Slow progress on the road to reform

23 February 1996

FIVE years after liberation, memories of the Iraqi occupation are still fresh in Kuwaiti minds. The physical evidence of the war may be gone but the political, economic and social legacies remain. The common experience of occupation has taught Kuwaitis many things, not least, what they have to lose. Today, having rebuilt the country, they are more anxious than ever to play a part in moulding its future.

Many Kuwaitis are equally preoccupied by the past. This has been very unsettling for the government. Its widely perceived failure to anticipate the Iraqi invasion and put the armed forces on alert remains a salient political issue. The national assembly, which is due soon to debate and publish two papers on what went wrong in 1990, is unlikely to give the government an easy ride.

Adding to the government's woes are the country's changed economic circumstances.

For much of the 1970s and 1980s calls for reform could largely be deflected by the lavish distribution of oil revenues. This option is no longer available. Soft oil prices have left the government running a deficit and forced it to tap into reserves already heavily depleted by the costs of liberation and reconstruction. The state of the economy has now become the key political issue in Kuwait.

Compared to most countries. Kuwait is still in an enviable economic position. Its citizens enjoy some of the highest living standards in the world. As the country is endowed with almost 10 per cent of the world's proven oil reserves, such good forrune is unlikely to change in the foreseeable future. 'The country still has a big margin of comfort,' says Elias Baroudi, chief economist at National Bank of Kuwait. 'But it would be dangerous to maintain the deficit in the long term.' In 1990. the reserve fund for future generations stood at more than $100,000 million, a comfortable cushion that allowed the government to provide a very generous welfare system. The value of the fund has since fallen to about $35,000 million. With the government consistently running a deficit of more than $3,000 million a year. and no sign of relief coming from higher oil prices, a clear consensus has emerged that the current level of spending is unsustainable.

However, the consensus evaporates when ways of tackling the deficit are discussed. A World Bank report commissioned by the government in 1994 advocated subsidy cuts, taxation and welfare reform. The government has made some piecemeal attempts to cut spending, but it is still not working to any clear masterplan. This has cast doubt on its ability to achieve the stated aim of balancing the budget by the end of the decade. 'The government has promised to tackle the problems but nothing has happened,' says Jasem Al-Sadoun, general manager of Al-Shall Economic Consultants.

Cultural reform

The question of economic reform is not simply a political issue. It is also a cultural one, having far-reaching implications for the way business is conducted and decisions are taken in Kuwait. Public sector bodies are now having to get to grips with the fact that their resources are finite. 'We are waking up after 20 years of being too comfortable. We have always had too much money to spend,' says Adnan al-Bahar, chairman of The International Investor, an Islamic finance company. 'We did not even know what priorities were.' Al-Bahar believes that a period of austerity will benefit Kuwait in the long run.

'Economies are made out of challenges,' he says. 'The war has forced us to increase efficiency. We have to change and this will be good for us.' Al-Bahar advocates a freeze on spending and the opening up of the economy to the private sector. 'We should aim to sustain a reasonable per capita income without oil revenue,' he says. 'We have to create the basic conditions and generate a businesslike attitude.' There are signs that the government now wants the private sector to play a greater role in the economy. But some fear that this may amount to little more than forcing priWritten and researched in Kuwait by Toby Ash SPECIAL REPORT KUWAIT vate firms to assume some of the responsibilities of the public sector, notably in the employment of Kuwaiti citizens.

Employment is an emotive political issue and will be a hot topic when national assembly members take to the hustings for the October election. The public sector, which used to provide jobs for almost everyone who sought a post, is finding it increasingly difficult to employ the growing reservoir of Kuwaiti labour. One worry for private firms is that the government will enforce a Kuwaitisation policy, obliging them to employ Kuwaiti nationals in preference to expatriate labour.

'This would be disastrous, says one company director. 'We have already cut our margins. If we had to pay the wages Kuwaitis demand we would not be competitive.' Despite such fears, the private sector is generally optimistic that it can benefit from any economic restructuring. The Kuwaiti stock market certainly had a buoyant year in 1995, becoming the most active in the Arab world in terms of turnover, due in part to the sale of more than $1,000 million of state assets by the Kuwait Investment Authority (MA).

One issue that continues to undermine private sector confidence is neighbouring Iraq, whose future direction is as unpredictable as ever. In October there was a hasty transfer of funds out of the country after Prime Minister Sheikh Saad al-Abdullah al-Sabab warned that Baghdad might try to avenge its defeat in 1991. 'Kuwait, your country and mine, will pass through the next three months in an extremely difficult.. and nervous situation,' he said in an interview.

In mid-December, Sheikh Saad's obvious hostility to rapprochement with those Arab states which declined to join the US-led coalition against Iraq provoked a show down with veteran Foreign Affairs Minister Sheikh Sabah al-Ahmad al-Sabab. Sheikh Sabah, who threatened to resign, has led the process of normalising Kuwait's relations with Jordan and only agreed to stay on after the intervention of Emir Sheikh Jaber al-Ahmad al-Sabah. The debate surrounding Kuwait's future relations with countries such as Jordan is set to continue in 1996.

Sheikh Sabah is not the only prominent figure to have threatened to resign.

In early December KIA managing director Ali alBader announced he was to stand down, although he has since agreed to complete his term which ends in March 1997. It was widely believed that Al-Bader had come under pressure to drop legal claims in London and Madrid against former KIA and Kuwait Investment Office (KIO) officials involved in the collapse of KIOs Spanish affiliate Grupo Torras in 1992.

As Kuwaitis are being asked to tighten their belts there is a rising clamour for clean, more accountable and transparent government. The most vocal critics are opposition deputies who are determined to crack down on improprieties. In November, the national assembly's finance and economic affairs committee asked Kuwait Airways Corporation (KAC) to provide details of its financial procedures as it investigated allegations that airline officials may have misused state funds. Deputies also continue to press for the prosecution of former oil minister Sheikh Ali Khalifa alSabah and others over funds that went missing from state-owned Kuwait Oil Tankers Company.

The national assembly can claim at least one victory in its battle against vested interests. For the first time since the crash of the Souk al-Manakh unofficial stock exchange in 1982, the bad debts issue has been settled, for the time being at least, and no longer dominates the political agenda.

The debate surrounding the repayment of the $20,000 million lost in the crash came to a head last year when the government amended the 1993 bad debts law, which would have obliged most debtors to settle in full by 7 September 1995. Arguing that full repayment in a single instalment would cause financial instability, the government proposed that the majority of debtors should be allowed to pay in five annual instalments starting from 6 December.

The amendments were eventually endorsed by the national assembly, but many deputies accused the government of protecting a few influential debtors at the expense of sound economic policy. However, in December more than 75 per cent of debtors actually paid up. Those failing to give adequate reason for non-payment will face prosecution.

The economy will continue to dominate the domestic debate in the run up to the national assembly elections on 5 October.

The vote may be healthy for Kuwait's infant democracy, but election campaigning is likely to delay further any far reaching economic reforms. 'This is not going to be a good year,' laments AI-Sadoun. 'Parliament will not be prepared to take unpopular decisions.'

Exchange rate: $1=KD 0.299 (February 1995)

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