Cautious Optimism Among Policy-makers In Kuwait

An unprecedented downturn in global economic activity and persistent lower oil prices for much of 2020, as well as financial and social repercussions from over a year of living under the shadow of COVID-19 pandemic, had combined to leave Kuwait’s state treasury struggling to maintain its liquidity throughout the past year. At one stage it was reported that the government had barely enough funds to function normally or to pay salaries of government employees.

But in the last couple of months, as the COVID-19 crisis apparently recedes, infections become more manageable and the pace of vaccination picks up, there is a cautious optimism among policy-makers in Kuwait. The country has begun easing restrictions on individual mobility and international travel, and there is marked uptick in business activity.

Indications of a global economic revival have also led to an increase in demand for oil, and concomitantly a rise in oil prices and in Kuwait’s fortunes. Higher oil revenues have not only helped mitigate the liquidity crunch, but also allowed the government to once again dust off the covers of its mega project plans and prepare to revive these economically and socially important projects. There are also signs that the government has finally found its mojo and is willing to push through much-needed economic reforms.

His Highness the Prime Minister Sheikh Sabah Khaled Al-Hamad Al-Sabah, reiterated this revival strategy last week in his address to students during a visit to Sabah Al-Salem University City. Referring to the COVID-19 crisis that had caused delays in implementation of several projects, he said that it was time to give these projects more attention and focus.

Expressing his optimism in the ability of youth to build the future of Kuwait and emphasizing that the young national cadre were the foundation for all the development projects being planned by the state, the premier urged youth to participate in these endeavors and “be a major part of these mega projects.”

During his visit the prime minister also expounded on Kuwait’s Vision 2035 strategic development plan. He noted that the mega Silk City Project, which extends over 1,800 square kilometers, can provide more than 100,000 job opportunities for citizens, while also diversifying the state’s income source.

He also pointed out that the “Mubarak Al-Kabeer Port Project, which is planned to have a capacity of 1,800,000 containers a year, will also provide great job opportunities for citizens, in addition to delivering financial benefits to the state. However, conceding the obstacles in pushing these projects through parliament, the premier said he hoped that the National Assembly would speed up approval of amendments to the law on the mega Silk City Project and other vital projects.

However, putting a damper on this new-found energy to retake the driver seat and move the country forward, the Ministry of Finance came out last week with a statement on the budget for fiscal year 2020-2021 (FY2020/21). The realized budget saw the country witnessing its largest deficit to date, notching KD10.8 billion, a jump of nearly 92 percent from the deficit of KD5.64 billion recorded in the previous fiscal, which in itself was a hike of 69 percent year on year.

Revenue fell to KD10.5 billion in FY20/21, a drop of 38.9 percent from previous fiscal, while expenditure increased 0.7 percent to KD21.3 billion, the ministry said in its statement. Oil revenues in FY2020/21 stood at KD8.790 billion, a 42.8-percent decline from the previous year, while non-oil revenues declined by 6.5 percent to KD1.730 billion. Expenditures on salaries and subsidies accounted for 73 percent of the aggregate expenditure, while capital and infrastructure expenditure accounted for 9 percent, the ministry statement revealed.

Attributing the large deficit to “sharp decline in oil prices and minimal government operations as a result of the COVID-19 pandemic,” Finance Minister Khalifa Hamada, disclosed that average Kuwait Export Crude selling price for the FY2020/21 was $42.36 per barrel, while average oil production fell to 2.5 million barrels per day due to compliance with production cuts mandated by the Organization of Petroleum Exporting Countries (OPEC).

Clarifying that the State’s closing accounts must be ratified by parliament in order to be considered final, the finance minister, in an obvious nudge to parliament to rally behind the Public Debt Law said, “The cabinet is prepared to discuss the closing accounts with the parliament and to move forward in implementing real, effective, and sustainable solutions to the challenges facing public finances.”

In June, shortly before the end of first term of the 16th legislative session and its recess until October, parliament approved the 2021-22 state budget, which projected KD23.05 billion dinars in expenditure and a deficit of KD12.1 billion. The budget, which was proposed by the government in January of this year projected KD23.05 billion in expenditure for the fiscal year that started on April 1, and a deficit of KD12.1 billion. However, approval for the budget proposal in parliament was repeatedly delayed because of the ongoing standoff between the executive and opposition members in the National Assembly.

Contentious relations between the government and opposition have for long blocked urgently needed economic reforms and stifled decision-making on key issues. A Public Debt Law that would allow the government to borrow on international debt markets has been pending in parliament since October 2017 when the previous debt bill had lapsed. Earlier this year, the finance minister was quoted as saying that an increase in oil revenue due to higher oil prices will not cover the country’s budget obligations and Kuwait would need oil prices of $90 per barrel to balance the budget.

