One of the richest petro-states in the world, Kuwait is strapped for cash
When then Kuwait’s finance minister Anas Al-Saleh warned in 2016 that it was time to cut spending and prepare for life after oil, he was ridiculed by a high population thanks to to a seemingly endless stream of petrodollars. Four years later, one of the richest countries in the world struggles to make ends meet as a sharp drop in energy prices raises deep questions about how the Arab Gulf states are run .
Al-Saleh is long gone, moving to other ministerial posts. A successor, Mariam Al-Aqeel, left in January, two weeks after suggesting that Kuwait restructure the public sector wage bill which is the biggest drag on state finances. His replacement, Barak Al-Sheetan, warned last month that there was not enough money to pay state salaries beyond October.
Slow to adjust their heavy spending habits as oil revenues plummet, the Gulf states are heading for a time of economic toll, sparking new debate over the future of nations that for decades have bought popular loyalty with it. the generosity of the state.
“We’re going to wake up someday and realize we’ve spent all of our savings, not because we haven’t checked our bank statement, but because we looked at it and said, it’s probably a banking problem. , then we bought the last Rolex, ”said Fawaz Al-Sirri, who heads political and financial communications firm Bensirri.
OPEC’s oil exporting club has revived crude from its historic decline this year, but $ 40 is still too low. The coronavirus pandemic and the switch to renewables threaten to keep prices low.
Saudi Arabia cuts benefits and imposes taxes. Bahrain and Oman, where reserves are less abundant, borrow and seek support from wealthier neighbors. The UAE has diversified with the rise of Dubai as a logistics and financial hub.
In Kuwait, however, a stalemate between the elected parliament and a government whose prime minister is appointed by the emir has led to a political stalemate. Lawmakers thwarted plans to reallocate state grants and blocked proposals for debt issuance.
Instead, the government has nearly depleted its cash flow, leaving it unable to cover a budget deficit that is expected to reach the equivalent of nearly $ 46 billion this year.
This has been a gradual decline for Kuwait, which in the 1970s was one of the most dynamic Gulf states, with its Frankish parliament, entrepreneurial heritage, and educated population.
Then the 1982 crash of an informal stock market shook Kuwait’s economy and coincided with the instability of the Iran-Iraq war that lasted for nearly a decade. Kuwait embarked on a spending spree to rebuild after Saddam Hussein’s assault led to the 1991 Gulf War. It took years for oil to flow freely again.
Kuwait still depends on hydrocarbons for 90% of its income. The state employs 80% of working Kuwaitis, who earn more than their private sector counterparts. Shelter, fuel and food benefits can total $ 2,000 per month for the average family. Salaries and subsidies absorb three-quarters of government spending, which is heading for its seventh consecutive deficit since the 2014 oil crisis.
Savings for life
But Kuwait has money, in abundance, hidden in an unbreakable fund – the fourth in the world at an estimated $ 550 billion. Touching the Fund for Future Generations, designed to ensure prosperity after the oil runs out, is a controversial proposition.
Some Kuwaitis say the time is right. Opponents warn that without economic diversification and job creation, economies would run out in 15 to 20 years.
“It’s not a solvency issue, although it is seen as a cash shortage,” said Jassim Al-Saadoun, director of Kuwait-based Al-Shall Economic Consultants.
Rich for infinity
The heritage fund has already come to the rescue, buying more than $ 7 billion in assets from the Treasury in recent weeks. Parliament approved plans to halt, in deficit years, a 10% annual transfer of oil revenues to the fund, freeing up an additional $ 12 billion, but not enough to cover the budget deficit.
To do this, the government must borrow. But after a first Eurobond issue in 2017, Kuwait’s public debt law lapsed. Al-Sheetan’s wage warnings came as it tried, unsuccessfully, to convince lawmakers to back plans to borrow up to $ 65 billion.
His demand coincided with a string of corruption scandals, some involving senior members of the ruling family, and lawmakers have demanded that the government end corruption before accumulating debt.
Al-Sheetan is the fourth finance minister in as many years. Kuwait has had 16 governments and seven elections since 2006.
The deadlock has undermined investor confidence. In March, S&P Global Ratings placed Kuwait’s sovereign rating on negative watch. Moody’s Investors Service followed. The IMF said this month that “Kuwait’s window of opportunity to meet its challenges from a position of strength is narrowing.”
“The belief system in Kuwait is that we are endlessly rich,” Al-Sirri said. “No one has the political capital to tell the Kuwaiti people that the party will soon be over if we do not support change.