What will become of Kuwait?

Kuwait has fallen behind its neighbours in the Gulf, despite its abundant petrodollars and a timeline that could see the country post its first deficit in 2017. As a result, the voices of dissent are growing louder
The International Monetary Fund warns that by as early as 2017, Kuwait’s oil revenues will no longer out-weigh its spending, causing the first deficit since 1998
By Courtney Trenwith
Fri 19 Apr 2013 11:48 AM

There is a distinct air of frustration swilling around in Kuwait City. The oil-rich Gulf capital has long benefitted from a stream of black liquid cash that has kept its books in check for fourteen years, but it has little to show for it and with the gravy train expected to slow well before the end of the decade, those with any sense of forward thinking are begging the question: what will become of Kuwait?

“The reliance on oil is quite dangerous. I think we have completely failed in addressing this major imbalance,” chairman of Kuwait Banking Association (KBA) and Ahli United Bank, Hamad Al Marzouq said during a recent finance conference.

“We lack a clear strategic vision here in Kuwait.”

While its neighbours Qatar and the UAE have ploughed much of their oil wealth into investments as varied as ambitious real estate developments, landmark buildings in Europe, sports sponsorship and major new infrastructure projects such as solar power systems, Kuwait has been the sleepy cousin in a corner of the Arabian Peninsula.

Little new infrastructure including roads, ports and airport facilities has been built or renovated for years, while the nation is known for little more than oil and its war with Iraq.

And time is running out for Kuwait to make the most of its spoils. The International Monetary Fund warns that by as early as 2017, the country’s oil revenues will no longer out-weigh its spending, causing the first deficit since 1998. The IMF forecasts that in 2017-2018 Kuwait’s oil revenues will be about KD25bn ($87.9bn) compared to KD29bn in spending.

“Kuwait is at a crossroads for conserving wealth [for] the future,” IMF deputy division chief of the Middle East and Central Asia Department, Ananthakrishnan Prasad says. “Our estimates shows that government expenditure will exhaust all oil revenues by 2017, which means no portion of these oil revenues would be available for future generations.

“There has to be a shift in policy in Kuwait and Kuwait will have to start saving more and have to start reducing their spending.”

There is also the risk of an even earlier oil price shock or prolonged decline.

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The diagnosis highlights more than ever the country’s need to diversify its economy.

“When you look at non-oil growth, Kuwait has really been lagging behind other GCC countries,” Prasad says. “[Kuwait’s non-oil revenues] grew only by 3.3 percent between 2006 and 2011; 2012 was even lower.

“Their headline growth is high because they have been producing more oil, especially in the last year because Libya was not able to produce and the GCC countries came in. That growth will go down in 2013 and we think headline growth will be only around 1.5 percent in 2013.

“But we think the non-oil growth will pick up now that the political situation has been stabilised and people will be able to concentrate on the economy.”

Much of Kuwait’s poor advancement is a symptom of its political unrest, with instability in the parliament hampering any real efforts to govern the country. In recent years the government has twice been forced to resign, while the February 2012 election was declared invalid.

Prasad says the relative stability that has taken place since the subsequent December 2012 election — in which only 46 percent of eligible voters participated amid a boycott — may help the country move forward.

There is no shortage of people in the private sector eagerly waiting with ideas.

KBA secretary general Hamad Al Hasawi says financial institutions are desperate to funnel money into roads, essential services and building new cities but there have been few opportunities so far.

“When the banks have high liquidity that means that they either don’t have a place to put the money into to work or they are enjoying having the money there and watching it, and I believe [the latter] is not the case,” he says.

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The country needs to identify what path it will take to diversify its economy away from oil.

“We need to look at what Kuwait could be,” Al Hasawi says.

“We could have Kuwait becoming a financial hub, we could have Kuwait becoming the capital of the world’s oil, we could create the largest science park that would gather all the GCC [countries] to be here and work with ventures [and] new research.

“We need to think in a very creative way. If we continue to believe that we’re going to continue [by] basing our thoughts on having oil as the main driver for this economy without being creative and creating possibilities for the new generation... we’re going to be diminishing, whether we like it or not.”

Kuwait Finance House CEO Mohammed Al Omar says there is enormous potential to develop Kuwait but it’s prevented by zoning that favours oil exploration.

“[We want to] create new centres, create new districts, new downtowns,” Al Omar says. “[Then] the banks will have the liquidity to finance and to do [even] more; you will see the retail businesses, carpet stores, aluminium stores [open], then you’ll have to have services [such as] private health [and] education. You create a whole economy.

“Kuwait is almost breaking even with expenditure and [revenue]. We don’t want to see Kuwait [record] surpluses, we want to increase the expenditure of the government.”

