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Middle EastJuly 3 2007

Legislative deadlock hampers development

One of the richest Gulf states, parts of Kuwait’s economy are booming, but politics and bureaucracy still hold back growth, write Nadine Marroushi and Jon Marks.
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Kuwait’s oil-dependent economy has benefited hugely from the crude price boom that has created a huge cash surplus for the government’s budget and new business for banks and other corporates. Half a dozen foreign banks are now authorised to operate in what Standard & Poor’s analyst Anouar Hassoune calls “a booming economic context”, and more may follow, building competition in a still heavily protected banking sector.

Kuwait remains oil dependent and resistant to more accelerated reforms. According to S&P, “in 2005, Kuwait’s oil sector represented about 50% of gross domestic product (GDP), 80% of government revenues and 95% of export revenues”.

With government reserves possibly approaching $200bn, this is hardly a crisis, but many analysts – and Kuwaitis of a more liberal bent – believe much more should be done to open up the economy now, to allow Kuwait to thrive for decades to come.

Political impasse

Prime minister Sheikh Nasser Al-Mohammed Al-Ahmed Al-Sabah is reform-minded, but his government continually faces opposition to change from the Gulf Co-operation Council (GCC) region’s most active – and conflictual – legislature. The National Assembly remains intensely sensitive to popular opinion – leading it to block everything from Kuwait’s agreed 80% write-off of Iraqi debt to the Project Kuwait development, that would bring international oil majors into the north of the country.

As one local analyst puts it: “A deep mistrust poisons relations between legislators and the national leadership.”

Meanwhile the established economy carries on apparently regardless. Analysts say growth will be sustained, although GDP is set to slow in the year ahead as oil prices fall and output lessens. S&P forecasts 5%-6% GDP growth in 2007-10, down from 8% in 2006.”

The government has plenty of scope to adjust its budgets: the proposed budget for 2005/2006 predicted a $8.9bn deficit, but it ended in a surplus of $23.5bn, according to Central Bank of Kuwait figures.

The Council of Ministers approved the 2007/08 budget in January based on a projected oil price of $36 per barrel. Finance minister Bader al-Humaidhi originally forecast a $7.2bn deficit, and has indicated that the government might use some of its windfall revenues for much-needed reforms.

S&P forecasts a budget surplus equivalent to 31.7% of GDP for 2007, down from 40% in 2006. “In 2008, this figure will continue to decline to 26%,” the ratings agency said recently.

Government spending is forecast at $36bn – up 18% from 2006 – excluding a one-off payment to the Social Security Fund, which was worth an estimated $21.6bn in 2006, and will rise to $22bn in 2007 based on the flow of estimated surpluses.

S&P projects overall government reserve funds at $160bn in 2006 and $193bn in 2007.

Public spending

The budget’s focus is expected to be on capital spending and public sector wages. Kuwaitis want a greater share of the emirate’s wealth; in late December, a parliamentary bill proposing to pay off all citizens’ private debts was rejected, but it points to the tone of political debate. As an economic brief published by National Bank of Kuwait points out, “in 2006, the government paid a grant totalling $702m to Kuwaiti citizens”.

While oil rents fuel a headline economic boom, analysts caution that economic reform and modernisation should be speeded up – not a view shared by many in Kuwait’s state-dominated economy, where many citizens see a well-paid job for life as their right. As oil prices fall and production output decreases, analysts are urging Kuwait, as well as other cash-rich GCC countries, to direct their money into building up the country’s physical infrastructure – such as transport, water networks, power generating capacity and housing – and diversifying the economy away from dependence on oil.

Not only is the economy prey to political bickering, it is also held back by bureaucracy, which creates heavy delays to prestige projects such as the Subiya causeway and Failaka island development. Infrastructure and energy projects are facing major delays as the government takes its time to make decisions.

Critics say that unlike the United Arab Emirates and other Gulf countries, Kuwait has little physical evidence to show for its high current account surplus. The release of the tender to design and build the 37-kilometre Subiya causeway, expected to be one of the world’s longest bridges, has been delayed until the end of this year, at the earliest, after the Environment Public Authority raised concerns about its environmental impact.

Failaka island was first tendered two years ago, and bids have been in for one year. The delay is said to stem from uncertainty over build-operate-transfer laws.

The Ministry of Energy is also rushing to meet its water and electricity needs ahead of another hot summer. As residents turn to air conditioning units for relief from the weather, water and electricity demand is expected to exceed total power generation capacity. Last summer, Kuwait experienced widespread blackouts as demand exceeded supply.

A plan to build 600 megawatts of emergency power capacity is being partly met by the recent award of a contract to the South Korean/German team of Doosan Heavy Industries and Siemens to build the Shuaiba north power and desalination plant, which would provide 500 megawatts of generating capacity. The ministry has also organised an awareness campaign encouraging Kuwait residents to become more conscious and thrifty in their use of water and electricity.

The need for change to meet such challenges is felt across the region. According to Nadhmi Nasr, a vice-president at Saudi Arabia’s national oil company Saudi Aramco, “the 1970s oil boom created an opportunity for countries to invest in all sections of the economy, including infrastructure, people and education. Some countries did it better than others, but we could have done even better as a region… I hope we don’t [make] the same mistake.”

Since its inception 13 years ago by national oil company Kuwait Petroleum Corporation (KPC), the $8.5bn Project Kuwait has stuttered along without gaining decisive momentum. With Project Kuwait, KPC proposes to achieve a target of 3.5 million barrels a day (b/d) of crude oil output by 2015 and four million b/d by 2020 – up from 2.8 million b/d today. This would be done by developing oil fields in the north of the country, on the Iraqi border.

Parliamentarians fear the project – when it goes ahead – would allow the government and KPC to sign over the state’s natural resources to international oil companies. This is despite the fact that Project Kuwait’s investment offer has been scaled back to international companies only signing operating service agreements.

Inflation fears

Economists see more pressing domestic concerns, including inflation fears as the dinar is pegged to the ever-weakening dollar – seen in Kuwait as the main cause for domestic price increases, which stood at about 3% in 2006.

In March, currency speculators invested more than $8bn into the dinar hoping to profit from the expected revaluation. This prompted the central bank to lower interest rates in the hope of making investing less attractive, but the currency revaluation never materialised.

In a regional context, Kuwait’s inflation looks good; it is well below Qatar’s forecast inflation rate of 11% and the UAE’s 7.3%. The only two GCC countries to match Kuwait’s healthy inflation rate are Saudi Arabia and Bahrain.

Despite Kuwait’s proximity to Iraq, geopolitical concerns seem less pronounced. S&P’s Luc Marchand says: “Although it is relatively important – Iraq, Iran and terrorist attacks are all potential risks – it is partly balanced by Kuwait’s strategic alliances with the US and UK, which were formed after the Gulf War. Kuwait can resist external shocks, notably due to the fact that current account surpluses would remain even after a shock, and by using its government assets if necessary.”KUWAIT 2

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