Inside a backdrop of swirling challenges, Kuwait’s economic destiny hangs in the balance. As the nation treads the tightrope of economic recovery, it defies the odds with a remarkable show of resilience.
The International Monetary Fund’s recent assessment shines a spotlight on both the risks and the potential for growth, unveiling a landscape of political gridlock, oil dependency, and a fervent quest for reform.
Kuwait’s Path to Economic Stability Amidst Challenges
Despite ongoing efforts towards economic recovery, Kuwait’s journey is marked by substantial risks that demand attention. The International Monetary Fund (IMF), in its recent assessment following consultations with the Kuwaiti government, emphasized the country’s vulnerability due to its heavy reliance on oil production.
The real gross domestic product (GDP) is projected to slow to a mere 0.1% this year after experiencing robust growth of 8.2% in the preceding year. The primary factor contributing to this deceleration is the impact of oil production cuts, a consequence of Kuwait’s participation in the OPEC+ alliance.
Persistent Gridlock Hinders Reforms
One of the pressing issues Kuwait faces in its pursuit of economic stability is the gridlock between the government and the parliament, which has consistently impeded reform progress. The IMF underscores the urgency of overcoming this political impasse, emphasizing that such reforms are pivotal for growth acceleration and diversification of the economy.
For years, conflicts between appointed cabinets and elected parliaments have hindered fiscal reform efforts, including the enactment of a debt law necessary for international borrowing. The repercussions of the pandemic’s blow to oil prices in 2020 led Kuwait to adopt temporary financial measures to mitigate the impact.
Strength in Buffers, Yet Political Deadlock Persists
Kuwait’s notable fiscal and external buffers place it in a position of strength to implement crucial reforms. Nevertheless, the ongoing political deadlock has the potential to continue delaying these necessary changes. The IMF highlights that Kuwait’s resilience should not lead to complacency; rather, it should serve as a platform for decisive actions that can propel the country toward stability.
The Path Forward: Fiscal Reform and Economic Diversification
Kuwait’s draft budget for the current fiscal year appropriately incorporates higher spending, reflecting the negative non-oil output gap. However, the IMF emphasizes that starting from April 2024, the focus should shift towards fiscal consolidation aimed at increasing non-oil revenue. This approach is accompanied by addressing inflexible current spending patterns while simultaneously augmenting capital investments to stimulate potential growth.
Balancing the Books: Welfare System and Oil Revenue
Kuwait’s generous welfare system, spanning from birth to retirement, is a significant component of the national budget. Salaries, constituting over half of total expenditure in the draft budget for 2023-2024, exemplify the importance of this system. Additionally, oil revenue contributes a substantial 88.2% of projected revenues, underscoring Kuwait’s reliance on this finite resource.
Recent Political Developments
In June, Kuwait witnessed the election of its third parliament within two and a half years. Sheikh Ahmad Nawaf Al-Ahmad Al-Sabah, the son of Kuwait’s ruling emir, was subsequently reappointed as prime minister. These developments hold potential implications for the country’s political landscape and its ability to address the economic challenges at hand.
Kuwait’s pursuit of economic stability is a multifaceted journey laden with challenges. Despite risks and ongoing political gridlock, the nation’s substantial buffers and resources position it to implement vital reforms.
The imperative lies in overcoming the barriers to reform, capitalizing on strengths, and diversifying revenue sources to reduce dependence on oil. As Kuwait navigates this path, careful fiscal management and strategic decision-making will play pivotal roles in securing its economic stability in the face of uncertainties.
Contributing article: https://www.reuters.com/world/middle-east/kuwaits-economic-recovery-faces-substantial-risks-imf-2023-08-23/
