EDUCATION Minister Ahmed al-Rubei gave Kuwaitis a chilling warning in early December. He told them that the introduction of taxation was now inevitable, adding that they should start adjusting their extravagant lifestyle: 'No society can live without taxes,' he declared.

His message was not new but it lent fresh urgency to a subject that the authorities have been mulling over for the past five years.

They recognise the need to impose levies and taxes to remedy the budget deficit, but have yet to find the resolve to match the rhetoric.

Low oil prices and consistently high spending have left the government running a budget deficit of more than KD 1,000 a year since 1991, equivalent to about 40 per cent of the country's annual oil revenues. There is little prospect of a significant rise in either oil prices or oil production and other means will have to be found to cover the shortfall.

The drain on reserves caused by the Gulf war has given a sense of urgency to the budgetary debate. Official figures on Kuwait's reserves are not published, but it is widely accepted that the Reserve Fund for Future Generations is now down to about $35,000 million from more than S 100,000 million before the Iraqi invasion. A further $4,000 million will be drawn from the fund in 1996 to pay the final instalments on the $5,500 million international loan Kuwait took out to pay for reconstruction.

Good news

The budget deficit for fiscal year 1994/1995 actually came in below expectations. In January Finance Minister Nasser al-Rodhan said the actual deficit was just under KD 1,000 million, compared to the projected figure of KD 1.736 million. Good news indeed, but it was largely the result of higher than expected oil prices rather than government reforms. The 1994/1995 budget assumed an oil price of $12 a barrel, while prices averaged $15 a barrel. The budget for fiscal 1995/1996 projects a deficit of KD 1,320 million, based on an average oil price of $13 a barrel.

The Kuwaiti economy continues to be dominated by the oil sector, which generates more than 80 per cent of government revenues. With little prospect of a sustained rise in oil prices, the government is having to look elsewhere for new streams of revenue.

To assist the effort the World Bank was commissioned to survey the economy and duly submitted a report to the government in 1994. It presented a robust analysis, but the government has been reluctant to implement many of its recommendations.

The bank advocated sweeping change cuts in subsidies, reform of the welfare system, taxation, tariff reductions, privatisation, trimming the bureaucracy and reform of the financial sector. It was a tall order, economically prudent but politically less palatable. Many analysts believe the government lacks the political will to introduce substantial cuts in welfare and end its commitment to find employment for all Kuwaiti citizens. 'It cannot cut expenditure much further,' says one banker. 'They can only try and cap spending.' However, it will be difficult to peg spending at present levels.

Recurrent expenditure on salaries is the biggest single budget item and the hardest to prune. About 40 per cent of the population is under 14 years old and more people will be joining the public payroll in the years ahead.

Rather than reduce spending, the government is looking for ways of boosting revenues. 'Increased fees and taxes are inevitable,' says Sami al-Anbaee, deputy manager of the economic research department at the Central Bank of Kuwait. 'But I don't think we need to impose income tax on the individual.' Kuwait's expatriate workers, who greatly outnumber Kuwaiti citizens, are likely to be the first to be affected by any new levies.

According to the Public Authority for Civil Information, there were 1,957,322 expatriates compared to 706,994 Kuwaitis at the end of 1995. Foreign workers already have to pay for selected health services and fees for other services are set to follow. There is also talk of boosting the charges on employers of foreign labour.

Activity in the non-oil economy has been negatively affected by the changes in the structural make-up of the population since 1991. The current population of foreign workers are savers rather than consumers and spending is depressed. Before the invasion, Palestinians who regarded the country as home were the largest expatriate community, numbering about 400,000. Since liberation they have been replaced with bachelor labour from south-east Asia and elsewhere in the Middle East. Most of their earnings are remitted home rather than spent in Kuwait.

Consumer demand is unlikely to pick up in 1996. Last December, the Central Bank of Kuwait imposed new restrictions on domestic credit in response to an upsurge in lending and fears of yet another Kuwaiti debt crisis in the making.

With public finances under pressure, the government has recognised the need to encourage the private sector to play a greater role in the economy. The privatisation process is the most obvious manifestation of this new thinking. There are also signs that the government and municipalities will use the private sector to expand the country's infrastructure on a build-operate-transfer (BOT) basis

New partners

Partnerships with foreign companies and investors have also found favour. The joint venture between state-owned Petrochemicals Industries Company and the US' Union Carbide to build a new petrochemical complex may be the start of a trend. A $1,200 million loan for the project is being raised by a group of local, regional and US banks.This is the first time local financial institutions have been involved in funding a project of this nature and scale.

The privatisation process passed several milestones in 1995 with the sale of public assets by the Kuwait Investment Authority (MA), which has been under the direction of Ali Rashid al-Bader since 1993. 'My mission was to strengthen KIA's accounting procedures, rebalance its investment portfolio, clear the problems related to our Spanish investments and begin the privatisation process,' says Al-Bader. 'I feel my mission has been largely accomplished.'

In 1995, the KIA disposed of assets worth more than $1,000 million, mostly minority stakes in companies. The most profitable sell off was a majority stake in National Industries Companies (NIC) in June which raised $658 million, more than $200 million above expectations. 'It was difficult to value the company,' says Al-Bader. 'It went for much more than expected. I cannot read minds.'

The World Bank has given the privatisation process its seal of approval. but wants it to be speeded up. This sentiment is shared by others. 'We would like to see a faster pace,' says Adnan al-Bahar, chairman of The International Investor. 'The market has a lot of liquidity.'

Al-Bader is determined to resist the calls to make haste. 'We give a planned injection of shares from time to time,' he says. 'The market does not want surprises.' KIA will only sell its interest in a company when its has received clear stake in the shares from an investor. It has plans to sell its interest in another 25 companies by 1998. Says Al-Bader: 'We will have another busy year in 1996. There is demand and the market is very active.'

The Kuwait Stock Exchange (KSE) has certainly picked up on the privatisation process. It was the most active in the Arab world in 1995, with a turnover of almost $4,500 million. According to Al-Shall Economic Consultants, the value of traded shares for the third quarter was $2,500 million, a figure 28 per cent higher than the value of trading for the whole of 1994. At the end of November the KSE launched a new computerised trading system allowing the 14 brokerage companies operating the market to match orders within seconds. Kuwait & Middle East Investment Company. with the assistance of SBC Warburg, is currently finalising plans to set up a futures market.

Not speculation

'The growth of activity on the stock exchange is not reflected in the economy.

But it does indicate confidence in the future,' says Al-Bader. 'Most local companies have restructured themselves and their earnings figures are getting better. The fundamentals are there. It is not just speculation.' Despite the hype, there are those who recognise the current privatisation process as symbolic, but see it as lacking in substance.

They believe that the sale does not indicate a real reduction in the state's role in the economy. That, they argue, will only come when the utilities are put up for sale. 'There is a consensus that this is the direction to move,' says Al-Anbaee.

The first sector slated for privatisation is telecommunications. The telecoms sector is currently being corporatised into a new company, Kuwait Telecommunications Company, in readiness for an eventual privatisation. The water, sewerage and power authorities will also have to begin operating as corporations before they can be considered for sale. Few analysts expect the sale of utilities to begin until 1998 at the earliest, when the KIA is due to complete its current round of disposals.