Battling Inertia – Kuwait’s Dilemma Continues

ECONOMY

Kuwait is one of the world’s richest nations with a GDP (ppp) per capita of $39,706 in 2013. But in a region of energy- dependent economies, the emirate is a leading offender.

Oil generates more than half of the Gulf state’s gross domestic product (GDP), and the vast majority of government income. Though high oil prices have seen Kuwait run a fiscal surplus for more than a decade – a situation aided by political wrangling that has slowed billions of dollars worth of planned infrastructure schemes – the country is in thrall to the global oil market and remains vulnerable to any sustained slide in price.

Further complicating the economic picture is its generous welfare system, which doles out free utilities, healthcare, education and job security for citizens, at a cost of more than $18 billion a year.

As in other GCC states, spending on social projects surged in the wake of Arab Spring unrest, growing by more than 24 per cent on average over the last five years. The Washington-based IMF forecast in October that Kuwait’s budget surplus will stand at 27.4 per cent of GDP in 2013/14, down from 33.4 per cent the previous fiscal year. Its economists predict the country will tear through its oil wealth by 2017 if it maintains its subsidy programme and fails to grow non-oil revenues, eventually sinking into a real budget deficit.

Unlike its GCC neighbours, Kuwait is a democracy and a volatile one at that. Political feuds and chronic bureaucracy have deterred foreign investment and left both its private sector and infrastructure lagging behind regional peers such as Qatar and the UAE. A $106 billion economic plan was passed in 2010, which aimed to diversify Kuwait’s oil- led economy, generate jobs for its youth and spur private sector growth. But the scheme, which outlined plans for a new airport, seaport, causeway and refinery, among other projects, has faced ongoing hurdles and numerous delays to key infrastructure awards. Recent signs, however, suggest the OPEC member is making progress in its push for privatisation. Kuwait in December signed its first public- private partnership (PPP) agreement for a power and desalination plant in the industrial hub of Al-Zour North, one of the major projects outlined in its economic plan. The plant, which will add a much-needed 1,500MW of power capacity to the national grid, is widely seen as a litmus test for planned future PPP deals. It will also aid the country’s overstretched electricity supply, particularly during the scorching summer months when power demand is at its peak. Kuwait’s government plans to hold 10 per cent of the plant, with Azour North One, the company overseeing the project, taking a 40 per cent stake. The remaining 50 per cent will be sold to Kuwaiti citizens in an initial public offering, once operations begin.

Analysts hope the deal signals the start of a more robust projects market in 2014, one that will see the government pressing ahead with long-awaited contracts. More than $24 billion in contracts could be awarded this year, according to Middle East Economic Digest (MEED) forecasts released in November, double the value seen in 2013.

HYDROCARBONS

Kuwait is among the world’s top oil producers, with the capacity to produce up to 3.3 million barrels per day (bpd). Much of the country’s oil is generated by mature fields in the southeast of the country, the largest of which is the giant Greater Burgan field, which accounts for around half of production. The Gulf state also shares a partitioned ‘neutral zone’ with Saudi Arabia, and holds a stake in the hydrocarbon assets there.

Kuwait gave a strong performance in 2012, with oil production averaging 2.8 million bpd, according to data from the US-based EIA, which tracks the global energy markets, as it sought to meet increased demand from rapidly growing Asian economies. About two-thirds of the country’s oil is exported, accounting for some 90 per cent of export revenues.

Kuwait is seeking to raise oil production capacity to four million by 2020. The OPEC member has earmarked around $100 billion to be invested over five years on a clutch of oil projects, including upgrading existing refineries and building a large new facility. The country’s energy sector has stuttered in recent years, as wrangling between the Gulf state’s cabinet and parliament crimped development. A further stumbling block is Kuwait’s ban on foreign ownership of natural resources; a stance that has strong domestic backing but one that has deterred investment from oil majors. This issue may become more pressing as the country seeks to develop a new generation of technically difficult reserves, such as the Ratqa heavy oilfield in the north, to meet its 2020 production target.

Kuwait has previously made efforts to expand its petrochemicals sector, signing a joint venture with US giant Dow Chemical Co in 2008. However, the planned $17.4 billion plastics project became a victim of the emirate’s volatile political climate, and was later scrapped, with Kuwait paying Dow $2.2 billion in compensation last year following a court ruling. The payout prompted a shake-up of management at the country’s state oil divisions in May, with the Gulf state saying it needed to inject “fresh blood” into the sector.

