ECONOMY: Reform tops the post-war agenda

25 February 1994

ON 18 January, Finance Minister Nasser Abdullah al-Rodhan bowed to the inevitable. In his frankest statement yet about government finances, he declared that budget reform is now at the top of the political agenda. Unless state spending is sharply reduced, the minister warned, living standards are going to fall.

Kuwaitis were not surprised by the substance of Al-Rodhan's remarks, merely that it had taken the government so long to admit it. As one Western diplomat puts it: 'It hardly takes a rocket scientist to see that, since liberation, Kuwait has been living well beyond its means.' Analysts such as local economist Jasem al-Sadoun of Al-Shall Economic Consultants, a strong critic of the government's lack of financial strategy, now feel vindicated. 'For the first time, the government is talking about controlling the budget deficit,' says Sadoun.

When Oil Minister Ali Ahmad al-Baghli later said that falling oil prices had wiped more than $200 million off expected revenues in the last two months of 1993 it was tempting to imagine that a concerted government campaign had begun.

The ailment has now been officially diagnosed but there is little consensus about how to treat it. Government officials talk of slashing salaries, subsidies and other costs across the entire state sector. However, there are few specifics, no timetables and there has been no action so far. 'There is a general understanding of what needs to be done,' says one high-ranking official in the oil industry. 'But there is a lack of will on how to see it through.'

The politicians don't want to provoke a public backlash. 'Kuwaitis have had it too good for too long,' says another diplomat. 'Any change is going to be painful.' Many members of the national assembly are already restive, if for different reasons. They have no wish to take the tough decisions when it was an unelected, post-liberation government whose policies accentuated the problems. Equally, government ministers would not welcome the prospect of defending unpopular decisions.

The current economic malaise has many causes. The Iraqi invasion cost at least $100,000 million in payments to the allies, damage to industries and buildings, loss of oil earnings and the costs of government compensation. Low oil prices last year hampered the recovery. However, the fundamental problems of the state-dominated economy are long-standing. They include:

An unwieldy bureaucracy. More than 95 per cent of all employed nationals work for the state. The wage bill of KD 1,160 million accounts for 29 per cent of all government expenditure. The guarantee of public-sector jobs for graduates has stunted private-sector development and encouraged inefficiency. The practice is clearly unsustainable - with 45 per cent of the national population under the age of 15, the labour force is set to double over the next 20 years.

Capital outflows. Nationals and an expatriate labour force estimated at 800,000 send about $10,000 million out of the country every year. There are few profitable local investment opportunities and investor confidence, particularly since the invasion, is low.

The welfare state. Benefits exceed anything available in the most advanced social democracies of Scandinavia. Education and health care are free. Housing costs are nominal, and electricity and water prices are heavily subsidised. Retirement pensions range between 65-95 per cent of the last monthly salary.

Minimal economic diversification. Oil accounts for more than 90 per cent of export earnings and contributes 50 per cent of gross domestic product (GDP).

Reforming the economy will be a long task and will require radical measures. MEED asked three leading local figures what prescriptions they favoured and whether they thought the population, as well as the politicians, were prepared to accept shock treatment. All three pick up on themes that are now widely debated.

Ali Rashid al-Bader, managing director of the Kuwait Investment Authority (KIA). As head of the state's most important investment body, Al-Bader advocates an extensive privatisation programme and limited cuts in subsidies on public services. He expects that, by the end of 1994, several state utilities will be ready for privatisation. The government has already signalled its intention to sell off telecommunications, petrol stations, and electricity and water services.

KIA is returning some of its local assets to private hands. Two mutual funds are expected to be established by March. The first, to be set up with Kuwait Foreign Trading, Contracting & Investment Company, will acquire shares in companies owned or part-owned by KIA. The second will be launched in association with a local real estate company and will entail KIA providing investors with a list of real estate opportunities to choose from. Both funds will have equity of KD 20 million and be open to local and non-Kuwaiti subscription, Al-Bader says.

