Kuwait enjoys sustained non-oil growth
25 August 2023
This month’s special report on Kuwait also includes:
> POLITICS: Stakeholders hope Kuwait can execute spending plans
> ENERGY: Kuwait’s $300bn energy target is a big test
> POWER & WATER: Warming erodes Kuwait’s power and water reserves
> BANKING: Kuwaiti banks enter bounce-back mode
> INTERVIEW: Kuwait’s Gulf Centre United sets course for expansion
After witnessing a substantial upswing in its economy in 2022, with real GDP growth surging to 8.2 per cent, according to the IMF, Kuwait’s growth has nominally slowed to 0.1 per cent in 2023. However, this plummet on paper is more a function of the country’s pullback in oil production than any dramatic swing in its economic fate.
Amid the surprise production cuts by the Opec+ producers in April 2023, Kuwait announced a cut of 128,000 barrels a day (b/d), equivalent to about 10 per cent of the group’s 1.15 million b/d in total cuts and around 5 per cent of Kuwait’s output.
In May and June, Kuwait pumped 2.55 million b/d of crude oil, down from 2.65 million b/d in April. For 2024, the country’s quota is 2.676 million b/d.
This curbing of the country’s primary export has naturally had a significant impact on headline growth, but looking ahead to 2024, the growth rate is projected to recover to 2.7 per cent.
Non-oil sustenance
Behind the fluctuations in Kuwait’s headline real GDP growth due to oil production and prices, the country continues to enjoy strong domestic demand and robust non-oil growth, with 4 per cent non-oil GDP growth in 2022 and a projection of 3.8 per cent growth in 2023, according to the IMF.
The World Bank, meanwhile, expects Kuwait’s non-oil economy to grow by 4.4 per cent in 2023.
Kuwait’s fiscal surplus stood at an estimated 7 per cent of GDP in the 2022/23 fiscal year, although that surplus is expected to disappear in 2023/24 after the Kuwait government approved an expansionary budget with a spending allocation of KD26.3bn ($85.5bn) for the current fiscal period – more than 12 per cent larger than the KD23.5bn spending budget for 2022/23.
If ultimately spent, the significantly higher allocated expenditure should further stimulate the non-oil economy.
The budget, approved on 2 August before the parliamentary summer recess, anticipates a fiscal deficit of KD6.8bn. This follows Kuwait achieving its first budget surplus in nine years in 2022/23. The current budget is based on an assumed average oil price of $70 a barrel, with an estimated government revenue of KD19.5bn, including KD17.2bn from oil revenue.
Kuwaiti business leaders are cautiously optimistic that this 2023 government could be the one to break the political gridlock
Oil price uncertainty
Looking ahead, oil price volatility remains the key threat to the oil-dependent Kuwaiti economy. Despite this, 2023/24 is conservatively budgeted in terms of its oil price assumptions, broadly aligning with the IMF assumptions for a $73.1 average in 2023, and $68.9 in 2024, and comparing with a July 2023 spot price around the $80-mark.
The hope will be that the price will remain at a higher mark and that the budgeted oil price turns out to be overly precautionary.
However, China’s economy showed signs of slipping again in July, with both imports and exports falling – a worrying sign for global trade and commodity prices. In mid-August, the International Energy Agency lowered its 2024 oil demand growth forecast to 1 million b/d in 2024, down 150,000 b/d from its prior forecast, pointing to a combination of high interest rates, tight credit, and sluggish manufacturing and trade.
The uncertainty of such scenarios should lend haste to the fiscal and structural reforms waiting in the wings. The hope is that Kuwait’s newly minted parliament and cabinet could mean that a resolution to the political gridlock is in sight, offering a path to the fiscal and structural reforms the country requires.
Kuwaiti business leaders are cautiously optimistic that this 2023 government could be the one to break the political gridlock between the government and parliament and reset the loop of successive resignations, reappointments and elections that have recently prevented any reform progress.
Reform requirements
Fiscal measures identified by the IMF as priorities include the need to rationalise Kuwait’s public sector wage bill and phase out energy subsidies, alongside introducing the long-delayed value-added tax and expanding the country’s corporate income tax base.
Advocated structural reforms include labour market reforms, competition strengthening, and climate change adaptation and mitigation.
Enacting at least some of these reforms will be crucial to Kuwait’s fiscal and economic viability in the medium to long term, with each delay only making tackling items such as the public sector wage bill harder.
In the short term, Kuwait can, of course, keep pumping. In June, Kuwait Oil Company CEO Ahmed Jaber al-Aydan told the Kuwait Times that the country’s oil production capacity would reach 3 million b/d by 2025. He also said the oil company would spend KD13bn ($42.5bn) on oil projects over the next five years.
The Kuwait government, meanwhile, announced in July that it planned to boost its crude oil production capacity to 3.15 million b/d within four years.
Yet at some point, Kuwait will still need to take a long, hard look at its future finances. All hopes are presently set on the 2023 government being the one to start moving in the right direction.
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