Fdi Flows Face Bottlenecks In Kuwait

In this age of liberalization, privatization and globalization of economies around the world, Foreign Direct Investment (FDI) has become the go-to mantra for international capital flow. FDI, which includes the flow of capital, expertise, and technology to a host country, is often seen as a solution to the challenge of scarce local capital and overall low productivity, and has been associated with improved economic growth in FDI recipient countries.

While Kuwait has made serious attempts to improve its FDI environment in recent years, there are clearly several gridlocks that have to be straightened out before the country can realize its full potential as an attractive destination for the FDI needed to spur its economic growth in an era of dwindling oil revenues.

Last week, the UAE Ministry of Economy announced an amended Commercial Companies Law that would allow foreign investors and entrepreneurs to establish and fully own onshore companies. The amended law, which comes into effect on 1 June , was announced by the country’s Minister of Economy, Touq Al-Marri who said the amended law would boost the country’s competitive edge and increase its appeal as an attractive destination for both foreign investors, entrepreneurs and talents.m The UAE is already the leading destination for foreign investments, among the six-nation Gulf Cooperation Council (GCC) states. More than US$10 billion in annual FDI also makes the UAE second only to Israel in attracting capital in the wider Middle East and North Africa (MENA) region.

The new amendments aimed at further strengthening the UAE’s position as an international economic centre are likely to up the ante for other GCC states looking to attract capital and talent to their own countries. The double whammy of COVID-19 crisis and an oil price that is only inching its way upward despite attempts by OPEC and its allies to throttle production, has made FDI a more pressing need for GCC states.

For ages GCC states have followed a policy of restricting foreign investments in their economies by limiting foreign businesses to take on local partners who were automatically entitled to 51 percent stake in the business, irrespective of their actual investment. Lengthy licencing processes entangled in red tape, minimum capital requirements, and local production rules, as well as lack of transparency in information related to investments have long deterred meaningful investments in most GCC countries.

However, since the precipitous fall of oil prices in mid-2014 and the ensuing economic repercussions faced by all the Gulf states, there has been a serious rethink on domestic investment strategies and the role of foreign investments to their economies.

Bahrain, which is most dependent on FDI with nearly 90 percent of GDP in foreign investments, has long encouraged foreign investments. In 2016 the country expanded the list of sectors that allowed 100 percent onshore foreign ownership to include tourism and mining.

Saudi Arabia, once the most reclusive of nations, and the largest GCC economy, has since 2014 been slowly prising open its economy to foreign investment. The process has speeded up in recent years in the wake of the country’s ambitious Saudi Vision 2030, which has witnessed more sectors being opened up for 100 percent investment and ownership in the kingdom.

All GCC countries have also implemented reforms to reduce red-tape and administrative burdens on foreign firms and actively promoted their countries abroad as attractive business destinations. In addition, the GCC states also provide a broad array of incentives to attract investors, including financial incentives and exemptions from import duties on raw material and equipment.

Most GCC states have also created special economic zones (SEZs) with independent, liberalized regulations., However, openness to foreign entry outside the special economic zones varies widely among the GCC members. However, a study by the International Monetary Fund (IMF) noted that while SEZs can attract FDI by offering better infrastructure and regulatory environment, they should not be viewed as the end goal, but rather as a second-best and temporary solution before more business-friendly regulatory frameworks and practices are extended throughout the country.

Meanwhile, Kuwait, which has only a little over 10 percent of GDP in foreign direct investment, has been generally more reluctant to embrace foreign direct investments. Nevertheless, it too had to liberalize its investment environment following the debacle of oil prices. Though the country scrapped its outdated FDI law, first enacted in 2001, and replaced it with a new FDI law 2013, it too failed to realize the desired impact that was expected at the outset. In 2015, in a bid to revive foreign investments, the government set up a new entity dedicated to promoting and developing foreign investments in the country.

The Kuwait Direct Investment Promotion Authority (KDIPA) was mandated to assist and streamline registration and licensing procedures for foreign investors, and attract foreign investments by offering a slew of incentives. In its fifth annual report presented to the Kuwait Cabinet in November 2020, the KDIPA detailed its achievements, activities and projects performed during the report period of the fiscal year 2019/2020. On receiving the report, the Cabinet lauded the notable efforts exerted by KDIPA in strengthening Kuwait’s economic position and attracting value added investments, to attain the country’s aspired economic growth and diversification of income sources.

In its report, the KDIPA highlighted its accomplishments during the review period, including completing the implementation of the third and final phase of the project titled, ‘Study on Improving Kuwait Global Competitiveness: Engine of transformation to Knowledge and Innovation-based Economy’, in cooperation with Kuwait Institute for Scientific Research (KISR). The authority also said it launched the ‘Kuwait Investment Road Map’ project based on the outcome of three technical reports analyzing the legal and regulatory framework for investment in Kuwait.