Al-Bader says the funds will provide new investment opportunities for the population. 'The most important thing is to create investment vehicles to enhance and enrich opportunities,' he explains. 'One reason why there have been capital outflows has been the lack of openings. We are looking to get people who are not currently involved in the stock market participating.' He points to the improved performance of companies listed on the Kuwaiti stock exchange over the past year as evidence that market confidence is returning.

He also sees scope for reducing subsidies on certain services provided by the government. However, he argues that any price rises should not be across the board. 'Take electricity and water for example. Those people who exceed the average household consumption, should have to pay an extra charge. In this way, some 80 per cent of the population will be unaffected by the measure,' he says. The rationale for such a move is simple: 'The idea is that government should not institute a fee structure to get money, but to push down consumption.'

Al-Bader believes the government should provide incentives to the private sector to employ nationals. 'Plans have been drawn up to encourage the private sector to take graduates in,' he says. 'For instance, the government could contribute 50 per cent of a graduate's salary to the private-sector employee for the first two years of employment.'

He acknowledges that the budget deficit is a matter of urgency. 'The fall in oil prices is affecting us like everyone else,' he says. 'We have to seriously tackle the issue. However much money you have, you always have to be cautious about the future.'

Hilal al-Mutairi, director-general at the Kuwait Chamber of Commerce & Industry. Al-Mutairi has a clear and simple message. 'I think the country needs deregulation,' he says. 'We hear a lot about privatisation, but still we do not see any results.'

Al-Mutairi's vision of privatisation extends far beyond state sell-offs. Government red tape has suffocated industry in the non-oil sector, he argues. 'If I want to open a factory here, I have to go through so many different authorities and documents....The government has got to get rid of the regulations and reduce its role in the economy.'

He also discounts concerns about the ability of private businesses to step into the shoes of state enterprises. 'Why do we sit and ask this question? Let the market decide if the private sector is strong enough to assume greater responsibilities.' For evidence of a local entrepreneurial spirit, he casts his mind back 20 years. 'This was the commercial centre of the area for 200 years, before the oil era. I personally believe that Kuwaitis are still very good businessmen.'

Al-Mutairi agrees that controlling the deficit is the most pressing task. Service industries should be encouraged and the government's wage bill reduced. Painful decisions should not be balked at, because, in his opinion, the size of the deficit provides an opportunity for a new beginning. 'We have to take action to stimulate the economy,' he argues. 'We are starting all over again from this point.'

Jasem al-Sadoun, general manager of Al-Shall Economic Consultants. Al- Sadoun has been the most vocal advocate of economic reforms since liberation. He has consistently argued that privatisation, a cut in subsidies and a reduction in state employment is a must if government finances are to be put in order again.

Al-Sadoun admits that a solution to the present difficulties will not be without a price. 'People will lose something in the short term but it will pay off in the future,' he says. To prepare the ground for the unpopular measures, he favours the launching of a public awareness campaign in which the government will lay out its goals and solutions to the population. At the same time, he says that co-operation is possible in implementing the measures, provided the government, the national assembly and other institutions sit down behind closed doors to thrash out a coherent economic reform plan.

He says there is still room to manoeuvre on cutting expenditure. Slashing defence spending is the easiest option. Equipment purchases are unnecessary, in view of the defence pacts with the UK, the US, France, and Russia, and have little direct impact on economic activity. He also argues that the government should scrap projects he considers to be white elephants. These include the plan to build new cities close to the Saudi and Iraqi borders, and developing Falaikha island.

Al-Sadoun views the development of the private sector as critical. 'Privatisation is not a choice, it is a must,' he says. Nationals will invest at home if there is political and economic security, as well as accountability in high office. The 30 per cent stake sold by KIA in Kuwait Food (Americana) last year proves that there is a willingness by Kuwaitis to invest in government assets, he says.

Adjusting subsidies should also be considered, Al-Sadoun says. Electricity and water charges are prime candidates. Taxes could also be applied on 'unnecessary' imports, such as luxury items and foreign labour.

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