Kuwait: Time to rethink the model
spending would result in a fiscal deficit within the next two years. Kuwait has large fiscal buffers and can tap into its reserves, adding a few more years of spending at current rates, but this will be a highly unpopular decision. The government could introduce spending cuts, but these are unlikely to be significant due to their politically sensitive nature (the bulk of public spending is directed to social welfare). Finding a new source of revenue thus is the most feasible alternative. Introducing taxes is one option, but the cultural, economic and political landscape makes it improbable. Leverage is another option, a path already being undertaken by Saudi Arabia. A yield curve for the corporate sector and an additional investment choice for citizens are two examples of its direct benefits. However, in order to leverage at low rates, the economy needs a firm backbone.
Like most GCC countries, Kuwait must diversify away from the energy industry and the public sector needs to shrink. Numerous attempts to tackle these issues have not yielded any results, as witnessed in past development plans where projects were not being implemented. In the last twenty years, the economic share of the oil industry has soared while private investment remained sluggish. Political deadlock has been a major reason behind the inactivity. This year, another five-year development plan has been approved for 20152020, budgeting around KD34 billion ($116 billion) in total. This is a positive signal of intent, but the government needs to follow through swiftly before its balance deteriorates further.
The urgency factor is fueling political incentives to reform. Depleting reserves, cutting wages, removing subsidies and raising taxes are all very unpopular. This leaves the government with the less painful option of seeking financing. In order to borrow, boosting capital spending is key, and according to IMF forecasts, investment will become a greater role in the economy in the upcoming years. Kuwait needs to be on a path of sustainable growth, and the latest development plan may be the government’s best opportunity of reviving the corporate sector and enabling the capacity to leverage. With the long period of ultra-low interest rates approaching its end, pressure is mounting on Kuwait to act.
The drop in the price of oil has been an important reminder of the economic challenges Kuwait will face if it does not reform its economy soon. The country is finally in a situation where it can no longer rely as freely on oil receipts to boost its economy, and that alone can be the ultimate catalyst for the economy to diversify and become sustainable in the long run. It is critical for the latest development plan to take off soon before it becomes harder for the government to finance future spending.