ECONOMY: Pressure for change eased by upturn

28 February 1997

IN an economy dominated by the oil sector, last year's $3 a barrel rise in crude prices was good news indeed. Boosted oil income help to cut the budget deficit by half and eased the immediate pressure on the authorities to either impose taxes or reduce benefits, or both.

There has also been good news for Kuwait's financial reserves. Unofficial estimates suggest the value of the Reserve Fund for Future Generations has rebounded to $40,000 million due to a rise in earnings from Kuwait's overseas investments. Some of this income is creamed off to cover the budget deficit. This is a relatively painless exercise while oil prices and investment income are high.

Oil income aside, a number of other factors have improved sentiment. In December, the government paid off the last instalment of the $5,500 million international loan raised to cover costs for rehabilitation and reconstruction after the Iraqi occupation, and the country is now free of all official long-term debt. A trouble-free northern border for the past two years and the continuing US commitment to defend the country has also made Kuwaitis more confident about bringing their money home. This sense of security, coupled with the on-going privatisation programme, has had a startling effect on the Kuwait Stock Exchange which has reached new highs.

The bad debt issue, which plagued the economy for more that a decade, is closer to being conclusively resolved. There has been a strong response to the deadlines for the repayment of more that $15,000 million of debt, most of which stemmed from the crash of the unofficial Souk al-Manakh stock exchange in 1982. Earlier there were concerns that debtors would still not pay up, in the belief that the government would hesitate to enforce penalties for non-payment. In the event, more than 70 per cent of debtors have been paying their instalments on time and the government is pursuing non-payers through the courts.

Growth - Gross domestic product (GDP) grew by 8.2 per cent in 1995 to KD 7,952 million according to figures published by the IMF. This was almost exclusively due to the 11 per cent increase in the value of output from the oil sector caused by higher oil prices. GDP growth will remain robust if oil prices stay at current levels.

A figure for inflation is not published in Kuwait, although it is widely estimated to be about 4 per cent. The population, which is growing by about 5 per cent a year, is 2 million, of whom only 38 per cent are Kuwaiti nationals.

Budget - The government's budget for the fiscal year to June 1997 puts total revenues at KD 3,000 million, of which KD 2,558 million is from oil sales. The budget is based on an average oil price of $13 a barrel, well below current market prices. This means the deficit will be less than the KD 1,210 million predicted. An actual deficit on this scale would be close to 15 per cent of GDP.

Expenditure for this year is put at KD 4,210 million, almost unchanged from KD 4,126 million in fiscal year July 1995- June 1996. The government is committed to reducing spending, but is finding little scope for cuts. Wages and salaries account for about 27 per cent of the budget outlays and as the government is obliged by the constitution to provide employment for Kuwaitis, this figure is set rise inexorably as more nationals join the job market.

The other big drain on resources is defence, which accounts for about half of government spending. Jasem al-Saadoun, general manager of Al-Shall Economic Consultants, believes that this one area where the government could cut back. 'It doesn't make sense spending all that money. We can't even utilise what we buy,' he says. However, most analysts believe that the defence budget will remain unaltered until there is a change of regime in Iraq.

Balance of payments - The current account surplus grew by almost 70 per cent in 1995 to KD 1,253 million, according to provisional figures issued by the Central Bank of Kuwait. The increase was largely due to the growth in overseas investment income, which rose to KD 1,197 million in 1995, from KD 827 million in 1994. Kuwait has had a current account surplus since 1992. In 1991, it recorded a KD 7,527 million deficit because of the invasion.

Kuwait's trade surplus grew by 23 per cent in 1995 to KD 1,635 million. Exports totalled KD 3,770 million in 1995, 95 per cent of which was oil. Imports totalled KD 2,135 million, up 9 per cent on the year. About 40 per cent of imports are consumer products, 25 per cent capital goods and the remainder intermediate goods.

Money supply - Money supply in its broad definition (M2) stood at KD 7,107.2 million at the end of the third quarter last year. This is down by 3.7 per cent from the end of the previous quarter. The fall was due to a 3.6 per cent decline in time deposits, a 5 per cent drop in savings deposits, a 5.4 per cent drop in certificates of deposit and a 6.3 per cent decline in foreign currency deposits.

Privatisation and the Kuwait Stock Exchange (KSE) - Strong corporate earnings, excess liquidity and the Kuwait Investment Authority's (KIA's) sale of state holdings helped the KSE reach new highs in 1996. The index rose by more than 40 per cent and weekly turnover regularly topped $1,000 million. Al-Shall Economic Consultants expects the market to rise by 10-25 per cent this year. There is also the prospect of the first direct foreign portfolio investment in the KSE in 1997, with a number of international banks holding talks with potential Kuwaiti partners.

The KIA privatisation programme is continuing apace. The government's investment arm has sold KD 653 million worth of shares since mid-1994. KIA managing director Ali al-Bader says the authority has another KD 1,000 million worth of shares to sell at current market prices.

There has been some criticism that the KIA has been too slow in selling off its holdings in light of the strong performance of the stock exchange over the past 18 months. 'The KIA has made a mistake,' says Al-Saadoun. 'It did not use the opportunity in 1996 to sell most of what they had.' But Al-Bader defends the KIA's approach. 'We care about the market. We have to be sure that it is not hit by more shares than it can handle,' he said in an interview on 20 January.

The KIA chief advocates greater transparency in the market and calls on brokers to invest more money in research. 'People do not just rely on inside information and gossip. The market is driven by hard data. But there is scope for more transparency and brokers should improve their efficiency,' he says. 'We do not have the research we need. Brokers say they cannot afford it, but the money they made last year should pay for proper market analysis.'

The National Assembly is due to debate a privatisation law this year. If passed, and approved by the emir, the sell-off of government utilities and state companies such as Kuwait Airways Corporation will theoretically be permissible.

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