May 30, 2021 aviation

Economy takes back-seat as parliament wrangles

In January of this year, Kuwait’s then caretaker government approved a budget bill that projected a deficit of KD12 billion for the fiscal year 2021-22 (FY 21-22) starting on 1 April. The forecast deficit would make it the eighth consecutive year that the country is faced with a deficit annual budget, and portends to the economic and financial challenges that loom ahead.

Despite the critical economic situation, the executive and legislative branches of parliament continue to remain at loggerheads, unable or unwilling to work together to discharge the primary responsibility entrusted to them — to draft and efficiently implement policies and laws that determine a long-term sustainable future for Kuwait.

Though the estimated deficit for FY 21-22 is less than the amended KD14 billion deficit predicted for the previous fiscal year, it reflects a pattern of recurring budget deficits in recent years.

The deficits can in large measure be attributed to sustained lower global oil prices, and, since 2020, on the ongoing COVID-19 crisis that continues to significantly impact the economy. Kuwait’s oil dependent economy is especially vulnerable to downturns in global oil prices, with any prolonged fall in international oil prices having a pronounced bearing on the country’s revenues and its budget allocations.

Oil accounts for around 90 percent of Kuwait’s revenue and the country produces around 2.4 million barrels of crude a day, making it the fourth-biggest member of the Organisation of Petroleum Exporting Countries (OPEC). However, since 2017, prolonged low oil prices and limitations on production, due to compliance with commitments to production cuts mandated by OPEC, have resulted in Kuwait facing a sharp fall in revenues that has resulted in repeated annual budget deficits.

In its latest assessment of the growing deficit among Gulf Cooperation Council (GCC) states, international sovereign credit rating agency, Standard & Poor’s (S&P), said that in 2021, Kuwait is expected to record the highest deficit-to-GDP ratio of 20 percent among the Gulf states. The agency also noted that Kuwait would account for nearly a quarter of the US$355 billion cumulative deficit that GCC states are forecast to accrue between the 2021-2024 period. Government debt as a percent of GDP is important, as it is often used by investors to assess a country’s ability to make future payments on its debt, thus affecting the country’s borrowing costs and government bond yields.

Attempts by the government to shore up its finances by implementing urgently needed financial and economic reforms, such as introducing a value-added-tax (VAT), reducing lavish subsidiaries doled to citizens, and addressing a bloated public wage bill, have all been thwarted by opposition in the country’s parliament. Efforts on the part of the authorities to raise funds by borrowing on the international debt market have also been blocked in the National Assembly. Since 2017, lawmakers have repeatedly rejected passing the government’s public debt bill that is required to authorize borrowing.

Falling income, recurring budget deficits and inability to issue debt have led to the state-treasury, the General Reserve Fund (GRF), facing a liquidity crisis. Confronted by the prospect of being unable to conduct its normal functioning, the government recently proposed drawing down from the country’s copious reserve fund, the Future Generations Fund (FGF). But this suggestion was promptly shot down by opposition lawmakers, who termed it a red-line that the government would not be allowed to cross.

To bring clarity on the structure of Kuwait’s reserve funds, it bears explaining that the GRF, which functions as the state treasury, receives all revenues of the government and disburses all expenses of the state. The GRF also holds the government’s other substantial assets, including its various public enterprises such as the Kuwait Fund for Arab Economic Development, and the mega Kuwait Petroleum Corporation (KPC) — the parent entity for all oil and gas subsidiaries that undertake upstream and downstream hydrocarbon activities in Kuwait and abroad.
The FGF was established in 1976 under law number 106/76, which mandated that 10 percent of the state’s total revenues each year should be deducted and transferred to the FGF in order to support future generations and prepare for the eventual end of the oil-era. The Kuwait Investment Authority (KIA) is responsible for managing both the GRF surpluses and all the assets of FGF. Established in 1953 to manage Kuwait’s surplus oil funds, KIA is the world’ first and currently the fifth largest sovereign wealth fund with estimated assets in excess of US$530 billion.

