Kuwaitis study belt-tightening measures
Introducing taxes, privatising public utilities, reducing energy subsidies are fiscally sensible steps for Kuwait to take to strengthen its economy.
Kuwaiti Oil and Finance Minister Anas al-Saleh attends a parliament session, at Kuwait’s National Assembly in Kuwait City, last February.
2016/03/18 Issue: 48 Page: 20
The Arab Weekly
Washington - Kuwait faces a $40 billion budget deficit for the fiscal year that begins April 1st but the government of Emir Sabah Ahmad al- Jaber al-Sabah has not joined other Gulf Cooperation Council (GCC) countries in cutting generous energy subsidies.
The emir, speaking to newspaper editors in January, said the government would lift subsidies and raise the prices of petrol, electricity and water but offered no time frame for doing so.
The delay is due in part to the long-standing contentious relationship between the executive branch of Kuwait’s government and its outspoken parliament. The government tried to reduce energy subsidies in 2015 but reversed course in the face of criticism from legislators.
Recognising the need to move cautiously and to have parliament’s backing, the government has agreed to have several ministers join a parliamentary panel to study subsidies. Parliament Speaker Marzouq al- Ghanim said the government promised it would not move unilaterally on subsidies and that any cuts would not affect low-income families.
At the World Economic Forum in Switzerland in January, Kuwaiti Finance Minister and Acting Oil Minister Anas al-Saleh said the economic climate provides the perfect opportunity to reduce subsidies.
“With low oil prices,” he said, “it is the right time.” But sensitive to public reaction, Saleh added: “We’ll have to look at rationalising subsidies to those who need them.”
Every GCC country has felt the financial pinch of lower oil prices and all but Kuwait have increased fuel and power costs for consumers. The International Monetary Fund (IMF) has called on the GCC states to remove subsidies, impose taxes and reduce spending or risk depleting their financial reserves within five years if current economic conditions continue.
The United Arab Emirates led the way, moving in mid-2015 from a system of fixed fuel subsidies to one in which prices adjust monthly to reflect global trends.
Saudi Arabia spent as much as $107 billion on energy subsidies in 2015 and the country’s leadership has traditionally been cautious about changes to its social welfare system. But the government of King Salman bin Abdulaziz Al Saud is intent on instituting financial reforms, particularly as record low oil prices have hamstrung the kingdom’s economy. The Saudi government announced at the end of 2015 that it was raising the domestic prices of petrol, electricity, water and natural gas.
Qatar, Oman and Bahrain have taken similar measures to raise energy-related prices domestically.
Kuwait’s oil revenues account for nearly 90% of its budget and about 40% of its gross domestic product (GDP). After 15 years of budget surpluses, Kuwait is expected to post a deficit of at least $23 billion for the fiscal year that ends March 31st. That budget was assumed that Kuwaiti oil would fetch an average price of $45 a barrel; prices were in the $30-$35 per barrel range much of the year. Kuwait’s 2016-17 budget is based on an average oil price of about $25 a barrel.
The government projects 2016-17 expenditures of nearly $63 billion — a 1.6% reduction in spending from 2015-16 — with expected revenues of $24.6 billion. Subsidies, public salaries and compensation will account for 70% of spending and oil income will provide approximately $19 billion in revenue.
Each year’s budget includes a contribution to Kuwait’s Next Generation Fund, a nest egg for the day when Kuwait’s oil production dramatically declines. The Next Generation Fund is part of Kuwait’s sovereign wealth fund, run by the state-controlled Kuwait Investment Authority (KIA). According to the Sovereign Wealth Fund Institute, as of February, Kuwait’s sovereign wealth fund was worth $592 billion, a healthy financial cushion against the effects of sustained low oil prices.
There were reports in late 2015 that the KIA was mulling selling assets in the sovereign wealth fund, which has generated returns of less than 9%. The goal would be to raise about $30 billion to help plug the budget deficit. It is unknown just how much the KIA has raised by tapping into the fund but the Kuwaiti government is looking for other measures to help meet budget needs. Saleh on March 8th announced that the government intends to issue domestic and international bonds and government committees are sorting out the process of doing so.
Kuwait is also planning a new sovereign wealth fund that would manage as much as $100 billion in local assets, including interests in local companies and power and water projects, with the goal of selling those assets to private investors in five to seven years.
Introducing taxes, privatising public utilities and reducing energy subsidies are the fiscally sensible steps for Kuwait to take to strengthen its economy and help its people wean off the largesse of the state. Those moves would likely be lauded by the IMF. However, as has proven often in Kuwait, progress on major economic decisions that require the parliament to agree with the government can result in lengthy delays.