The story of Kuwait’s economy continues to be a frustrating tale of heavy reliance on public sector spending and a government that consistently misses its targets, particularly when it comes to capital expenditure. With oil prices high, it means there is no great urgency to change course at the moment, but in the longer term, the pressure is likely to increase.

When the most recent elections were held for the National Assembly (parliament) in December 2012, there were hopes that it might at last lead to some progress being made with much-needed economic reforms. Since then, there have been some positive signs. In January, MPs gave the go-ahead for the privatisation of Kuwait Airways and several major projects, such as the $2.6bn Subiya Causeway across Kuwait Bay and the $2bn Al-Zour North independent water and power project, are also gradually moving forward.

Government spending

Coupled with the introduction by emiri decree of a new Companies Law in November last year, it suggests a better environment for the private sector. But the reality is that almost everything in Kuwait ultimately depends on government spending. According to the Washington-based IMF, some 80 per cent of Kuwaitis work in the public sector, while private sector activity is largely dependent on government spending and expatriate labour. Unfortunately for Kuwait, there are a number of problems with the way the government chooses to spend its money.

This past year, spending could have come somewhat below that level, at 90 per cent or even lower

Elias Bikhazi, National Bank of Kuwait

Full-year figures for the fiscal year 2012/13, which ended in March, are not yet available, but the evidence from the first 11 months is not encouraging. While revenues have come in at more than twice the full-year budget projections, mainly because of the conservative oil price of $65 a barrel set in the budget, the amount of spending has lagged well behind.

In the 11 months to the end of February, total spending was running at just half the full-year budget projections, with capital expenditure even worse at just 35 per cent of the planned full-year total. Even allowing for a late surge in spending in the final month of the fiscal year, it is clear the government will not reach its target.

“The government has spent 93 per cent of its budget on average in the past five years,” says Elias Bikhazi, chief economist at National Bank of Kuwait (NBK), the country’s largest bank. “This past year, spending could have come somewhat below that level, at 90 per cent or even lower.”

As a result of the high revenues and limited spending, NBK is projecting a budget surplus of around KD15bn ($52.5bn) for 2012/13. But it is not just a question of how much is spent. Where the money goes is equally important and here too there are long-running problems.

One of the biggest areas of spending is on wages and salaries for public sector employees, which accounted for KD3.1bn of the KD10.6bn spent in the 11 months to February. Subsidies and debt relief for Kuwaiti nationals is also significant. In early April, parliament passed a law requiring the government to buy KD744m-worth of citizens’ bank loans taken out before March 2008. While such measures help consumer spending, the money also tends to lead to higher imports, reducing the impact on gross domestic product (GDP).

“The economy is dependent on what the government does in terms of its spending programme,” says another economist based in Kuwait. “The government needs to stimulate the economy, which implies spending more money, but it needs to spend it on the right things. Kuwait could do with a boost to its infrastructure and the balance of spending should shift more towards implementing sizeable projects. Current spending doesn’t have the same effect.”

Slower growth

As a result, GDP forecasts for the coming years do not make particularly happy reading. London-based Capital Economics says it expects Kuwait’s GDP to grow by an average of 2 per cent this year and next, compared with 3.3 per cent for the GCC as a whole.

The IMF takes a similar line, projecting 1.1 per cent growth this year and 3.1 per cent next year, compared with an average for the region’s oil exporting countries of 3.2 per cent in 2013 and 3.7 per cent in 2014.

The lower growth means Kuwait will continue to lose ground to its regional rivals, which have proved better able to diversify away from a reliance on oil and gas revenues.

In the short term, this is not necessarily a huge problem for Kuwait – it has plentiful financial reserves and almost no debt so it could easily cope with a period of lower oil prices.

In the longer term, this will need to change. Capital Economics estimates that if the government continues to increase spending at its current pace, its break-even oil price could rise to $120 a barrel by the end of the decade.