Kuwait’s economic reforms face domestic opposition

  • September 10, 2019
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When Kuwait’s ruling emir opened the parliamentary session last year, he urged lawmakers not to allow higher oil prices to hold back economic reforms needed “to protect future generations”.

But changing the culture of entitlement is difficult for such a wealthy country.

Kuwait has the most open political system in the Gulf. The emir retains strong control, appointing a cabinet led by the ruling family. But the lively parliament frequently questions ministers and block legislation. In August, the government said that the Emir Sheikh Sabah Al Ahmad Al Sabah, 90, had suffered a minor health setback, reviving longer-term succession questions given that the crown prince is in his 80s.

In the wake of the 2014 oil price collapse, the government had introduced austerity proposals that sought to raise taxes, cut benefits and curb state spending. A recent improvement in state finances prompted by a recovery in the price of oil has made the argument for reform even harder.

Parliament, elected in 2016, has rejected and watered down many such proposals including cuts in subsidies for energy use. Its budgetary committee has also blocked the introduction of a sales tax, which all Gulf Cooperation Council states were supposed to introduce in 2018.

Parliamentarians have vigorously defended the demands of 1.4m Kuwaiti citizens, who are heavily outnumbered by more than 3m foreign workers and accustomed to generous state benefits and plentiful jobs.

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Kuwait can balance its budget with an oil price of $48 a barrel, the lowest so-called break-even price among Middle Eastern oil exporters. “But now is exactly the time for reforms,” says one diplomat in Kuwait. The IMF has also called on the government to speed up reforms “from a position of strength”.

A big priority for the IMF is trimming the public sector wage bill by encouraging nationals into jobs not supported by the state. The IMF says the private sector will have to absorb the 99,000 Kuwaitis — equivalent to a fifth of the current Kuwaiti labour force — expected to enter the job market in the next five years.

Chart showing Kuwait's population by age group

Attracting foreign investment has been identified as a key means of reducing dependence on oil exports. “The government and parliament are increasingly collaborating to diversify the economy for future sustainability,” says Sheikh Meshaal Jaber Al-Sabah, director-general of the Kuwait Direct Investment Promotion Authority (KDIPA). “Capital is not the main issue, but we are aiming to attract new technology and innovation that create job opportunities and add value to the economy.”

To do so, KDIPA offers incentives such as tax holidays and the ability to exert full ownership and control of businesses by foreign investors. Restrictions on ownership remain in a few sectors, including natural resources and security.

Most foreign investment is in the technology sector, says Sheikh Meshaal. Other areas of interest include oil and gas, renewable energy, training and construction. Since taking applications for business incorporations in 2015, the authority says it has attracted more than $3bn of investment.

The overall foreign direct investment (FDI) inward flows into Kuwait are even higher, when taking account of investors who opt for taking a minority stake with a local partner, he adds.

UN statistics on FDI into Kuwait paint a different picture, putting the value at $1.4bn between 2015 and 2018. But Sheikh Meshaal argues that these figures do not accurately reflect true levels of inward investment. KDIPA is working with the country’s central bank to provide broader coverage of data reporting in the national accounts, he says.

Diplomats representing inward investors laud KDIPA’s efforts as an interlocutor with foreign investors by helping to ease regulations and boosting legislative protection in areas such as intellectual property rights. But they also urge more work to deliver open, more understandable tendering processes for foreign companies.

“Maximum transparency is needed,” said one diplomat. “Big investment in infrastructure needs maximum transparency in the tendering process — some of them start and then are not completed, perhaps for a good reason, but the idea is to get a more expeditious tendering process.”

Confusing documentation and arcane processes can act as a difficult hurdle for foreign-owned businesses, leaving large local merchant groups at an advantage. Many inward investors therefore continue to choose partnerships with Kuwaiti firms as the avenue for entry into the market.

The government’s grandiose infrastructural spending plans, alongside wide-ranging investment in energy, healthcare and education, feed into the country’s long-term development vision, New Kuwait 2035.

The finance ministry says $60bn has already been ploughed into the economy as part of the reform plan, with another $100bn set to be deployed through 2035.

map of Kuwait

Overall, there are $429bn in planned projects in Kuwait, out of which $239bn in contracts are under construction, according to ProTenders, a Middle East construction market research company.

Mubarak al-Kabeer port is the centrepiece of the country’s development plans. Located on Bubiyan Island near Kuwait’s northern border with Iraq, the Northern Gulf Gateway project — also known as Silk City — is planned as a free-trade zone.

Backed by China, it is designed to attract a range of high-tech industries and tourism and create between 200,000 and 400,000 new jobs.

The government has positioned the project as a means to prepare Kuwait for an era of declining oil revenues. For a country still scarred by the experience of the Iraqi invasion and occupation of 1990-1991, securing foreign support for expanded trade facilities is also seen as a way to ensure Kuwait’s long-term security.

Kuwait's Deputy Prime Minister and Minister of Defence Sheikh Nasser Sabah al-Ahmad al-Sabah arrives for a meeting with French President Emmanuel Macron (not seen) at the Elysee Palace in Paris, France, April 29, 2019. REUTERS/Philippe Wojazer
Kuwait’s deputy prime minister and minister of defence Sheikh Nasser Sabah al-Sabah © Reuters

The government intends to share a draft law with parliament shortly, setting out a framework for these northern projects.

A separate administrative and legal status for the free zone would allow modern arbitration and foreign ownership of companies, according to one person involved in promoting the law.

Parliament, however, has already raised objections to early drafts, with lawmakers complaining that the proposals would remove its oversight. Some are also concerned that the tourism plans could allow for alcohol sales in a conservative society, which — like Saudi Arabia — bans it.

Opposition to the northern project is symptomatic of the troublesome relationship between parliament and government. Critics have long said parliament has held Kuwaiti development back by preventing reforms. But its defenders say lawmakers can act as an important brake on the government and ruling family promoting change at a faster pace than Kuwaiti society can handle.

Some in the private sector fear the influx of foreign investors will eat into their business. Others believe the project to be a white elephant that will waste resources that could be better channelled elsewhere.

“I am for it, but it must be clear for everyone to see — what is our benefit — $450bn to be invested in the desert for what?” says one senior Kuwaiti businessman.

“They could put 10 per cent of that into our economy and we would become like Singapore.”

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