Alamy via Reuters
Within the past few weeks the Kuwaiti government has reaffirmed plans to impose a 15 percent tax on multinational companies and issued a decree to permit government ministries to set their own charges for public services.
Rules governing foreign ownership of real estate are being relaxed and plans have been announced to open the residential mortgage market to local banks, ending the monopoly of the Kuwait Credit Bank.
Government departments have been told to reduce delays in project implementation and set themselves key performance indicators.
Kuwait’s cabinet has approved a draft decree that will permit the country to sell international debt, pending final ratification by the emir. The debt law would enable the government to borrow up to KD20 billion to cover budget shortfalls, according to an earlier draft.
All of these measures have a good chance of becoming reality, given that the government now has a free hand to act, following the suspension of the National Assembly in May last year.
The suspension of the Assembly has ended the distractions caused by endless squabbling between ministers and parliamentarians, and legislative delays arising from the frequent elections held whenever the Assembly was dissolved. In the four years prior to last year’s suspension, Kuwait had held four rounds of elections.
It would however be naïve to imagine that Kuwait is now embarking on a radically different economic path, putting behind it the procrastinations of the past.
A 15 percent corporate tax on foreign companies has existed for some time but is only partly enforced. Kuwait, with Qatar, remains one of two GCC countries which has yet to introduce a local Value Added Tax.
Kuwait has failed to develop non-oil income in the way that Saudi Arabia has in recent years
Yet the recent movements on policy issues go to the heart of Kuwait’s lacklustre economic performance over the past decades.
Despite all the talk about the Kuwaiti government’s budget deficits, Kuwait does not have a financial problem. Let us be very clear about that. Its problems lie in governance and economic management.
Kuwait’s state reserves amount to around $630 billion. Both in terms of absolute size and in relation to Kuwaiti gross domestic product, the Kuwait Investment Authority (KIA) is one of the biggest government wealth funds in the world.
With minimal debt outstanding and credit ratings of A+ or AA-, the government could effortlessly raise tens of billions of dollars through bonds and other debt instruments.
The IMF’s latest Article IV report on Kuwait, published in December, shows consistent budget surpluses when investment income and profit transfers from local companies such as Kuwait Petroleum Corporation are included.
According to that report nearly two thirds of Kuwaiti government revenue arise from oil sales, and about another third comes from investment income and profit transfers.
Oil revenues certainly fall short of budgeted expenditure – hence the $20 billion deficit figure being cited for next year’s budget. There’s no getting round the fact that the government does need cash to make up the shortfall.
Kuwait’s economic indicators at a glance
And if the income from government investments funds is actually unrealised gains, for example on overseas property holdings, then the government certainly has a cash deficit.
If however a significant proportion comprises income, such as rents on those overseas property holdings, then it may not.
Kuwait’s Ministry of Finance disclosed in 2020 that its General Reserve Fund, which held most of the country’s liquid investments, was entirely depleted, leaving the longer-term holdings in the Reserve Fund for Future Generations as the only financial buffer.
That buffer is huge, but by law it cannot be used to smooth budget deficits.
There are, of course, problems on the expenditure side of the budget. Government salaries, subsidies, grants and social benefits account for more than two thirds of spending. Total current expenditure accounts for 90 percent.
With public sector wages around 40 percent higher than what is on offer in the private sector, according to the IMF, shifting economic activity and talent from the public to the private sector will not be easy.
Kuwait has failed to develop non-oil income in the way that Saudi Arabia has in recent years. For nearly 15 years, the latter’s non-oil budget revenues have been increasing by about 15 percent each year and they now account for about a third of the government’s revenue.
That is why the flurry of decrees and announcements in recent weeks offers a glimmer of hope.
Kuwait needs to unlock its ability to raise financial liquidity; it needs to reduce subsidies on government services. Most fundamentally, it needs to accelerate industrial activity, encourage financial sector innovation at home and facilitate investment from abroad.
None of this will be achieved immediately. It will take consistent policy action over years, perhaps decades.
Let us hope that the actions taken and plans so far announced will be the start of a consistent march forward which will accelerate as the benefits become apparent. We’ve waited long enough.
Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems
