Kuwait maintains its long-term vision for growth

Kuwait faces many of the same challenges as other oil-exporting economies in the Gulf Co-operation Council. With downward pressures on commodity prices expected to persist over the medium term, the country's government is being forced to cut spending while it pursues a strategy of non-oil diversification. A growing population also means that the authorities must find ways of stimulating private sector job creation while cutting the public sector wage bill. There is little doubt that these tasks will be difficult in the current environment.

But unlike many of its regional counterparts, Kuwait is facing these problems from a singular position of strength. For one, the government’s balance sheet is exceptionally strong. Assets held by the Kuwait Investment Authority, the country’s sovereign wealth fund, are estimated to be more than 400% of gross domestic product (GDP), or $550bn, according to the National Bank of Kuwait, while government debt levels are just 8.3% of GDP.

Most importantly, these resources need only be marshalled for a population of about 4 million, in a country that has, in relative terms, less extensive infrastructure demands than some of its neighbours.

“Kuwait, relative to its Gulf peers, is well placed to weather the storm. Despite its oil dependence, the country has ample reserves and low public debt levels. These policy buffers provide some room for manoeuvre even as economic growth is set to slow,” says Daniel Kaye, lead Middle East economist at Oxford Economics.

Silver lining

Meanwhile, the government is expected to adopt an accommodating fiscal stance over the medium term. In particular, strong project expenditure is likely to drive the growth of the non-oil economy, with about Kd34bn ($113bn) allocated to be spent between 2015 and 2020, according to the National Bank of Kuwait. As a result, real non-oil GDP growth is expected to hit 4.5% in 2016 and 5% in 2017, easily outpacing oil sector growth of 0.6% and 0.2%, respectively. For the country’s banks, this is expected to provide good growth opportunities moving forward.

“The non-oil economy is expected to continue to grow in the current environment of lower oil prices; indeed, we expect growth to improve. The reason is a strong commitment by the government to stay the course on its development plan and capital spending targets and its robust fiscal position,” says Shaikha Al Bahar, deputy group chief executive of the National Bank of Kuwait.

Though this outlook may be encouraging, the coming years will not be short of difficulties. Inevitably, hard decisions will have to be made about reforming the economy, including difficult changes to long-standing and popular tax and subsidy regimes. Moreover, the efficiency of government itself, including its bloated staffing levels and high degree of bureaucracy, are frequently cited as impediments to such reform by private sector players.

“In the past, the pace of reform has been very slow. [But] if there is a silver lining to the collapse in oil prices it is that it opens up opportunities for meaningful economic reform. Arguably, the last time the Gulf economies came close to implementing serious changes was in the 1990s, during a similar price decline,” says Mr Kaye.

Reform plans

In the coming months, the Kuwaiti cabinet is expected to unveil a petrol subsidy reform package covering diesel, kerosene, aviation fuel and other products. This follows an initial attempt by the government to lift a number of fuel-related subsidies in January 2015, a move that was eventually scrapped due to strong resistance from the country’s parliament. According to data from the International Monetary Fund, subsidies currently account for about 9% of GDP. 

Meanwhile, discussions are under way in the National Assembly over the introduction of a wage reform bill covering the structure of public sector pay. If passed, the bill will introduce a standardised pay scheme across Kuwait’s public sector and provide the government with direct oversight of wage growth as well as specific pay bands within official offices, agencies and ministries.  

“One key issue for the government is to control the growth of the public sector wage bill. It has to do this while it is under pressure to increase the employment of Kuwaiti nationals who are entering the labour force and can’t find jobs in the private sector,” says Mr Kaye.

Partnering up

Perhaps more significantly, the government’s attempts to mobilise greater private sector investment in the economy have been crystallised by the introduction of a new public-private partnership (PPP) law. Though initially enacted in 2014, the law did not become active until April 2015.

Under the new regulations, the structures of PPPs in Kuwait are more closely aligned with international norms. For example, the new law improves the ease of changing, extending or renewing a project, while they also make it easier for investors to provide security to the project financiers, according to global law firm Ashurt.   

“The government has presented its vision for economic reform in Kuwait in order to expand the non-oil sector. This includes developing greater partnerships between the public and private sector. Currently, there are more than 10 mega-projects waiting to be implemented in Kuwait under the PPP system,” says Hamad Al-Hasawi, secretary-general of the Kuwait Banking Association.

“In addition, the government intends to accelerate the privatisation programme of public enterprises in the future. For this purpose, the government initiated the Supreme Council for Privatisation, which is expected to convert a number of public assets to the private sector,” he adds.

Collectively, efforts to pursue privatisation, a greater role for PPPs and associated economic reforms fall under the government’s latest Kuwait Development Plan 2015-2019. In turn, this plan is expected to contribute to the country’s longer term 2035 vision of becoming a hub for financial services and trade.

Vital role 

The latest plan follows an earlier national development plan, for 2010 to 2014, which was characterised by a similar long-term agenda. Yet, the government has acknowledged that it failed to meet some of its targets, including the execution of a number of infrastructure projects. As a result, various investment projects have been carried over to the new five-year plan. This is a direct outcome of the improved relations between the central government and members of the National Assembly.

“In recent years, the Kuwaiti government and parliament have been working together more harmoniously. This has led to the approval of a large number of infrastructure projects,” says Elham Mahfouz, chief executive of the Commercial Bank of Kuwait.

Momentum is already being generated in Kuwait’s quest for greater private and foreign direct investment. The Al Zour North independent water and power production facility, scheduled for completion in the fourth quarter of 2016, has involved the investment and participation of a consortium of Japanese banks and corporates in one of the country’s most significant infrastructure projects in years. Once fully active, the facility will increase Kuwait’s power generation capacity by 30%, while its desalination capacity will be increased by about 80%, according to the National Bank of Kuwait.

These trends bode well for Kuwait’s banking sector. “Kuwait’s banks play an important supporting role in the government’s development plans by providing the private sector and contractors, whether domestic or international, with loans as well as a host of banking services. Banks have a large capacity to lend even though system liquidity has retreated somewhat over the past year due to the lower oil prices,” says Ms Al Bahar.

Moreover, this more conducive political environment will be important if Kuwait is to realise its long-term vision for development. The government’s effort to build a more market-focused economic system will be contingent upon its success in attracting foreign investment and promoting a more competitive business environment. Agencies such as the Kuwait Direct Investment Promotion Agency, for example, will play an important role in these ambitions.

Moving forward 

Similarly, ongoing work to build up the country’s new Competition Protection Authority will be paramount. Here, the World Bank is working closely with local authorities on a technical assistance programme to review Kuwait’s competition law, assist with institutional set up, as well as to conduct various regulatory and sector-specific competition reviews.

As the 2016 Kuwait report from Bertelsmann Stiftung’s transformation index notes: “The ruling family and a few long-established merchant families control key economic activities and sectors. Informal monopolies and oligopolies do exist, while connections between the administration and private businesses result in uneven market competition.” 

If the government can iron out these problems, the outlook for Kuwait’s economic growth will be lifted further. Increased competition and foreign direct investment are likely to benefit the country’s burgeoning small and medium-sized enterprises (SMEs), just as bank financing to these entities is increasing. Looking ahead, this can only help to mobilise non-oil economic growth and private sector job creation.

“For SMEs, we have seen major developments in the financing of these enterprises through local banks, especially by the Industrial Bank. The medium-term plans of the Industrial Bank and the National Fund for the Development of Small and Medium Enterprises involve providing the necessary finance for several thousands of these businesses over the next five years,” says Mr Al Hasawi.