Kuwait’s economy has stalled in recent months, and much of the blame is being laid on the bitter infighting between the executive and legislative arms of the country’s government, rather than the global banking turmoil that has caused problems elsewhere.

The infighting has led to political and economic deadlock. With the price of crude oil, the primary source of national income, at half the level it was a year ago and credit markets drying up, Kuwait requires urgent action to reinvigorate its economy.

A $5bn stimulus package has already been agreed by the cabinet, but the real problem facing the economy is not a lack of funds. For progress to be made, the National Assembly (parliament) and the cabinet need to find an effective way of working together.

Structural change

As a result, much depends on the outcome of fresh parliamentary elections that are due on 16 May and the subsequent selection of a new government by Kuwait’s ruler, Emir Sheikh Sabah al-Ahmed al-Jaber al-Sabah.

Senior financial and political sources in the country say that even beyond the elections, there needs to be major structural change in the country’s bureaucracy – the unwieldy public sector employs the vast majority of Kuwaitis and progress can often be tortuously slow on major government contracts.

“The real problem with projects, with economic stimulus, is structural,” says one senior source at the Central Bank of Kuwait. “It is because of bureaucracy that things do not get done.”

One source close to the cabinet and the ruling Al-Sabah family agrees. “The problem is not the parliament; it is government bureaucracy,” says the source. “There needs to be a change to the way the country is run. It has nothing to do with the elections. We cannot pass projects because we have 200,000-300,000 people to do work that requires 50,000. What takes several weeks somewhere like Dubai takes months here.

“If the election brings in some new faces and new thoughts on Kuwaiti bureaucracy, then there could be a change.

“If it creates a feasible five-year plan for the country’s development, and they ignore all of the other nonsense like calls for wiping out debt, then maybe something will happen,” the source adds, referring to previous calls from some MPs for state funds to be used to pay off Kuwaitis’ personal debts.

Kuwait has not always suffered from such bureaucratic stasis. In an office in Kuwait City, one international oil company executive tells MEED how surprised his fellow oil men were by the speed with which Kuwait repaired its energy infrastructure after the 1990 invasion by Iraq.

“There were 700 oil wells set on fire,” says the oil executive. “The estimate was that it would take one to three years to get it put out, but the Kuwaitis got it done in six months. In a time of crisis, things get done here.”

However, this has rarely been the case in times of stability, he says.

On paper, Kuwait has gone from strength to strength since Iraqi forces were removed from the country 18 years ago. It had a budget surplus of KD6.09bn ($20bn) in 2008-09, marking a 10th consecutive year of multi-billion-dollar budget overruns.

Of its revenues of KD21.1bn in the 2008-09 financial year, KD19.9bn, or 94 per cent, came from sales of crude oil, of which Kuwait holds the world’s fourth-largest reserves.

Kuwait Petroleum Company, the state-run body responsible for the country’s energy sector, said in March that oil production and distribution capacity was at 3 million barrels a day (b/d). At its lowest point, during the Iraq war, production fell below 100,000 b/d. “It is amazing what they have achieved, no question,” says the oil executive.

At the time of writing, however, Kuwait has no parliament and the cabinet tendered its resignation more than a month ago, although it continues to operate.

In recent years, major projects have suffered because of the lack of consensus between these two arms of government. Kuwait’s projects market includes vital infrastructure schemes and is worth more than $320bn, according to Gulf projects tracker MEED Projects, but has stagnated despite the ready availability of capital. Kuwait has $500bn in available funds and assets, according to Randa Azar Khoury, chief economist of the National Bank of Kuwait (NBK). However, much of this does not get spent.

“About 50 per cent of our 2008 construction budget was put back in the coffers because the government was not able to get projects through,” says one source close to the country’s cabinet.

Preliminary results suggest that the country’s expenditure for 2008 stood at KD15bn, KD4bn less than the budget figure of KD19bn for the year. Parliamentary infighting and, according to some commentators, a lack of political will on the part of the executive, are to blame for schemes such as a $15bn refinery at Al-Zour grinding to a halt in what one contractor in the country describes as “total political stasis”.

These problems have compounded the effects of the global economic downturn on the country. Both NBK and the Central Bank of Kuwait forecast that the economy will contract in 2009-10 largely because of falling oil prices.

Private participation

As MEED went to press, the oil price was close to $50 a barrel, down from a high of more than $147 a barrel in July 2008. The total number of people employed in Kuwait also fell by 0.2 per cent in 2008 to 2.1 million, mainly because of expatriates losing their jobs. Non-Kuwaiti employment fell by 0.9 per cent last year to 1.75 million, and while 15,000 more nationals found jobs the same year, the majority – 262,000 of the 336,000 total – remain employed by the state.

Kuwait needs the private sector to grow to provide employment for future generations. With more than 20,000 students enrolled at Kuwait University alone, it is doubtful that the public sector can continue to support the majority of the population. A reinvigorated projects market, led by the public sector, could provide the necessary jobs outside the state sector.

“These projects are necessary to revive the private sector and revive the public sector,” says Kamel al-Harami, a local independent economic analyst.

“We need to see the public and the private sector get moving,” says the senior source at the central bank. “We need to induce the private sector to form a partnership with the public, but [the major projects] are government projects. We need to improve the business climate, and to do that we need political consensus.”

There are signs that there will be changes in leadership after the elections. Because of the decision of some MPs to withdraw from the forthcoming elections, there will be a minimum change of 30 per cent in the parliament’s 55-seat membership, says Al-Harami.

Many observers in Kuwait hope the parliamentary elections – the third in as many years – will also be followed by the appointment of a new prime minister, rather than the reappointment of Sheikh Nasser Mohammed al-Sabah.

Al-Harami says the new government needs to show that it has clear plans for the future. “It is not the parliament that is the issue but the government,” he says. “The majority of people are expressing their opinions louder than before. They are worried that the government does not have a real programme for development.

“They [the new government] should push to invest more in education and the oil sector. What is the point in allocating $80bn for projects if they never happen? They need an economic roadmap saying that each year they are going to build a specific number of schools, roads and hospitals.”

The first major test for the new parliament will be to approve the economic stability package agreed by the cabinet in March and ratified by the emir in April. The bill encourages Kuwaiti banks to lend to local companies, with the state guaranteeing 50 per cent of any loans. The central bank is permitted to underwrite a total of KD1.5bn ($5.2bn).

If two thirds of MPs vote against the bill, the parliamentary deadlock is likely to begin again. When he dissolved parliament, the emir called for a new government to focus on consensus for the good of the country. If this could not be reached, he said, more severe action would be taken.

This is widely seen as an allusion to a possible suspension of parliament. Some in the country are hopeful that this threat, coupled with a strong government, could set a fresh agenda for progress. “I hope we get some good people in,” says the source close to the cabinet. “But here, you cannot expect anything.”