Kuwait’s fiscal balance returns to deficit in 9-month FY23/24

Revenues fall 27% y/y to KD 15.5bn on lower oil prices and output

KUWAIT: Kuwait’s Ministry of Finance data show that the government recorded a fiscal deficit of KD 1.7 billion for the first nine months of the current fiscal year (FY2023/24), after an exceptional surplus in the same period of the previous fiscal year. The deficit was due to a combination of much lower oil revenues and a broad surge in spending above historic trends. Given no big change in oil prices so far in 2024, and assuming the typical jump in spending towards the end of the fiscal year, a wider deficit is likely in the closing accounts of FY23/24. The switch back to a deficit highlights the public finances’ continued exposure to volatile oil revenues and the structural impact of high current spending.

The fiscal deficit was around 4.5 percent of pro-rated estimated GDP in the first nine months (April-December) of FY2023/24, from a surplus of KD 10.1 billion in the same period of FY2022/23. Almost half of the year-on-year worsening in the balance was due to a drop in revenues linked to lower oil prices and OPEC+ production cuts, which were recently extended until mid-2024.

The rest was due to a surge in spending, which although expected due to a record size budget (including some exceptional items), came at a notably higher rate of allocations compared to previous years, which could be an indication of a change in bookkeeping practices. Still, a sizeable portion (KD 9 billion or 35 percent) of the budget expenditure allocation remains unused, and with the historical actual/budgeted spending ratio at around 95 percent, spending is likely to accelerate in the final months of the year. Together with a lower oil price average so far in the final quarter of FY23/24, the deficit is likely to widen to above KD 3 billion by the end of the fiscal year, exceeding our previous forecast of KD 2.2 billion.

Broad increase in current spending

The 9M saw a jump in total expenditures by 56 percent y/y to KD 17.2 billion, 65 percent of the full-year budget allocation. Current spending which constitutes the vast majority, rose by 59 percent y/y to KD 16.5 billion, with a broad increase across all spending categories, but mostly in compensation of employees, goods and services and subsidies which rose sharply from the previous year. As mentioned above, the higher spending can be partly owed to a large budget, which added KD 3.3 billion in current spending, around half of which (KD 1.6 billion) was one-off arrears and vacation allowances. The remainder comes from budgeted increases in other items including wages & salaries, social security, cost of living and student allowances, and MoH pharmaceuticals. Further, nine-month spending as a percentage of the pro-rated budget allocation was an elevated 87 percent in FY23/24compared to only 63 percent the previous year, reflecting the higher than usual pace of spending. Finally, the higher spending came despite a lower oil price average (-16 percent y/y) which would normally lead to lower fuel related outlays under subsidies and goods and services.

Capital expenditure

Capital expenditure continued to decline, with 9M cumulative outlays down 6.2 percent y/y to only KD 763 million. Outlays were 39 percent of the fullyear budget allocation, which was at a recent low of KD 1.83 billion. Low capital spending reflects a multi-year negative trend despite the large projects in the state’s development plan, making room for increased current spending and reflecting ongoing liquidity constraints. In addition, the decline could be attributed to the political turbulence of recent years, which may have affected the decision-making and execution process. With that said, the pace of decline was slower than previous years, implying that spending could stabilize before potentially recovering to levels consistent with long-term development goals. This will depend on liquidity-enhancing reforms which could spur a revival in capex.

Revenues fall

Revenues fell 27 percent y/y to KD 15.5 billion in 9M FY 23/24, reaching 79 percent of the full-year budget, though well below historical levels despite the typically conservative budget revenue assumptions. The drop was due to the exceptionally high oil revenues in the previous fiscal year, combined with a decline in oil prices, and below budget production of 2.55 mb/d (vs 2.65 mb/d) due to OPEC constraints. With production limits expected to continue until mid-2024, and softer oil prices so far this year, oil revenues could be close to the budget projection of KD 17.2 billion by the end of the fiscal year. Meanwhile, non-oil revenues amounted to KD 1.2 billion, 51 percent of the full year budget and with the fiscal year drawing to a close in March, nonoil revenues could fall slightly short of the 10 percent increase outlined in the budget.

Public finances

Given the record size of the FY23/24 budget and that cumulative spending was well above trend in the first nine-fiscal months, expenditure is on track to reach a record level in the FY23/24 closing account – although uncertainty over the likely size of the year-end jump in spending makes projections difficult. The draft budget for FY24/25 projects a KD 1.7 billion or 6.6 percent b/b decline in spending, but this is mostly due to the omission of the prior mentioned one-off items from the previous budget and recurring current spending (mostly wages and subsidies driven) remains high. As expenditure continues to rise to critical levels, the vulnerability of the government’s finances to oil price volatility becomes more pronounced, stressing the need for swift reforms to address structural weaknesses and to promote fiscal sustainability.