Energy subsidies are draining Kuwait’s public budget, the Gulf state’s finance minister said on Wednesday, as the government carries out a spending review to help avoid a budget deficit as early as this decade.
Subsidies in the major oil producer are expected to cost 5.11 billion dinars ($18.2 billion) next fiscal year to cover items like fuel and energy.
Kuwait’s growth model has generated large improvements in living standards and welfare, Finance Minister Anas al-Saleh told a conference co-chaired by the International Monetary Fund.
“However this growth model has involved many costs. The public sector wage bill is currently very high as a percentage of public spending, subsidization of basic goods is exhausting our state budget,” he said.
The IMF says Kuwait, one of the world’s richest countries per capita, could have a budget deficit as early as 2017 if it keeps spending at the current rate. Kuwait estimates this could happen by around 2021. It has posted a budget surplus for at least the past 15 years, according to latest available data.
Policymakers have intensified calls for economic reform, but any changes are likely to face resistance from the elected parliament and prove unpopular in a country which provides a cradle-to-grave welfare system for its citizens.
Analysts say extensive social spending programmes are one of the reasons why Gulf Arab states such as Kuwait, which has no income tax, have been shielded from the kind of Arab Spring unrest seen elsewhere in the region.
Thanks to subsidies it costs as little as 5.2 dinars ($18.40) to fill an 80-litre petrol tank. Electricity costs just 2 fils (less than 1 U.S. cent) per kilowatt hour, a fraction of what it costs to produce.
Results of the subsidies review are expected this year. Kuwaiti newspapers have reported that the government is considering lifting subsidies for expatriates, who make up two-thirds of the population. Saleh told reporters on Tuesday that nothing had been decided yet.
He also told the conference that Gulf Arab countries need to reduce their reliance on oil for state revenues. Crude income accounts for more than 90 per cent of Kuwait’s government revenues.
“You will see the cost for producing oil becomes higher and higher now. Really you cannot depend on oil forever, this is becoming ever clear,” IMF Deputy Managing Director Min Zhu told reporters on the sidelines of the conference.
Gulf policymakers had started to realise this after seeing changes in the global oil supply structure, demand and costs, Zhu said. “They realized then they cannot rely on oil forever.”
Energy subsidies in Kuwait account for 6 percent of gross domestic product and this is too big, he said.
“If you say you need a sustainable fiscal account, the first thing you want to cut is energy subsidies,” he added.
Money saved on subsidies can be used on social expenditure, such as healthcare and education, he said, adding that per dollar spending on such areas was much more productive than on subsidies, which did not always reach the people in need.
“This is the area we talk to many authorities in the region (about). I can tell you, it was not an easy issue before but now people are open to talk about it,” Zhu said.