Kuwait in search of an economic strategy

10 November 2009

The global downturn has given Kuwait reason to think carefully about its plans for economic development and create a long-term vision for the country

Kuwait’s list of planned projects is impressive. From Bubiyan Island container port and the City of Silk to a fourth oil refinery, the Kuwait Bay bridge and the Kuwait City metro, the list is both broad and ambitious. But how many projects have progressed beyond the design stage and what is the strategy behind them?

The financial crisis of the past 12 months, with the dramatic fluctuation of oil prices from a high of $147 a barrel in July 2008 down to $39 a barrel in December, have provided strong reasons for Kuwait to think carefully about a coherent vision for the long-term development of its economy.

Key fact

Kuwaithas halved its 2009-10 capital projects budget from KD2.4bn to KD1.2bn because of the financial crisis

Source: MEED

Although the country has oil reserves of about 104 billion barrels, which will last for up to 100 years at its current production level of 2.4 million barrels a day, the uncertain long-term outlook for global markets makes it hard to forecast how much revenue oil will provide from one year to the next.

The problems that shook Kuwait’s economy in late 2008 highlighted the need to strengthen the country’s economic structures if it is to carve out a niche as a financial centre. In November, a court order suspended the Kuwait Stock Exchange for almost a week to prevent further investor losses after the bourse’s market capitalisation declined by 31 per cent between January and November last year.

Population growth

Meanwhile, population growth of about 3.3 per cent a year poses more long-term economic challenges. Within the next decade, jobs will need to be created in the country’s private sector to avoid a situation of high unemployment among Kuwait’s young population, 65 per cent of whom are under 25.

Kuwait is not alone in the region in facing such a challenge, and some of its Gulf neighbours have already sought to develop a strategic response. Foremost among them is Abu Dhabi’s 2030 plan, designed to transform the UAE capital into a model of sustainable living that also generates jobs for local people.

In Kuwait, political and business figures have argued, such a forward agenda is lacking. They complain that the government’s agenda is too short-term in its scope and is conceived as merely a series of individual projects rather than a coherent strategy.

With its tradition of ‘grilling’ cabinet ministers, Kuwait’s National Assembly is not an easy environment in which the government can develop a long-term agenda. Repeated ministerial changes undermine attempts to develop continuity of policy.

But the openness of political discussion in Kuwait does at least create a forum in which development and its challenges can be aired and debated. Senior business figures see this as a positive. “We have a free press, free speech,” says Mohammad al-Omar, chief executive officer of local bank Kuwait Finance House. “Overall, we are fortunate that here in Kuwait we are a democratic country.”

Kuwait’s position at the head of the Gulf and its long history of financial activity and trading are seen by policymakers as strategic strengths, provided the country can move fast enough to take advantage of them.

“Everyone expected the April 2009-March 2010 budget to be expansionary, but in fact it was tight”

Walid Mohamed, analyst, Global Investment House

“We have this location. We have this institutional set-up. We have the talent. This compares well with other GCC societies,” says Yousef al-Ebraheem, former finance minister and now personal economic adviser to Emir Sheikh Sabah al-Ahmed al-Jaber al-Sabah. “But although Kuwait still has an advantage in this respect, other countries in the region are catching up.”

The country’s particular socio-political profile can help it carve out a niche in the region’s economy, he adds.

“It is wrong to think simply in terms of competing with the other GCC countries,” says Al-Ebraheem. “Kuwait can complement them.”

But if Kuwait is to play to its strengths, it will have to repair the flaws that left it so painfully exposed to the global financial crisis.

“The crisis has had a great impact on Kuwait,” says Al-Ebraheem. “We see some companies listed on the stock market that made big mistakes. They put their money into long-term investments, but funded them with short-term borrowing.

“And they invested into too narrow a range of assets. They did not do enough due diligence. When the credit markets dried up, they were the big losers.”

Al-Ebraheem stresses that the government is now making great efforts to revive economic activity, but recognises that some sectors, such as real estate, still have a long way to go.

Land reform

Meanwhile, there are long-term challenges to be faced. Al-Ebraheem points to the need to create jobs, sustain reform in education and improve the quality of the workforce. The issue of land reform is especially pressing, he adds.

“Government must come up with a set of policies and rules in providing land,” he says “You cannot create jobs and businesses without land. There is plenty of land currently controlled by government.

