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PolicyJune 3 2009

Political wrangling hampers Kuwait

Standing strong: Kuwait's financial system is bearing the brunt of the credit crunch well, although political tensions are clouding the country's future prospectsTension between Kuwait's ruling government and elected parliament are hampering policy formation and intensifying uncertainty as the economy gets back on its feet. Will the new parliament elected last month change the situation? Writer Stephen Timewell
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Political wrangling hampers Kuwait

While Kuwait, like many other countries, faces the impact of the global financial crisis, it also faces another dilemma, which is perhaps causing more distress: the issue of domestic politics. In the only country in Gulf that claims some sort of democracy, the continuing tension between the elected parliament and the government not only remains an obstacle to policy formulation but is also damaging Kuwait's financial reputation, creating more uncertainty and causing much-needed projects to be cancelled. As one economist puts it: "Uncertainty on political grounds adds to uncertainty on economic grounds."

 So will the outcome of the elections held on May 16, which followed the dissolution of parliament by the Emir, Sheikh Sabah Al-Ahmad Al-Sabah, on 18 March, change matters? Two days before the dissolution, the government had resigned to avoid questioning in parliament. On March 19, 2008, the Emir had also dissolved parliament over similar clashes and elections had been held in June 2006 and May 2008.

 Kuwait's infant democracy reflects clear tensions between a government run by the powerful ruling family and a parliament that is extremely critical of the so-called 'whales' or 'big guys' and is keen to help the 'little guy' and 'champion' (the lower and middle classes). In this struggle, it is important to understand the voting demographics; of Kuwait's 3.4 million population, 1.1 million are Kuwaitis, of which 362,000 were eligible to vote in the 2008 election, where there was an 80% turn-out. Parliament is instinctively against the award of mega contracts for infrastructure projects and is focused on issues such as debt relief for consumers as well as grilling ministers over their actions.

Under criticism

 "Parliament does not care about developing the economy or pursuing major projects," complains one local banker, while former opposition lawmaker, Musallam Al-Barrak, recently slammed the new Financial Stabilisation Law, saying it was issued to aid highly influential rich people. He claimed that the law was tailored to serving the interests of a number of companies battered by the global financial crisis.

 Will this new parliament be different from others? Signs were that voting patterns were not expected to change significantly, with Islamists and tribesmen expected to maintain their grip on a parliament that has to approve all laws, the budget and can stop deals. So, more of the recent political deadlock is considered likely, with voting still very tribal and putting at risk plans to attract investment. As the governor of the Central Bank of Kuwait, Sheikh Salem Abdul Aziz Al-Sabah, says: "Without a productive political environment there will be no progress in the economy.".

 The impact of the political blockage taking place is evident in the cancellation of major projects, which is increasingly frustrating for all those involved. In late December last year, the huge $17.4bn K-Dow petrochemicals deal, a joint venture between US firm Dow Chemical Company and a subsidiary of Kuwait Petroleum Company, was cancelled after being announced earlier in the month. Opposition parliamentarians argued that Kuwait was over-paying on its $7.5bn investment. According to MEED magazine: "Power struggles are nothing new in Kuwait, but the collapse of the K-Dow deal has dealt a serious blow to its hopes of becoming a leader in the global petrochemicals industry."

 Various other projects, such as the 615,000-barrels-a-day Al-Zour refinery and the City of Silk development on the north shore of Kuwait Bay, have been put on hold after coming under parliamentary review.

Questionable support

 Amid the political and financial turmoil, the government is taking steps that are supportive of the economy but, unlike neighbouring countries, it is also taking spending steps which appear unsupportive. Under the leadership of the central bank governor, Mr Al-Sabah, the Financial Stability Law was enacted by Emiri decree in April and has been well liked by investors. The new parliament, however, needs to approve this new law in the coming weeks and that is no certainty.

 "The Financial Stability Law," according to a recent National Bank of Kuwait report, "has three major components: measures to support the health of the banking system, measures to boost lending to the real economy, and measures to reduce potential damage from wobbly non-bank investment houses. The more stimulative part of the package is, of course, the part to boost lending. There, in an effort to support private sector spending and activity, the government will guarantee 50% of any new domestic loans issued before 2011 (with a maximum maturity of five years and up to a combined value of Kd4bn [$13.9bn])."

 The law is regarded as stimulative in the current depressed environment but the recent draft budget for fiscal year 2009/10 takes an axe to spending at a time when the economy seems to be in need of as much support as possible. With expenditure cut by 36.4% overall, the budget also includes a Kd445m cut, or a 26.7% downturn, in project spending.

Matter of timing

 Why has the government decided to decrease spending at this sensitive time? One economist says: "The government feels no one is really hurting, the situation is not that bad, and the new stability law is enough." Also, the government is perceived as being very conservative and so when it budgets for a 42.4% cut in oil revenues in 2009/10 to Kd6.7bn, due to lower oil prices, it also believes it has to cut spending significantly. A 36.4% cut in overall spending is certainly not the type of fiscal stimulus which many officials, including the central bank governor, have been calling for, or are deeming as what would be supportive of the financial industry.

 So what is the outlook for 2009 and beyond? The world's seventh largest oil exporter, curiously, has no official gross domestic product (GDP) data for 2008, but with more than 50% of the economy dependent on oil and the average oil price dropping from $90 a barrel in 2008 to an estimated $47 a barrel in 2009, the central bank governor expects a 1% to 2% contraction in GDP this year with an improvement in 2010.

 But although the Kuwait Investment Authority still has financial reserves estimated at $300bn, providing a powerful cushion, and the banking sector is regarded to be strong enough to weather the current storms, the real concerns for the country lie in its political structure. If the new parliament elected on 16 May cannot achieve an improved degree of political stability then the country's reputation, economic prospects and financial rating will continue to suffer and Kuwaitis will have only themselves to blame.

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Top six Kuwaiti banks at end-2008

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Read more about:  Global economies , Middle East , Kuwait , Policy