Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
WorldApril 2 2012

Kuwait's growth challenge

Home to an estimated 9% of the world’s total oil reserves, Kuwait posted its 12th consecutive budget surplus of $18.9bn in 2011. But while the country's coffers are flush with cash, continued political infighting has stymied development, leaving the economy overly reliant on the oil sector and the country's basic infrastructure in need of improvement.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Kuwait's growth challenge

A cursory glance at Kuwait’s macroeconomic figures suggest a positive economic growth story. The country’s real gross domestic product (GDP) grew by 5.7% in 2011 – a significant improvement on the 3.4% growth achieved in 2010 – according to the International Monetary Fund (IMF). In 2011, the country also boasted the highest budget surplus in the Middle East and an estimated current account balance of $57.2bn. Meanwhile, its external debt fell to about 32.5% of GDP, from 40.9% in 2010.

With a surplus of Kd5.3bn ($18.98bn) – 21% of GDP – the 2010/11 fiscal year (which ended in March 2011) marked Kuwait's 12th year of posting a surplus, having accumulated more than $140bn in budget surpluses in the past 11 years. However, these impressive headline figures mask a much more complicated and disappointing economic reality on the ground.

Plan of action

Kuwait’s enviable fiscal situation is owed in large part to its failure to recycle its surpluses into long-overdue and much-needed infrastructure schemes aimed at diversifying its economy. “The macroeconomic figures disguise the fact that we are in a stagnant position,” says Randa Azar-Khoury, group chief economist at National Bank of Kuwait (NBK), the country's largest lender. “The GDP growth is increasing but it is being driven by the public sector.”

In February 2010, the government unveiled a five-year $130bn economic development plan (EDP) that outlines a total of 1100 projects aimed at modernising and diversifying Kuwait’s oil-based economy. With an estimated 9% of world crude oil reserves, petroleum accounted for nearly half of Kuwait’s GDP, 95% of its export revenues and 89% of total government income in 2011. Kuwaiti officials have committed to increasing oil production to 4 million barrels a day by 2020 from the current 2.4 million barrels per day.

The macroeconomic figures disguise the fact that we are in a stagnant position... The GDP growth is increasing but it is being driven by the public sector

Randa Azar-Khoury

The EDP seeks to diversify the economy by giving a more central role to the private sector through the privatisation of public firms and a renewed focus on the delivery of public services through public-private partnerships (PPP). The plan was followed by the approval of a privatisation bill in May 2010, which allows the government to sell assets to private investors.

The bill was of historic importance given that it was the country’s first economic plan since 1986 and the first in a series of economic plans that are scheduled until 2035. “The EDP is not just an opportunity but a necessity,” says Naveed Ahmed, senior financial analyst at Kuwaiti investment company Global Investment House. “It is the need of the hour and, if executed properly, it will help the entire economy. Just like Qatar has its development plans associated with the 2022 FIFA World Cup, Kuwait needs the stimulus of the EDP.”

Below the mark

Of the 1100 projects planned as part of the EDP, the oil and gas sector accounts for 37.5%, transport and communications 20.4%, power and water 16.2%, housing 15.5%, education 5.2%, miscellaneous sectors 3.4% and health 1.8%.

But to date, the EDP’s efforts at kick-starting the country's economy have proven to be somewhat lacklustre. The government has continued to undershoot its spending targets on the plan, achieving an estimated 60% of its targeted Kd5bn infrastructure expenditure in the fiscal year 2010/11. This is nothing new. Kuwait has underspent its budget by an average of 9% a year for the past 10 years. 

“The private sector has been comatosed because of the political structure of the country,” says Ms Azar-Khoury. “There are huge opportunities for it to grow but the regulatory constraints and political haggling haven’t been conducive to this.”

While often celebrated for having the Gulf region’s only fully elected parliament, some see this as a double-edged sword. While it has watched its neighbours in the United Arab Emirates, Qatar and Saudi Arabia all embark on impressive economic development drives over the past decade, Kuwait has consistently had its plans derailed by political infighting. The blame is largely levelled at Kuwait’s political system, for its slow progress in pushing through the EDP. There have been three dissolutions of parliament and six government resignations in the past five years. 

Schisms within Kuwait’s parliament make it difficult for consensus to be gained on projects, which has resulted in the cancellation or delay of several contract awards and prevented many other schemes from even leaving the drawing board. The high-profile $77bn Madinat al-Hareer – or Silk City – located just off mainland Kuwait, has been halted for its masterplan to be redesigned, while the $15bn Ras al-Zour alumina refinery has also been saddled with continuous delays at the planning stage. The public works ministry’s programme to build eight new hospitals is also running behind schedule. 

Further delays

The country was also dogged by a corruption scandal at the end of 2011, which led to public protests and the resignation of the prime minister Sheikh Nasser Mohammad al-Ahmad al-Sabah and his cabinet in November 2011. An investigation is now under way to examine a series of payments made into the bank accounts of political figures and the alleged misappropriation of funds.

In February 2012, Kuwait held elections – the fourth since 2006 – which saw some two-thirds of the 50-seat national assembly won by candidates who opposed the former government. “The power vacuum will have led to a further halt in the EDP’s progress and there is still a wait-and-see approach as the government is new,” says Mr Ahmed. 