KDIPA report observed that the authority had fostered the adoption of digitalization by completing the plan to develop its IT infrastructure and technologies; renewed its ISO certification 9001:2015 and ISO 10002:2018 after meeting the required criteria, and underlined that it had received awards for institutional excellence. The report also noted that KDIPA had taken part in Kuwait’s efforts to combat COVID-19 and curtail its outbreak, abiding by the announced health and precautionary measures, and contributing to spreading public awareness.

In addition to keeping open communications channels with investors and responding to their inquiries during the pandemic, the KDIPA had also launched promotional campaigns for targeting investors, strengthening external relations, as well as participated in several official delegations, bilateral committees, business councils and forums, and activated its social media channels to stream updates on economic and investment developments in Kuwait.

In no way detracting from the noted achievements of KDIPA, and definitely not questioning the Cabinet’s back-patting for the authority, it needs to be pointed out that the annual report warrants closer scrutiny. The report showed that during the period under review, the KDIPA attracted new direct investments amounting to KD115.8 million, which was less than 0.1 percent of the country’s estimated GDP of $135 billion in 2019. To put this figure in perspective, the world average in 2019 based on 178 countries was 4.15 percent. The report also showed that the total cumulative approved direct investments since KDIPA started its operations in early January 2015 till end of March 2020 amounted to around KD1 billion.

In addition, the report noted that total investment over the past five years came from 21 different countries and local partners, and was mainly concentrated in the services sector, including information systems, oil and gas services, construction, training, healthcare, and energy. In addition, the report disclosed that the resulting total expenditure in the local economy from foreign investments was around KD458 million over the period from early January 2015 till end of December 2018.

Some would argue that the latest report card by KDIPA was a damning indictment on the poor performance and ineffectiveness of the authority. Obviously, while institutional measures, studies, promotional campaigns and international recognitions are indeed laudable and necessary, they do little if anything to warrant the setting up of an authority whose primary objective was attracting investments to the country.

If further inculpation of KDIPA was needed, one needs to look no further than the annual Global Opportunity Index (GOI) compiled by the Milken Institute, an independent non-profit US-based economic think tank that among its various services publishes an annual assessment of countries based on various factors that influence foreign investment activities. The 145 countries evaluated for the 2021 index were ranked on the basis of their performance in five broad categories — business perception, economic fundamentals, financial services, institutional framework, and international standards and policy measures.

Despite improvements in several categories evaluated by the report, none of the six GCC states made their way into the first quartile of the145 countries assessed.

The UAE, which ranked 33rd globally, remained first in the Middle-East region and held on to its pole-position among the GCC states. Qatar with a global rank of 42 came in second place in the GCC, followed by Bahrain (44), Oman (49), Kuwait (54) and Saudi Arabia (57).
Though Kuwait managed to improve its standing from a year earlier, the report noted that it, along with most other GCC states, lagged in several metrics when it came to attracting foreign capital. Among the serious deficiencies noted were regarding policies that ensure protection of the investor, including recovery and resolution process, and transparency with regard to the quality and quantity of information available to international investors.

However, the GOI ranking and assessment of GCC states has to be read in the context of another report in 2020 by the United Nations Conference on Trade and Development (UNCTAD). The World Investment Report (WIR) published by UNCTAD in the midst of the COVID-19 crisis in 2020 noted that global flows of Foreign Direct Investment (FDI) would be under severe pressure as a result of the COVID-19 pandemic. It also warned that this would likely worsen the already lackluster growth in international investment recorded over the past decade.

The UN agency said it expected FDI to fall sharply from the US$1.5 trillion recorded in 2019, and drop well below the trough reached during the 2008 global financial crisis. The report estimated that global FDI in 2020 would be around $1 trillion, a drop of 40 percent from the $1.54 trillion recorded a year earlier, and the lowest flow of FDI since 2005. In addition, the report projected that FDI would decrease by a further 5 to 10 percent in 2021 and begin to initiate a recovery only in 2022.

The WIR report also noted that though the total FDI flow of US$1,548 billion in 2019 was distributed relatively fairly between developed and developing economies around the world, the disparities between regions in developing economies were stark. Of the US$685 billion, or around 45 percent of global FDI that flowed to developing economies in 2019, nearly 57 percent ($389bn) went to east and south-east Asian nations.

In contrast, developing countries in West Asia, which includes the GCC states, received barely 4 percent ($28bn) of total FDI flow to developing economies. Data from the World Bank on net inflow of FDI to GCC states in 2019 show that the lion’s share went to the UAE ($13.8bn) followed by Saudi Arabia ($4.6bn). In contrast Kuwait received only around $515 million.

Industry analysts point out that in order to benefit from long-term capital flows, the countries in the region need to acquire adequate human capital, sufficient infrastructure, economic stability and liberalized markets, as well as institutional factors such as degree of openness and trade policies, legislative environment and impartial judiciary and enforcement of laws. Clearly, Kuwait has shortcomings in many of the above outlined factors needed to attract and retain foreign capital.

 

SOURCE  ;   TIMES KUWAIT

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