DEMOGRAPHICS

Kuwait’s population has grown steadily in recent years to reach an estimated 3.9 million people, according to the country’s Public Authority for Civil Information.

Foreign workers comprise more than two-thirds of the population, largely through the presence of blue-collar migrants from Asian and other Arab countries, and represent nearly 80 per cent of the private sector workforce. Nationals, by contrast, hold some 76 per cent of jobs in the public sector, where wages are often significantly higher; a reflection of the country’s economic malaise. The national unemployment rate is estimated at three per cent.

Foreign labour is a charged issue. Kuwait has faced calls to limit the number of migrant workers in the country, and address demand for jobs among its own citizens. Expatriates have also been blamed for social problems in the oil-rich emirate, with claims in some local media that they are a drain on government resources.

Kuwait’s labour ministry said last March it planned to cut the number of foreigners entering the country by 100,000 a year over the next decade, largely by limiting access to unskilled

workers and targeting those working illegally. It is unclear how steep labour cuts will impact on Kuwait’s ambitious $106 billion economic development plan, the rollout of which is likely to require additional labour resources.

A further source of political tension is Kuwait’s more than 100,000 stateless residents, or bidoon – an Arabic word meaning “without”. Many trace their origins to nomadic tribes that once moved freely around the Gulf, or to later immigrants, who failed to apply for nationality at the time of Kuwait’s independence in 1961. As a result, they have no legal ties to the state and lack access to basic services such as healthcare, education, or the right to work. The legal status of this group is a thorny issue, with some accusing members of the community of falsely seeking to become Kuwaiti citizens to qualify for the country’s lavish social benefits and services.

Kuwait’s parliament in March passed a bill to grant citizenship to up to 4,000 people, a move many hoped would resolve the issue of its stateless population. The government had previously said as many as 34,000 bidoon could eventually qualify for citizenship.

GEOPOLITICAL

Kuwait is a constitutional monarchy, in which the emir is head of state with the right to appoint the country’s prime minister, currently Sheikh Jaber Mubarak al-Hamad al-Sabah. The Gulf state’s cabinet is led by the prime minister, with prime portfolios, such as defence and foreign affairs, usually held by members of the royal family. This cabinet is paired with a 50-member constituent assembly, which is – in theory, at least – directly elected to parliament through polls every four years.

The emirate has the most open political system in the Gulf Arab region, but its efficiency is marred by frequent disputes between its cabinet and parliament. Kuwait’s parliament has been dissolved six times in the last seven years, amid political infighting or for challenges to the government, pushing key economic development plans behind schedule.

The cabinet was reshuffled again in January, just five months into its term, with Sheikh Jaber appointing Anas Al-Saleh as finance minister and Ali Al-Omair as the country’s ninth oil minister in 10 years. Emir Sheikh Sabah Al-Ahmed Al-Sabah had accepted the resignation of seven ministers in December, following the interrogation of cabinet members by lawmakers over alleged mismanagement and corruption.

Kuwait’s political system makes it difficult for the government to push through economic reforms that are unpopular with voters. Attempts to rein in benefits are typically met with resistance by lawmakers, who argue the state could slash costs by tackling wasteful spending instead. Previous laws passed by parliament have required the government to write off citizen’s personal debts, and fund cash handouts worth billions of dollars.

There are signs, however, that Sheikh Jaber could take a tougher line in shaping fiscal policy. In October, he described the existing welfare system as “unsustainable” and said Kuwait must do more to curb its rising spending bill and conserve its oil wealth for the future.

“It is necessary for Kuwaiti society to transform from a consumer of the nation’s resources to a producer,” he said in comments published by the

state news agency. The government in December also warned it may impose a tax on national firms to help bolster state revenues. In common with other wealthy Gulf Arab states, the emirate does not tax earnings.

Kuwait, for many foreign companies, is a sleeping giant. Its vast oil wealth and pressing infrastructure needs ostensibly make it an attractive prospect for multinationals, but much depends on efforts to drive economic reform bearing fruit. The diversification of its oil-led economy, expansion of the private sector and reevaluation of social spending will be critical to Kuwait reinvigorating its economy and closing the gap with other Gulf Arab states.