Without majorly improving the business environment and providing good investment opportunities to the private sector, the future outlook will be limited

Sheikh Nasser Mohammad al-Ahmad al-Sabah

Arguably the most striking outcome of the growing discontent was the resignation of Kuwait’s central bank governor in February 2012 – a post he had served in for 25 years. Sheikh Salem Abdulaziz Al-Sabah, a member of Kuwait’s ruling family, resigned over his sharp criticism of what he said were “unprecedented” increases in government spending. "The challenges facing the local economy amid an increase in public spending to very high levels will hinder the central bank from taking responsibilities in the future to achieve its objectives as defined by the law," he said in comments carried by Kuwait’s state news agency Kuna.

Mr Al-Sabah had been increasingly vocal in his calls for the government to push through economic reforms. In July 2011, he said: “Without majorly improving the business environment and providing good investment opportunities to the private sector, the future outlook will be limited.” 

Meanwhile, in November 2011, the finance minister, Mustafa Al-Shimali, was quoted as saying that public sector wages have risen to roughly 85% of the country's oil revenues, representing "a real danger". About 80% of employed Kuwaitis work in the public sector, and government employees held a wave of strikes across the country during September and October 2011, seeking salary increases. A strike at the national airline Kuwait Airways ended with a 30% wage hike, while oil sector workers received a 50% wage rise after a strike threat.

Population swell

The need for diversification is even more urgent in light of Kuwait's rapidly expanding population, which is expected to grow from the current 2.7 million to 5.4 million by 2030. Growing the private sector will be key to generating further employment opportunities in the next 20 years. The burgeoning population further stresses the need to expedite the EDP so that work can begin on a range of social, transport and power projects and help ease the considerable pressure currently being exerted on the country’s infrastructure.

Despite ranking as the fourth largest producer of oil among the Organisation of the Petroleum Exporting Countries group – pumping 2.4 million barrels per day out of the ground – Kuwait faces annual power shortages due to a shortfall in generating capacity. Meanwhile, a severe shortage of housing led Sheikh Ahmed al-Fahad al-Ahmed al-Sabah, former development and housing affairs minister, to announce in 2010 that the country would provide 70,000 new homes by 2015. The private sector and the success of the PPP model is integral to overhauling the country’s infrastructure.

The Partnerships Technical Bureau (PTB) – the body set up to oversee the country’s PPP programme – plans to raise $28bn by privatising and developing 32 projects on a PPP basis over the next five years. Many believe the progress of Kuwait’s PPP plans hinge on the success of Kuwait’s first independent water and power project – the Al-Zour IWPP. The project is being sponsored by the PTB and the first phase is currently under negotiation with preferred bidder, the French multinational energy company GDF Suez. 

“We are hoping the private sector is starting to emerge from its coma with the undertaking of the first PPP this year – the Al-Zour IWPP,” says Ms Azar-Khoury. “The reality today is that our national champions and leading entities in the private sector are more likely to grow outside Kuwait than inside the country. Private investment has been very limited to hard assets such as real estate.” 

Bright spot

Indeed, the property market was one of the bright spots of Kuwait’s economy in 2011 – the total value of real estate sales increased by 35% over 2010 to stand at Kd2.7bn. The investment sector, ie. apartment buildings that generate income, performed especially well, recording annual growth of 53%.

“Kuwait didn’t experience the euphoria of other Gulf real estate markets,” says Ms Azar-Khoury. "And that’s mainly [down] to two reasons – we didn’t allow foreign investment and there was a lot of destruction after the Iraqi war. So we don’t have the surpluses that exist in Dubai and there is a shortage of quality commercial properties, while residential supply is not keeping up with demand.” 

However, the rest of Kuwait's economy is subject to the overall slow implementation of the EDP, which is weighing down on business confidence and stalling the pace of privatisation. In October 2011, Kuwait Airways announced it was delaying its plans to offer 35% ($280m) of its share capital of Kd220m to potential long-term investors. The Kuwaiti parliament had approved a plan in 2008 to privatise the loss-making airline.

Aside from the limited success in attracting local investment, Kuwait noticeably lags its Gulf neighbours in attracting FDI. In 2009, it received only $145m in FDI, the second lowest of all countries in the Middle East and north Africa region after Yemen, according to United Nations Conference on Trade and Development statistics. And, according to the World Bank’s 2011 Ease of Doing Business report, Kuwait ranked 74th (out of 183 countries) in terms of ease of doing business and 141st with respect to starting a business.

Economists forecast a slowdown in growth in 2012. The IMF forecasts real GDP growth of 4.5% in 2012 while NBK’s projection is less optimistic at 3.8%. In the current fiscal year 2011/12, the government’s EDP expenditure is targeted at Kd5.4bn. However, the early signs have not been encouraging, with the government once again expected to fall short of its target and with NBK predicting in its Gulf Co-operation Council economic outlook published in January 2012: “We could still end up near 60%.”

For the foreseeable future, Kuwait's economy will remain hugely sensitive to the momentum, or lack thereof, of the EDP. Until the long-standing political stalemate is resolved, the country's full growth potential cannot be realised.

Was this article helpful?

Thank you for your feedback!