Kuwait budget forecasts record deficit
The Kuwaiti government unveiled a proposed budget for the coming fiscal year that forecasts a record deficit and that highlights the country’s reliance on oil income to fuel its economy and its slow pace of adopting critical fiscal reforms.
The government is facing swift pushback from a vocal parliament on the deficit figure and on pledges to impose overdue taxes on the Kuwaiti citizenry.
The budget details come during a politically tense time for Kuwait after accusations of corruption and no-confidence votes in parliament against key ministers prompted the Kuwaiti cabinet to resign in November.
Kuwaiti Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah tasked former Foreign Minister Sheikh Sabah al-Khalid al-Hamad al-Sabah to serve as prime minister and a new cabinet was sworn in December 17.
At a January 14 budget briefing, Kuwaiti Finance Minister Mariam al-Aqeel said the country’s deficit for the 2020-21 fiscal year, which begins April 1, would expand 19% to 9.2 billion dinars ($30.3 billion) after considering the standard 10% of revenue that the government transfers into the state’s Future Generations Fund (FGF).
Kuwait’s spending is to remain flat at approximately $74 billion but the government said revenues would decrease from approximately $52 billion in the current budget to around $48.7 billion in the coming fiscal year.
The government sees Kuwait’s oil income, which accounts for 87% of the country’s earnings, declining 7% to $42.5 billion in the 2020-21 budget. The proposed budget is based on an oil price of $55 a barrel, at the low end of the $55-$65 a barrel range the Kuwaiti government used in building its 2019-20 budget.
Some 71% of Kuwait’s spending in the 2020-21 fiscal year is earmarked for public wages and subsidies, with capital expenditures maintained at 16%. Aqeel said the $30.3 billion deficit would be covered by withdrawals from the Treasury or the country’s General Reserve Fund (GRF).
She noted that the government would push for the National Assembly to pass a stalled public debt law, without which Kuwait has been unable to finance its deficit by borrowing and has had to increasingly rely on GRF assets.
A previous debt law expired in 2017 and parliamentarians have blocked efforts to increase the country’s debt ceiling from $33 billion to $82 billion and enable the government to offer 30-year bond issues from a current 10-year limit. Aqeel said: “The government will fight for getting this law approved since the cost of borrowing is less than the cost of withdrawing from the reserves.”
She said the government wanted the National Assembly to approve legislation to implement selective taxes that have been adopted in other Gulf Cooperation Council (GCC) members.
Kuwait has yet to institute a 5% value added tax (VAT) on designated goods and services that the GCC mandated in 2015 be introduced by all members. The government suggested it would implement the VAT in its 2021-22 fiscal year.
Kuwait is the last GCC member not to have enacted a “sin” tax on tobacco and sugary drinks, though it indicated it would institute such levies during the 2020-21 fiscal year. However, the government faces strong resistance from an angry parliament, which has stymied economic reforms recommended by leading financial institutions that MPs argue would negatively affect average Kuwaiti citizens.
Parliamentarians blasted the Kuwaiti government for the proposed 2020-21 budget. MP Abdulkarim al-Kanderi placed blame for the $30 billion deficit on “mismanagement” by the previous governments and warned that the Kuwaiti people would not suffer for that poor fiscal handling.
Kanderi and MP Thamer al-Suwait cautioned that the prime minister would immediately face a “grilling” in the National Assembly should the government attempt to introduce measures that could create a financial burden on Kuwaiti citizens.
As the National Assembly faces a general election in 2020, it is unlikely there will be much progress on the contentious issue of selective laws.
There is growing concern about depleting the GRF’s assets should Kuwait continue to finance its deficits by large asset withdrawals from the fund. Both the GRF and the FGF are investment vehicles managed by the country’s sovereign wealth fund, the Kuwait Investment Authority (KIA). The KIA is estimated to hold $592 billion in assets, equivalent to 430% of Kuwait’s GDP.
The FGF — a buffer for when Kuwait’s oil eventually runs out — has grown with solid profitability but, estimates last year by credit ratings agency Moody’s Investors Service said, the GRF’s assets declined $48.4 billion from the 2015-16 to 2018-19 fiscal years. The agency warned that the fund’s liquid assets “would be depleted under most plausible circumstances within the next four years.”
Credit ratings agency Standard & Poor’s earlier in January maintained its sovereign credit rating for Kuwait at “AA with a Stable Outlook.” Despite “risks related to Kuwait’s undiversified, oil-dependent economy,” the agency said, “the ratings on Kuwait remain supported by the country’s high levels of accumulated fiscal and external buffers.”