Kuwaitis must be tired of hearing about ‘financial sustainability’. After the new government announced its intention to implement economic and financial reforms, that seems to be all anyone wants to talk about.
Economists agree that financial sustainability requires the availability of inflows and the accumulation of reserves that provide the government with sufficient capacity to meet current and future spending obligations. A report issued on 2 June by Al Shall—a Kuwaiti consulting firm—said Kuwait was over-reliant on oil revenue, which has become a concern since oil prices began to fall from their 2014 highs after the US increased production.
A position of strength
Kuwait has made hay while the sun has shone. It has more than $900bn in sovereign assets, which can bolster public finances and support the treasury in the future. Since the Future Generations Reserve Fund (FGRF) was set up in 1976, the country has not channelled the proceeds of its sovereign investments into the public purse. Yet oil revenue will eventually decline—perhaps sooner rather than later—so planning for the future will require reform, not least in public sector employment policies and various state subsidies.
Financial sustainability will require a different economic structure, with a streamlined public sector, an enhanced private sector, and more Kuwaitis in the workforce. After all, other oil-rich states have managed their oil revenues prudently.
Learning from others
In the 1950s, when Iraq was a monarchy, oil revenues were used for infrastructure projects and initiatives that generated economic and social returns, with government spending reliant on taxes, duties, and customs.
Norway began producing oil in 1969 and established its sovereign fund in 1990. It adopted a philosophy of public benefit for managing its oil revenues, with returns going towards national healthcare, education, and other public initiatives. In choosing where to invest its sovereign wealth, the Oslo government diversified risk across several economic sectors, opting to put its oil money into only those companies and countries deemed relatively stable.
The idea of financing Kuwait’s budget deficit from its sovereign wealth fund (the FGRF) seemed to contradict its original goal, which, as the name suggests, is to provide financial support to Kuwaitis after the decline in oil revenue.
Reserves and debt
Between 2014 and 19, the country dipped into its General Reserve Fund (different from the FGRF) to the tune of $68.5bn to meet its obligations after the oil price dropped. Only a post-COVID oil price rally prevented the reserve from further depleting. Kuwait’s government wanted a new public debt law to allow borrowing of around $65bn over 30 years. Still, the parliament rejected this, wondering what the government would do with all those borrowed billions—and how it would repay them.
Indeed, Kuwait missed several opportunities to borrow funds when bank interest rates were close to 0% before they rose again in early 2022. Public debt in Kuwait remains low, just 9% of gross domestic product (GDP), and the government has taken steps to liquefy assets from the General Reserve Fund by selling some assets to the FGRF.
Seeking sustainability
The ratings agency Fitch says the break-even oil price for the government budget is $90 per barrel, based on an oil production level of about 2.4 million barrels per day. Kuwait achieved a surplus of around $21bn in the fiscal year ending 31 March 2023, but its public sector remains bloated, with thousands more being hired at will. Labour subsidies are also given to private-sector employees and self-employed workers.
With an estimated 20,000 new arrivals yearly, the amount needed to cover wages is huge and growing. This constitutes the biggest drain on the government budget, around 61% this fiscal year. That is more than $80bn annually allocated to state salaries. The budget includes projections for a deficit of around $19.2bn, assuming an oil price of $70 per barrel. This is a concern, given that Kuwait usually runs surpluses and has no other significant sources of government revenue beyond oil.
Distortions and taxation
Circumstances may change. The government may be compelled to revisit the budget law and amend it to account for sovereign fund revenues, yet few would welcome this. Instead, financial authorities should seek to rationalise spending.
This should include guidelines and limits on employment, subsidies, and pricing of government services to improve non-oil revenues and reduce current spending. To achieve the dreaded 'financial sustainability,' Kuwait must address its economic distortions, relieve the state from its various commitments (including the ownership and management of vital facilities), and bring the private sector in from the cold.
Kuwait should also introduce a value-added tax (VAT) like other Gulf countries. If government spending commitments can be trimmed and then met with daily income rather than rainy-day savings, Kuwait will be on the right track.