On the optimistic side, there are indications that the government is preparing to push through the Public Debt Law while parliament is in recess, with the prime minister indicating as much during his address to university students last week at the Sabah Al-Salem University. In response to a question on introducing and implementing the public debt law so as to ease the liquidity crunch and enable the government to execute mega projects and pave the way for diversifying the income, the prime minister re-affirmed, “The state’s financial solvency is excellent, but flaws exist in the undiversified economy,” and these need to be rectified.

Circumventing the question on exactly how he planned to execute the Public Debt Law, the prime minister said that Kuwait was following the example of other nations and resorting to borrowing on international debt markets in order to cope with financial and economic burdens facing the country. Clarifying that in order to finance some or all of its financial deficits, it was important to soon pass the public debt law, the prime minister noted that as a first step in this direction the government had formed a committee to redraft the law, which is expected to be submitted soon.

Stressing that the financing targets would be in line with the requirements of the current situation, the premier added that the consensus among committee members was that the public debt ceiling in the upcoming project will be set at about KD24 billion, which is an increase from the KD20 billion presented to parliament earlier. He explained that the committee’s approach is based on setting the public debt ceiling at 60 percent of the GDP, which estimated at constant prices in 2019 amounted to about KD40 billion. He clarified that the year 2019 was used as the reference year, because 2020 is considered an exceptional year due to the COVID-19 crisis.

The premier added that the Council of Ministers had considered all available options to deal with the risks of running out of liquidity and concluded that there was urgent need to expedite the approval of the Public Debt Law, especially in light of reports submitted by various authorities on the economic and social damages caused by a delay in its approval. The premier also pointed out that it had become even more imperative to pass the debt bill, given the country’s huge fiscal deficit in the last financial year, which at KD10.8 billion is the largest financial deficit recorded for Kuwait.

In a sign of renewed enthusiasm for reviving and reenergizing the economy the Cabinet recently reviewed a three-point ‘roadmap’, which it said would hasten the implementation of development projects across the country. The draft plan, which aims to “support the national economy and meet the needs of comprehensive development,” includes short-term goals (nine), which will be completed this summer, medium-term goals (five) and long-term goals (four), Foreign Minister and State Minister for Cabinet Affairs Sheikh Ahmad Nasser Al-Mohammad Al-Sabah said after a recent extraordinary meeting of the Cabinet.

The projects highlighted for implementation are in sustainable energy, the development of Failaka Island, environmental fuels, the beautification of Kuwait City, healthcare and Kuwait International Airport, amongst others. The cabinet also tasked ministerial committees with monitoring and speeding up the implementation of these state-funded projects. The committee would also seek the expertise and recommendations of consultants, specialists and civil society in implementing the projects, which are expected to enhance the country’s revenues, and increase employment of the national youth cadre.

Adding to the positive sentiment in the economy following the recent rise in oil price, it was also recently reported that the Kuwait Gulf Oil Company (KGOC) had begun operations of the first pipeline to supply gas from Al-Khafji joint zone to Kuwait. Light gas totalling 24 million cubic feet is expected to be transported by pipeline daily from Khafji to Kuwait Oil Company networks. The company said in a statement that operating the pipeline would boost optimum use of the petroleum resources in the joint zone between Kuwait and Saudi Arabia and meet local needs for gas especially in the power production during peak consumption times.

Meanwhile, the World Bank In its latest report on economic developments in Kuwait, also hinted at a healthier outcome for the country’s economy going forward. The bank noted that though in 2020 Kuwait recorded the largest major fiscal deficit among the Gulf Cooperation Council (GCC) countries relative to its GDP, which amounted to 26.2 percent, this is expected to decrease to 22.6 percent of the output this year, before shrinking further to 19.3 percent in 2022 and 8.3 percent in 2023.

The bank also pointed out that Kuwait will continue to record deficits throughout the years 2021-2023, but with lower percentages of GDP in 2023 than they were during the decline in economic activity in 2020. On the other hand, the report commented that oil exports will continue to boost economic growth in Kuwait and that growth will rebound to a moderate level of 2.4 percent in 2021 before increasing to an average of 3.2 percent during the years 2022 and 2023. The country is also expected to implement a value-added tax some time this year, said the bank report.

Last week, in his address to university students, His Highness the Prime Minister revealed that the Future Generations Fund (FGF) had in recent months achieved unprecedented profits, and he lauded the Capital Market Authority for injecting KD2.5 billion into the state treasury recently. Addressing Kuwaiti students, he stated, “Your country is rich; for we enjoy excellent financial solvency however we have some shortfalls in the economy. He lamented that though “much has been achieved to transform Kuwait into a commercial-financial hub, strained relations between the executive and legislative authorities “have pushed a host of issues backwards.”

It is nice to know the government has begun to realize that the ongoing contentious relationship with the opposition in parliament is having a detrimental impact on the country and its economy. The hope now is that this delayed acknowledgement will lead to decisions designed to firmly push through much-needed economic, financial and social reforms in the country.

 

SOURCE  :  TIMES KUWAIT

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