In numbers

$60 a barrel: Oil price assumed to calculate Kuwait’s 2011/12 draft budget

$43 a barrel: Oil price assumed to calculate Kuwait’s 2010/11 budget

Source: MEED

The Kuwait government has announced a budget that for the third successive year plans for a deficit.

Finance Minister Mustafa al-Shimali has secured the backing of the cabinet for his draft plan to set an expenditure target of KD17.9bn ($64.1bn) for the 2011/12 financial year.

Revenues are projected at KD13.4bn, implying a deficit of KD4.5bn. Kuwait has assumed a conservative price of $60 a barrel for oil in its calculations. Most analysts believe crude prices will average about $100 a barrel this year, supported by strong demand from China and other emerging economies. If oil revenues do live up to market expectations, Kuwait is once again on course for a healthy surplus.

Deficit to surplus

“The budget deficit is not a big deal as Kuwait is almost always very conservative and budgets a deficit,” says Faisal Hasan, head of research at the local Global Investment House (GIH).

“Oil prices will certainly be above $60 a barrel for the fiscal year. The 2011 Kuwait Export Crude average price as of 1 March was $87 a barrel, with expectations of price hikes due to the political instability in the region.

“This has been the historical trend as well, the government’s budget deficit turns out to be an actual surplus.”

Al-Shimali is still waiting for parliamentary endorsement of the budget. But MPs are unlikely to insist on changes, because the government’s strategy for the new financial year, which begins in April, is a continuation of the policies it has successfully pursued since 2009.

The government has so far only released preliminary figures for 2011/12, says Elias Bikhazi, head of economic research at local lender National Bank of Kuwait (NBK). “There are no major surprises. The final budget will be fairly close to these,” he says.

This has been the historical trend as well, the government’s budget deficit turns out to be an actual surplus

Faisal Hasan, Global Investment House

Bikhazi says the government routinely sets budgets on the basis of conservative oil price forecasts. For 2010/11, the government’s revenue projection assumed an oil price of only $43 a barrel, but crude averaged about $75 for the year. The result is that systematically the government announces a deficit budget, stirring critical comment from some Gulf observers, only to notch up a comfortable surplus, year after year.

The latest budget targets a deficit of KD4.5bn, but Bikhazi says a surplus of about KD3bn is likely. If so, it would be the 12th consecutive year of surplus, he says.

In January, Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah marked the 50th anniversary of Kuwait’s independence by granting every citizen KD1,000, as well as free food rations for a year. The reality of a comfortable financial cushion in government finances means that this state generosity is easily affordable.

“The budget can easily withstand this amount of additional spending,” says Bikhazi.

Hasan of GIH agrees: “The latest figures from the Public Authority for Civil Information in June 2010 show the Kuwaiti population was 1.13 million, which means the Emiri grant costs about KD1.13bn.”

The grant was actually paid in February, which means the additional outlay will be absorbed in the financial year now drawing to a close. The 2011/12 budget will only have to absorb the relatively small cost of the food rations, which are to be made available in 13 monthly phases.

GIH estimates the cost of the food rations at about KD230m, while NBK says it will cost KD170m and even that is easily affordable.

Boosting spending

The aim of the grant is to boost domestic consumption. Many Kuwaitis are struggling to pay personal loan obligations, and some MPs have been mounting a campaign for the government to write-off these debts.

But indebted citizens will not be forced to use the money to reduce their obligations. They will be free to spend it as they wish.

“Banks have been instructed to not take the money from their clients’ accounts to redeem debts. Furthermore, we believe that most citizens have used and/or will use the money, which will increase domestic consumer spending,” says Hasan.

GIH says the grant will not inject so much surplus cash into the economy that it will boost inflation. Instead it expects the consumer price index to rise, but as a result of world food price pressures and other factors.

The grant could, however, have quieten debate on socio-economic issues.

It may help to soften popular pressure on the administration for a loan write-off. It could also buy the government some extra room for manoeuvre with potentially sensitive economic reforms, such as privatisation and efforts to reduce Kuwait’s current heavy reliance on the oil-funded public sector as the main provider of jobs for nationals.

The grant could even earn the government some political space to pursue negotiations with Iraq over Baghdad’s Saddam Hussein-era debts. Although Kuwait can afford to write off a portion of these, the government remains under political pressure to continue insisting on payment in full.

This pressure might ease slightly now that the administration has shown such generosity to the local population.

Hike in salaries

The grant is not the only tool that government is using to bolster consumer spending and cultivate public goodwill. The draft budget proposes a 12 per cent hike in spending on public sector salaries. The military, in particular, is expected to benefit.

Non-oil project and capital spending is also being expanded by 19 per cent to KD2.5bn, as the government seeks to upgrade infrastructure and create the base for more competitive non-hydrocarbons activity.

For example, it is expected KD10m will be allocated for preparatory work for the planned Subiya causeway across Kuwait Bay. The main construction contract is expected be awarded within months.

The bridge is critical to the development of the planned City of Silk development on the north shore of the bay. It will also provide a main access route from the south to the Bubiyan island container port project. 

There will also be capital investment of about KD2.5bn in the oil sector, Bikhazi says. But this does not fall within the budget.

There is a question mark over the pace at which some of the projects proposed under the five-year $100bn development plan approved by parliament in early 2010 will be carried out.

Today’s booming oil revenues provide Kuwait with the means to make the big investments needed to reduce its long-term dependence on oil, something that is widely recognised as a key priority.

The possibility that delays to government-backed projects due to political wranglings could hold back the pace of economic diversification is a key concern to some analysts. “The budget is supposed to include the spending on the new development plan. However, only a small sum of the previous year’s budget was used on the development plan, so we believe it is leaning more towards being conservative,” says Hasan.

“I think Kuwait needs capital spending in megaprojects to broaden the base of the economy and create employment opportunities for its citizens.”

Finance Minister Al-Shimali has said the new budget will shift spending more in favour of investment. But Hasan does not expect to see a rapid reduction in Kuwait’s dependence on oil.

Diversification goals

“The goal of the development plan is to diversify the economy away from oil and strengthen the private sector,” he says. “But the development plan has not been moving as quickly as expected, which might mean the dependence on oil will remain longer than expected.

“The intention to diversify away from the oil-based economy is there and plans have been in place to attract non-oil investments. However, oil will continue to remain the dominant factor in the economy in the medium term, although in terms of growth, non-oil growth will outpace the oil growth.”

The five-year development plan projects real gross domestic product (GDP) growth of 5.1 per cent in 2011. But GIH expects Kuwait’s overall performance to fall short of that, in the 4-4.5 per cent range due to slow progress on some projects.

With another conservative budget oil price forecast, the finance ministry has placed Kuwait in a good position fiscally to execute its development plans. But it will also require the political will to make them a reality.