“We need to develop a process for making this available, particularly in small pieces suited to the needs of smaller entrepreneurs.

“We also need to reduce bureaucracy and provide a financial vehicle for supporting small business that is willing to take some risks in doing so.”

The issue of long-term financial planning came to a head in Kuwait in October when the government announced its revised five-year plan, together with its capital expenditure programme for the next four years.

Aseel al-Awadhi, one of the four women to win a National Assembly seat in May’s general election, is critical of the plan. “The strategic plan that we have for five years has no details,” she says. “It does not answer the questions of why, when and how. This is not a proper plan. It is not obvious and it is not clear enough.”

Al-Awadhi cites the example of a government policy to privatise state schools, arguing that the policy was put forward without explanation of why it might be a good idea, and without evidence to show what such a measure could achieve.

She also argues that Kuwait’s government is too bureaucratic, and complains that many officials owe their positions to social or tribal affiliations, rather than to skill or ability.

Unsurprisingly, her views are not shared by senior government officials, who protest that they are developing a coherent approach.

“The five-year plan does set out a planning philosophy and goals, and how to get there,” says one key government strategist.

He says the government plans its expenditure under three headings: current expenditure, small and medium-sized projects and megaprojects.

Current expenditure is controlled by the annual budgets. It can fluctuate to some extent but the scale of spending is largely dictated by fixed costs, such as salaries for public servants.

The budget also includes small and medium-sized capital projects, such as an extension to an existing hospital. It is these smaller investments that have been most affected by the economic slowdown. Originally, this section of the 2009-10 budget made KD2.4bn ($8.4bn) available for such capital projects but, as a result of the crisis, this had to be pegged back to KD1.2bn, with some schemes postponed.

In the 2010-11 financial year, this type of capital spending will accelerate again, says the strategist. The increase will be aimed at those areas that will have the most immediate impact on boosting economic activity after the recent slowdown – education, health, housing, infrastructure and the oil sector, notably through further work in the northern oil fields and work on a fourth refinery.

The third strand of the government’s economic planning is megaprojects, such as the $77bn City of Silk urban development planned for the north shore of Kuwait Bay, and the 23.5 kilometre bridge linking it with the rest of Kuwait. The public financing element of such a huge investment is kept separate from the annual budget fluctuations.

“The megaprojects are not dependent on the ups and downs of the oil price,” says the official. “Budgets for these were allocated a long time ago. The reason they are not yet being built is because of the due process that must be done, such as an environmental impact assessment of what is going to happen to Kuwait Bay when you construct the bridge.”

There is widespread support for diverting the thrust of urban development to the north shore of Kuwait City, easing the pressure on the capital. But published strategy documents for the City of Silk project lack detail. “One of the most important things is to actually establish City of Silk, rather than just talk about it all the time,” says one senior official.

In the short term, the government’s priorities will focus on economic recovery, which will need to be driven largely by increased public sector spending. Yet the government has so far taken a cautious approach.

“Everyone expected the April 2009-March 2010 budget to be expansionary, but in fact it was tight,” says Walid Mohamed, senior financial analyst at Kuwaiti investment company Global Investment House. “Even predicated on an oil price of just $35/barrel, it still produced a surplus of KD1.5bn, when a deficit of KD2bn had been expected.”

The lack of urgency on the government’s part may be partly explained by the absence of immediate social pressures. Unemployment among expatriates living in Kuwait is almost zero and, even among Kuwaitis, it is only 3-4 per cent, says Mohamed.

But looking to the future, new jobs will certainly be needed. Although the public sector still accounts for most jobs held by Kuwaitis, the private sector is generating a greater proportion of new jobs. At the end of 2007, the proportion of Kuwaitis employed by the public sector had fallen to 79 per cent, down from
90 per cent five years earlier.

In May, the government felt able to raise the ‘Kuwaitisation’ requirement – the quota of employees who should be Kuwaiti nationals – in the banking sector to 60 per cent from 40 per cent. It also commissioned a report from former UK prime minister Tony Blair on the future educational needs of Kuwaitis.

Kuwait’s decision-makers, newly elected in May this year, will need to make plans for serious socio-economic improvements if the country is to produce a labour force suited to the requirements of the competitive modern economy it aspires to have.

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