In a respite for the financially-starved government, lawmakers passed a bill in 2020 that amended the FGF law and made the annual transfer of funds conditional on the country registering a surplus budget in any given year. The amendment reinstated around KD3 billion that the FY20-21 budget had already transferred to the FGF and allowed the government to tide over its immediate payment requirements, especially the disbursement of public wages. While this cash infusion provided a breather, it was not sufficient to meet the government’s growing financial commitments and budgets of ministries.

Left with very few options to raise money, the government is reported to have begun liquidating some of the state’s assets held by GRF through asset swaps with the FGF. Some of the prime assets held by GRF, including its stake in Kuwait Finance House and telecoms company Zain, are said to have been swapped for cash in late 2020. In January of this year, the GRF is also said to have transferred its flagship possession, Kuwait Petroleum Corporation, over to the FGF.

These asset swaps have helped the government garner a few more billion dinars, but it has also further weakened the overall viability of its treasury. The GRF is also said to be negotiating with state-owned KPC for another KD7 billion in accrued dividends that the organization owes the state treasury. Latest indications are that the two have reached an agreement to repay the dividends over a 15-year period. The Corporation has contended that it needed the money for capital expenditure to continue maintaining its upstream oil and gas operations and to invest in oil fields.
Though this staggered financing arrangement does not help the GRF meet its immediate cash requirements, it is expected to provide a relief for KPC, which was planning on raising capital by issuing debt on local, regional and international markets. The lack of funds and borrowing plans by Kuwait’s national oil company, which produces around 7 percent of the world’s total crude oil, is emblematic of the overall financial challenges the country faces.

Analysts believe that the short-term measures pursued by the government will only help push the liquidity crisis further down the line, and that it could reemerge as early as the third-quarter of this year. Moreover, even if the government is able to pass the contentious public debt law through parliament, the proposed ceiling of KD20 billion in the law means that, given the current trend in budget deficits, this amount will probably be exhausted by 2024.

However, any prospects of an early passage of the debt bill through parliament looks unlikely in view of the ongoing confrontation between the executive and opposition members in parliament. In its assessment of Kuwait’s deficit, Standard and Poor’s noted that a public debt law in the absence of any meaningful reforms would be meaningless, and that the current problems besieging the government are likely to return in a few years time.

If another indictment on Kuwait’s economy was needed, this was provided by the 2021 FM Global Resilience Index. The index revealed that Kuwait’s resilience to economic, supply chain, and other risk disruptions were the lowest among its neighboring Gulf Cooperation Council (GCC) states. The index showed Kuwait scoring 42.1 points out of a total possible 100 points to rank 86th among the 130 countries assessed in this year’s index.
The FM Global Resilience Index, published annually by the US-based mutual insurance company, FM Global, compiles qualitative and quantitative data on the economic, supply chain and risk quality data of 130 countries, to evaluate their resilience to these disruptions.

The index provides foreign investors and companies with detailed data about countries that help them make informed strategic decisions when it comes to investing abroad. In the current scenario, countries ranking high in the index are considered to be well-positioned to foster robust economic rebound and post-pandemic business recovery. Countries at the other end of the index are deemed to fare poorly in similar situations.

Kuwait’s position in the lower half of the third quartile of this year’s index is indicative of its weakness in mustering effective responses to economic emergencies. The index ranking is also a reflection of several inherent weaknesses, not least of which is the country’s inability to implement much-needed economic, financial, and administrative reforms.

Lower ranking in the Global resilience index together with the higher deficit-to-GDP ratio estimated by S&P for the 2021-2024 period, are potent pointers to Kuwait’s flailing economy that could discourage investors and investment in the country going forward. What Kuwait needs is long-term sustainable solutions that include far-reaching reforms and restructuring of finances, including reducing subsidies, restructuring the public wage bill, imposing new taxes such as VAT, overcoming spending gaps, and implementing efficacies to meet economic exigencies.

Clearly, it is time to rethink the entire situation where the country’s vital plans, bills and policies get bogged down in parliament, while the executive and legislative display immature antics and wrangle over piddling issues.


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