revenues, it is also thanks to Riyadh’s economic diversification drive. A major boost has come from the implementation of VAT, and its recent tripling to 15%, although this has also driven inflationary pressure. But, while Kuwait agreed along with the other GCC states back in 2015 to implement a 5% VAT rate from 2018 (MEES, 18 December 2015), it has yet to do so and there remains no fixed date.
This extreme dependence on oil revenues means that the government is highly exposed to the vagaries of international oil markets. When prices crash, the government simply has less funds. On the other side of the ledger the government has little flexibility when it comes to reducing spending.
Nearly 90% of government expenditure is on “current spending,” of which the single largest element is public sector wages. At $24.5bn for the 2020-21 financial year, wages account for 35% of planned total spending. Subsidies and other financial assistance programs also cost the government billions.
In 2013-14, the last financial year before oil prices dropped, government revenues of $114bn were more than five times larger than the public sector wage bill of $18.3bn. For this year’s budget, revenues are projected to fall to just $24.5bn, level with the public sector wage bill. The upshot is a seventh consecutive budget deficit, with this year’s shortfall coming in at a staggering $46bn. Conservative oil price assumptions mean the deficit will likely ultimately prove smaller.
Meanwhile capital spending is being squeezed and typically comes in at $6.5bn-$8bn each year. Many projects that the government seeks to push through are held up amid parliamentary inquiries.
The government’s room to manoeuvre to reduce the wage-burden is limited, and Mr Salim says that many of the current problems stem from Article 41 of the constitution. Article 41 gives the state the obligation to provide employment for every Kuwaiti. “This creates bloated ministries with huge budgets, which are then more susceptible to corruption.”
With Kuwait’s strong population growth, the wage commitments are only going to grow further in the coming years. Moreover, the prospect of a guaranteed wage from the state regardless of the economic situation, means that few enter the private sector, which remains underdeveloped as a result.
Mr Salim says that this means “Kuwait effectively has a universal basic income (UBI) scheme with people being paid for public sector jobs despite doing nothing.” He suggests that switching to an explicit UBI would represent an improvement as it “would free up people to then develop the private sector whilst honoring the constitution.” Linking payments to oil prices would then ease the fiscal pressure during periods of low oil prices.
Ultimately, the seeming inability of Kuwait’s politicians to address the immediate challenges doesn’t bode well for the prospects of addressing the underlying issues. And the longer they delay, the harder the task becomes.