In late September, the International Monetary Fund (IMF) issued a report that objectively assessed the Kuwaiti economy and listed its strengths and weaknesses. The report pointed out that the rise in oil prices has led to a surplus in Kuwait’s general budget and current account. The report said that the surplus remained high and has reached 33% of the 2012 gross domestic product, despite the rise in current expenditure allocations.
According to the finance minister, the budget achieved a surplus of 12.7 billion Kuwaiti dinars [$45 billion] in fiscal year 2012-13. That was due to higher oil prices and to an oil production level of about 3 million barrels per day, which is approaching full capacity. The total 2012 current account is $79.8 billion and is estimated to be $72.1 billion for 2013.
These indicators confirm the strength of Kuwait’s financial situation, enhance its ability to meet its domestic and foreign obligations, raise its financial reserves and increase the value of Kuwaiti-owned assets abroad. Over the past two years, the Kuwaiti government has raised the funding of the “future generations fund” from 10% to 25% of total government revenues.
The performance of the oil sector is strong, but the non-oil sector has room for improvement. The report said that the growth rate in the non-oil sector went from 0.9% in 2009 to 2.2% in 2012. That rate is expected to reach 3.3% in 2013 and may rise to 4.4% in 2014. After the Central Bank of Kuwait cut its discount rate to 2.0%, the potential to improve the level of indebtedness of the non-oil sector has become attainable, which would improve the investment opportunities for several economic activities.
The IMF report showed that bank credit rose in June at an annual rate of 6.3%. Local banks have high liquidity. At the end of August, bank deposits totaled 34.6 billion dinars [$122.5 billion], of which 29.8 billion [$105.5 billion] were for the private sector and 4.8 billion [$17 billion] for the public sector. Of that, 28.2 billion dinars [$99.9 billion] were used to fund various economic sectors, which confirms that the funding remains below the banks’ financial resources. So, cutting the discount rate is possible.
The financial situation is sound, but are the macroeconomic conditions satisfactory? Kuwaiti officials should not relax and avoid making important and difficult decisions due to the availability of funds, the improved performance of the non-oil sector to some extent and the strength of the banking system.
Public spending reveals that there is more current spending than capital spending. Even the capital expenditure allocations are not entirely spent due to bureaucratic problems, weak implementation and slow decision-making at all administrative levels. So projects approved in the development plan from 2010-11 to 2013-14 have been disrupted. And a project that is supposed to take two years now takes five, not to mention the high capital costs. The private sector remains absent from these development projects and from projects related to infrastructure and facilities such as electricity, water, telecommunications, transportation, education and health care.
According to the plan, the private sector will undertake and own a number of projects. But present laws have disrupted the private sector’s role in housing, utilities, oil and other vital projects. The plan, which has stressed raising the private sector's contribution in the local production, has not achieved the desired results so far, as it approaches the end of its time frame.
Human development is still far from achieving its goals. The country still depends on imported labor, which makes up 84% of the total labor force in the country. In past years — when the plan was supposed to be implemented — the government adopted, under pressure from parliament, policies that raise salaries and benefits in public institutions. That has caused fewer citizens to join the private sector. It goes without saying that public sector employment has become a significant burden on the state, not only financially but also economically and socially, with high rates of underemployment in various institutions and lower productivity among employees who are citizens.
The policy to support employment in the private sector has failed in raising the national employment rate after public salaries were raised. Salaries are important in attracting citizens to the labor market, but the educational system is still unable to provide the skilled workforce required by private sector enterprises. In this context, the IMF report noted the need to enhance the quality of education and vocational training and encourage women to join the workforce.
According to statistics, about 20,000 Kuwaitis enter the job market every year. So new concepts of employment are needed. Kuwait also needs to improve working conditions and expand privatization, which expands the private sector.
In conclusion, Kuwait’s financial situation is sound, but the country still has significant structural problems that must be addressed.