Kuwait's non-oil sector continues to disappoint

The biggest challenge facing Kuwait as it looks to invigorate its non-oil economy will be building political consensus between the executive and parliament. Published in MEED, 23 March 2012

There may be a new National Assembly (parliament) in Kuwait and a new cabinet, but any hopes that the two sides might find a way of working together have quickly dissolved.

Opposition candidates dominated parliamentary elections on 2 February, securing 34 of the 50 seats available. Already one of them, Saleh Ashour, has filed a motion to question Prime Minister Sheikh Jaber al-Mubarak al-Hamad al-Sabah over a corruption scandal that plagued the previous parliament.

Political cooperation in Kuwait

There is no doubt that the country would benefit if the two sides agreed to cooperate more. The economy is growing at a steady pace. Gross domestic product (GDP) rose by an estimated 5 per cent last year, according to the Washington-headquartered IMF. However, this was mainly because of the high price of oil on international markets. The rest of the economy is performing relatively weakly, hampered by the government’s inability to pass through reforms and push ahead with major projects.

“The economy has been pretty consistent over the post-financial crisis period, since 2008-09,” says Daniel Kaye, senior economist at National Bank of Kuwait (NBK), the country’s largest bank. “We’ve had decent, but unspectacular growth, and in all likelihood this year and next year will see more of the same, with GDP growth around the 5 per cent mark.

“The oil sector is obviously very strong, which is translating into very strong fiscal and trade balances. The non-oil sector is considerably more sluggish.”

Reinvigorating the non-oil sector is perhaps the biggest economic challenge facing the government. It is certainly not lacking in ideas on how to do this, but what it does lack is the ability to put them into action.

Kuwait is in the middle of a KD31bn ($110bn) five-year development plan, running from 2010 to 2014, which involves substantial investment in infrastructure. In addition, there are a number of programmes to boost private sector activity, including the privatisation of some state assets and a public-private partnership (PPP) programme, which is being overseen by the Partnerships Technical Bureau.

However, in all these cases, the results have been disappointing. For example, figures available to date suggest that the government is falling far short of its investment targets for the development plan. In the first six months of the scheme, spending levels were just 15 per cent of the expected KD5bn total for that year, according to local investment bank Kuwait Financial Centre (Markaz).

Meanwhile, most of the PPP schemes have yet to get off the ground and the planned privatisation of Kuwait Airways is currently on hold, while the company is restructured. Other assets have been mooted for privatisation including Kuwait Stock Exchange and Kuwait Post, but as yet there is no timetable for when any deals might happen.

As ever in Kuwait, the key problem is the mistrust between the government and parliament, with the latter often blocking the former’s bills.

“There’s a basic lack of trust,” says Kristian Coates Ulrichsen, Kuwait research fellow at the London School of Economics. “The parliament doesn’t trust the government. There’s been a steadily rising level of opposition over the past 10 years. With an even stronger opposition majority now, I think it is even less likely that anything will get through.”

Making leglislative concessions

Occasionally, the government has been able to get some initiatives through the legislature, but only after making concessions, which undermine their effectiveness. A case in point is the Privatisation Law, which was passed by the parliament in May 2010.

The restrictions that MPs placed on any state sell-offs mean that a number of sectors are off limits, including oil and gas production, refining, health and education. In addition, tough measures were imposed to protect Kuwaiti staff in any firm that is sold, which can make the businesses less attractive to potential buyers.

“It is arguably the most democratic state in the GCC and that being the case they have more political hurdles to get through,” says another senior economist based in the region. “They have a very turbulent political scene and that’s really stood in the way of them being able to mobilise their oil resources and develop their economy. Popular sentiment has prevented them from opening up and privatising.”

The problems are widely recognised at the most senior levels in Kuwait. In an interview with the official Kuna news agency in February, Crown Prince Sheikh Nawaf al-Ahmad al-Jaber al-Sabah stressed the need for the two sides to find a viable working relationship.

“Cooperation between the two authorities at present is no longer just prudent, it is vital,” he said. “Cooperation would enable the nation to realise a great deal in the field of overall development and the economic situation.”

They will get the chance to at least try to work together on a number of economically important bills in the coming weeks and months. A draft law covering the third year of the development plan, which is due to start in April, has been sent to parliament. In addition, a draft budget is being drawn up and is currently being examined by the Supreme Council for Planning & Development before it too is sent to parliament for approval.

Kuwait’s spending plans

The budget is expected to include spending of KD22bn for the fiscal year 2012/13, starting on 1 April. That marks a rise of 13 per cent from KD19.4bn for the current fiscal year. The budget is expected to be based on an average oil price of $65 a barrel, which is $5 a barrel higher than the 2011/12 budget, but still well below current oil prices.

The proposed deficit is thought to be about KD8bn for the coming year, before the mandatory transfer of 10 per cent of government revenues to the Future Generations Fund. However, in all likelihood Kuwait will end the year with a large surplus, given the conservative oil price that the budget is based on.

That has certainly been the case in past years. In 2010/11, for example, the government budgeted for a deficit of KD6.4bn, but ended the year with a surplus of KD5.3bn. The surplus for the current fiscal year, ending in April, is expected to be higher still.

These large surpluses highlight the problem the government has with its spending plans. In most years, Kuwait’s government tends to struggle to spend as much as it hopes to due to parliamentary opposition to its policy programme. In 2010/11, it only reached its KD16bn target due to an Emiri grant of KD1,000 per person late in the year.

There are some in Kuwait who will be glad if the government fails to reach its spending target for this year. The long-serving governor of the Central Bank of Kuwait, Sheikh Salem Abdulaziz al-Sabah, resigned in February, citing the high level of government expenditure and the dangerous impact this was having on the national economy. He has yet to be replaced.

It is not just government spending that can be slow, bank lending rates are also subdued, growing by just 1.3 per cent last year, according to central bank figures. This is partly due to the problems at local investment companies, which are still struggling to put their own houses in order following the economic crisis of 2008-09. Lending to investment companies fell by 18 per cent in 2011. Consumer lending is more robust, but business lending is also weak.

“In our view, the government needs to adopt a much more aggressive approach to economic reforms in order to take Kuwait’s non-oil economy onto a higher and more dynamic economic plane, perhaps in line with what’s happening in other places in the Gulf, like Dubai, Qatar, Abu Dhabi and even Saudi Arabia,” says Kaye.

“In the business sector, everyone is waiting for the development plan. We hope that will be the next big catalyst for lending to businesses. Hopefully, the government can get moving on that soon.”

Hydrocarbons dominant Kuwait’s economy

In the interim, the combination of high oil revenues and the political log-jam that prevents reforms means that the hydrocarbons sector will continue to dominate the local economy. According to NBK, the oil and gas industry accounted for 49 per cent of the country’s GDP in 2010. With production levels raised last year to help offset the loss of Libyan oil output, that share is likely to have increased.

Few other industries are of any meaningful size in comparison, although the financial services sector accounts for 10 per cent of GDP and the transport and communications sector a further 8 per cent. For as long as the political inertia persists, there is little chance that the country’s economic situation will alter. The costs of this for Kuwait are difficult to quantify, but it seems clear that, unless the situation changes, it will continue to lag behind its regional peers.

“For the government, survival is the name of the game; survival and trying to pass what it can and reach compromises where it can with the opposition and avoiding some of the more contentious issues,” says Coates Ulrichsen. “They’re falling further and further back. It’s not as if they’re surrounded by a sea of slothful competitors. They’re surrounded by some of the fastest developing countries in the world.”