Kuwait ruler passes 33 per cent spending increase

19 August 2010

Expansionary budget for 2010-11

The ruler of Kuwait has approved an expansionary budget for 2010-11, which will see government spending increase by 33 per cent year-on-year, although senior economists and financiers in the country do not expect to see a significant impact on the economy until late 2011 or early 2012.

Sheikh Sabah al-Ahmed al-Jaber al-Sabah approved the spending programme for the year to May 2011 on 28 July, government records obtained by MEED show. It forecasts spending of KD16.3bn ($56bn) against revenues of KD9.7bn, with a further KD971.9m to be set aside for the country’s Future Generations Fund.

The planned spending marks a 33 per cent increase from the government’s 2009-2010 budget, which earmarked KD12.1bn for expenditure. However, this includes a series of transfers between departments including a one-off payment of KD1.1bn to the Public Institution for Social Security. Analysts at the local National Bank of Kuwait (NBK) estimate that the increase in spending, which will directly impact the economy is closer to 15 per cent.

Nevertheless, the deficit the government has forecast for the year, of KD7.6bn, is even higher than the KD6.4bn it forecast earlier in the year, as it pushes to move on a series of major projects in the hope of reinvigorating the country’s stagnating non-oil economy.

“The government has increased its confidence in megaprojects spending,” says Faisal Hasan, a financial analyst at the local Global Investment House. “This should create increased liquidity in the [banking] system, more public and private opportunities, economic diversification and just as importantly create more jobs.”

The government is in the process of rolling out a $100bn-plus, four-year development plan, which includes a number of megaprojects and public-private developments. Schemes that fall under the plan include a railway and metro system, a major new port at Bubiyan Island in north Kuwait and the first phase of a $77bn real estate development at Subiya, known as the City of Silk.

Among the biggest increases in departmental budgets for 2010-2011 were for the water and electricity ministry, which will spend KD3.4bn in the year to May 2011, up from KD2.4bn in 2009-2010; the civil aviation directorate, will nearly treble spending to KD157.4m and the public works ministry, which will cost KD668.1m to run over the next year, up from KD497.2m in 2009 and 2010.

Analysts in the country say that the budget is unlikely to be an accurate reflection of either government expenditure over the coming year and expect revenues to be far higher than those projected.

The government has forecast an average oil price of $43 a barrel for the year, but consensus among bankers and economists in the country is that the Kuwait Export Crude contract will trade in a range of $65-75 over the coming year.

In its 2009-2010 budget, the government forecast a deficit of KD4.9bn an oil price of $35 a barrel and oil revenues of KD6.9bn. Given an average oil price of $60-plus, the government is likely to have turned a surplus of more than KD6bn in total.

Given that the budget is meant to cover the year from the end of April, but was not approved until July, it will be difficult for government departments to achieve the aggressive spending programmes planned for the next year, says Daniel Kaye, a senior economist at NBK.

“Between April and July they went on the spending outlined in the 2009-2010 budget,” he says. “It remains to be seen if the government can hit that improved budget number. We won’t see a significant impact on GDP [gross domestic product] over the next year, but we should see it filter down from next year onwards.”

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