Kuwait has long depended on oil for both revenue and economic growth. But, with nearly 80 per cent of the Kuwaiti workforce employed in the public sector and more than 85 per cent of government income generated by oil, the pull on hydrocarbons exports is unsustainable.

The government ends up banking a lot of money that could be spent on projects and job creation

Kuwait City-based banker

With a new five-year plan passed by the country’s fractious National Assembly, or parliament, in February, hopes are high that the country might finally start to ease its dependence on oil and government jobs. But to do this, the ruling cabinet must maintain consensus with opposition politicians.

In May, the Central Bank of Kuwait reported that for the year to 31 March 2010, the government had posted its 12th consecutive budget surplus – KD8.2bn ($28.2bn). According to the local National Bank of Kuwait, the final figure is likely to be closer to KD6bn after accounting for discretionary spending, but the run of surpluses is a clear sign of a robust economy.

Kuwait’s oil dependence

However, closer analysis of the 2009-2010 figures shows that both government finances and the wider economy continued a worrying trend of oil dependence, weak non-oil growth and poor implementation of government spending.

Revenues for the year were KD17.93bn, 122 per cent above budget, largely because of higher-than-budgeted oil prices and higher-than-forecast oil production levels, with hydrocarbons exports making up 85.8 per cent of export revenues during the year. The ministry budgeted for an average oil price of $35 a barrel for 2009-2010 on the basis of production of around 2.2 million barrels a day. The actual average price for Kuwait Export Crude in 2009-2010 was $61.6 a barrel, according to the National Bank of Kuwait. Randa Azar-Khoury, the bank’s chief economist, says oil production was as much as 11 per cent above the government forecast.

Kuwait has a long-standing tradition of budgeting for a far lower oil price than forecast, and this in part accounts for the surpluses it has run over the past decade. But the remainder of the surplus comes from another, less positive, tradition: below-budget spending. In 2009, the government planned to spend KD12.1bn over the coming year, but actual spending was only KD9.75bn.

“The government has struggled to implement projects, largely because of bureaucracy and political pressure,” says one Kuwait City-based banker. “They end up banking a lot of money that could be spent on job creation and private sector opportunities. Instead, a lot of projects remain on ice. Kuwaitis continue to depend on the state as employer and oil revenues keep on propping up the state.”

The National Assembly is seen as the sticking point for several stalled projects. Officials pointed to intense political pressure when giving reasons for the cancellation of construction contracts on a new $15bn refinery project at Al-Zour in March 2009, for instance. The state, meanwhile, employs 270,600 Kuwaitis out of a total labour force of 338,800, meaning the public sector accounts for 79.9 per cent of the national workforce. The number of Kuwaitis working for the state actually slows down the bureaucratic process, rather than speeding it up, says a government source.

All of this may be set to change, following the passage of the country’s first long-term development plan in more than 20 years. The plan calls for more than $120bn in government spending on a wide array of megaprojects, the privatisation of public companies and renewed focus on public-private partnerships.

As a result, the government has budgeted for a deficit of KD7.4bn in 2010-2011. Some KD4.78bn of this is made up of spending on infrastructure projects, including a new rail network and port developments. The National Bank of Kuwait forecasts economic growth of 3 per cent for the coming year if about 90 per cent of planned spending is implemented.

Privatisation bill

In May, parliament passed a privatisation bill, which allows the government to start selling off assets to private investors, with the aim of attracting foreign companies to bring expertise and technology into the country and cut dependence on the state for employment.

But business leaders believe the road ahead will not be easy. Having passed through parliament, the bill carries several amendments which would, says one banker, effectively leave investors “hamstrung” by compliance to Sharia law and a requirement for a government share and deciding vote in each company.

“It shows the level of compromise that is needed to make things work here,” he says.

Yet, if the government’s plans are successful, economic growth could be exponential.

“We would need to see a return to growth in the global economy,” says Azar-Khoury. “But the five year plan is for 5-6 per cent growth. If it is implemented, it can be even higher – as much as 10 per cent.”