The government has announced a KD30bn ($105.19bn) infrastructure and economic development plan including new roads, government buildings and an expansion of Kuwait International Airport, but little has progressed since its launch in 2010.

“Nothing is stopping us [from investing] but the issue is the development plan has not taken off as fast as expected, therefore the opportunities simply aren’t there or there aren’t as many of them as we’d wished,” Gulf Bank CEO Michel Accad says.

“The banks in general have access to liquidity, they’re looking for good assets to invest in and frankly, infrastructure development is something that would be of interest to all the local banks. Definitely we want to be a player in that space.”

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In a sign that the wheels of progress may soon begin to move, finance minister Mustapha Al Shamali said earlier this month Kuwait would spend KD4.5-5bn ($15.8-17.5bn) on development projects in 2013-2014.

But therein lies another issue for economists — the country’s inability to properly plan its spending further than one year ahead. Like other GCC countries, Kuwait’s budget is based only on one-year forecasts.

The KBA is calling for a broad overhaul of the country’s economic framework and for greater private sector investment.

“We need a long-term vision to address structural imbalances,” Al Marzouq says. “This is something we’ve been talking about probably since the 1970s or even the ‘60s but nothing has been done.

“[Also] the government’s dominance in the local economy is quite destructive to any real economic growth. I would like for the government not to take the leading role... in terms of economic initiatives. The economic development plan, I think, was a complete disaster and the infrastructure projects which were included, I really have doubts regarding their return on investment.”

Al Marzouq points to the construction of a major road connecting Kuwait City and Al Jahra City, estimated to cost more than $1bn, as evidence of inefficiency. It simply duplicates the existing road between the two cities, he says.

The money should have been used to create transport to a newly created centre that could open up entirely new opportunities for Kuwait.

“We have a road there already — what is the return on investment?” Al Marzouq says. “Is it going to lead to any new industrial city... [or] a generation of foreign currency? These are questions that have not been asked.”

Kuwait is also weighed down by its massive public sector wage bill. According to the KBA, 94 percent of Kuwaiti nationals who work are employed by the government, with the rest split about evenly between the private sector and self-employment.

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Not only is the public sector workforce considered to be bloated, wages have increased an estimated 100 percent in only a few years. Meanwhile, little accountability and benchmarking against key performance indicators are well below best practice, creating enormous inefficiency.

Al Hasawi says 30-40 percent of public employees should be made redundant.

“[The government pays] $3,500 a month — KD1,000 — for a job that you actually spend a couple of hours out of eight hours doing nothing,” he tells Arabian Business.

“It’s an easy access. If [a person] doesn’t finish his education… don’t give him access to a job where he will actually do nothing and basically just... get stamped [to say] I attended a job. At the end of the day this is the salary for doing nothing.”

But more and more graduates appear to be turning down the “easy” path into a cushy government job. Jarrah Al Manea, a 24-year-old finance student, says he worries he will witness the “down and down” spiral of his country if mentalities do not change.

“The [culture] of the working environment here in Kuwait is ‘let’s do it the easy way’,” he says.

“In the private sector everyone can improve themselves and somebody who deserves it will [be promoted]; in the public sector, no, you just stay where you are.”

The government also is splurging an estimated $12bn annually subsidising services such as water, electricity and petrol. Electricity is subsidised by 95 percent, while the price of oil at the petrol pump has not risen in fifteen years, according to figures recently quoted in the National Assembly.

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International economists are warning that subsidies are not sustainable, however politically unpalatable it would be to cut them.

“The oil producers are running surpluses, but expenditures are rising and revenues cannot keep up if you assume oil prices remain reasonable and production increases are not as high as in previous years,” Bank of America Merrill Lynch economist Jean Michel Saliba told the Financial Times in February.

A group of eight lawmakers has proposed axing the subsidies — but only for expats, while making the services entirely free for nationals.

Meanwhile, the government has agreed to bail out nationals who took out loans between 2002 and March 2008 in a decision that is estimated to cost KD744m. It has defended the move by claiming banks charged excessive interest rates on consumer loans during the period and violated Central Bank of Kuwait regulations.

However, the banking sector has steadfastly rejected the allegations and described the bailout as politically motivated. External auditors that assessed the loans of 400,000 borrowers with Kuwaiti banks following the global financial crisis found only a small number of violations.

The mounting budget concerns and lack of vision for the country’s future is worrying even the young.

“Basically I don’t see a very good future for Kuwait,” Taiba Al Ibrahim, a 21-year-old university student tells Arabian Business.

“You can see the countries all around us — Qatar, Dubai — they’re all improving in their infrastructure [and] in their workplaces, and then we see Kuwait [and] there are no improvements. We don’t even have a good tourist place for people to come to.”

In the words of Gulf Bank’s Accad: “We just need to get on with it”.

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