Kuwait’s crisis pushes government to cut spending, expand debt

The country faces many unprecedented challenges, including a decline in oil revenues and its reserve currency and an inability to find alternatives to lost income.
Wednesday 09/09/2020
A Kuwaiti clerk holds up banknotes at a currency exchange shop in Kuwait City on September 7, 2020, a sector heavily affected by the COVID-19 pandemic which caused a sharp drop in travel and tourism. (AFP)
A Kuwaiti clerk holds up banknotes at a currency exchange shop in Kuwait City on September 7, 2020, a sector heavily affected by the COVID-19 pandemic which caused a sharp drop in travel and tourism. (AFP)

KUWAIT – Kuwait’s suffocating economic crisis has forced the government to limit spending as it faces a decline in oil revenues and the repercussions of the COVID-19 crisis, amid a wave of social unrest triggered by reduction of public subsidies and jobs.

Recent data and indicators reveal that Kuwait’s economic burden is growing. The government has tried to limit its losses by taking steps to bridge the financial gap, but experts believe its austerity measures are not proving effective.

The government’s recent step increased fears within economic and popular circles about liquidity and the potential loss of financial balances, reinforcing the need for new external debt, which parliament has rejected

MP Adnan Abdulsamad, chairman of the budgets and final accounts committee, said on Tuesday that Kuwait has cut 945 million dinars ($3.1 billion) in expenditures from its budget for the 2020/2021 fiscal year due to the health crisis.

The Twitter account of the National Assembly quoted Abdulsamad as saying that workers’ rights, benefits and subsidies would not be affected by those cuts.

“As a result of the current crisis, the ministry of finance has amended the estimates for the 2020/2021 budget, with revenues estimated at 7.5 billion dinars and expenditures at 21.5 billion dinars,” Abdulsamad reportedly said.

In January, then Kuwaiti Finance Minister Mariam Al-Aqeel expected spending of 22.5 billion dinars ($73.5 billion) and revenues of 14.8 billion dinars ($48.4 billion for the 2020/2021 budget.

In June, the Council of Ministers requested that the finance ministry coordinate with all government agencies to reduce its budgets by at least 20% for the current fiscal year due to the drop in oil prices and the health crisis.

Abdulsamad said that the finance ministry estimates 7.5 billion dinars ($24.5 billion) in revenue and a deficit of 14 billion dinars ($45.7 billion) after the amendment, adding it is possible the deficit will “improve because the price of a barrel on which the budget was estimated is $30 and its current price is $45.”

A monthly report published by Kuwait’s Central Bank recently showed that the country’s foreign exchange reserves decreased by 1% in July from the previous month. According to the bank’s data, Kuwait’s reserve decreased to 13.78 billion dinars ($ 45.1 billion) in July 2020, compared to 13.92 billion dinars ($45.6 billion) in June.

Reserves increased by 18.9% year on year, up 11.59 billion dinars ($37.9 billion) from the same month in 2019.

The country’s reserves included about 12.97 billion dinars ($ 42.5 billion) in deposits and currencies, some 564.4 million dinars (1.83 billion dollars) in the International Monetary Fund’s (IMF) special drawing rights, and around 214.2 million dinars ($ 702.4 million) in balance at the IMF.

Kuwaiti Minister of Public Works and Minister of State for Housing Affairs Rana al-Fares attends a parliament session at the national assembly in Kuwait City on September 1. (AFP)
Kuwaiti Minister of Public Works and Minister of State for Housing Affairs Rana al-Fares attends a parliament session at the national assembly in Kuwait City on September 1. (AFP)

Kuwait’s economy depends on the oil industry, which constitutes more than 90% of government revenue. After previously producing 2.8 million barrels of oil per day, Kuwait’s output has decreased to 2.2 million barrels due to the OPEC+ cuts.

The health crisis and the collapse of oil prices has increased pressure on the government to impose austerity measures after previous attempts failed due to pushback from the public and parliament.

Today, Kuwait faces many challenges, including a decline in oil revenues and its reserve currency and an inability to find alternatives to lost income.

This has led to the country’s credit rating dropping, prompting economic circles to intensify pressure on authorities to act quickly before more consequences hit, including its local currency losing value.

The unprecedented financial crisis has made many previously available options impossible to implement.

Analysts believe that expanding public debt is now inevitable, as the government is having trouble providing enough liquidity for the current fiscal year.

The draft public debt law is still controversial within political circles, especially the National Assembly, as it allows the government to borrow 20 billion dinars ($64.8 billion), provided that the amount is repaid in ten years. The old draft would have allowed the government to borrow $81 billion.

A parliamentary committee rejected the law last August, amid mass public opposition to it due to fears of spending loans on current expenses. Experts believe that Kuwait was late in introducing laws that guarantee quick, effective reforms, and needs to amend and update old laws to match the global economic climate.

Kuwait’s economy is dominated by traditional law, as the state controls all manufacturing sectors, and has trouble reducing spending due to political and popular opposition to any changes in subsidies or government support. The private sector’s role in reducing the state’s burden is limited.

Economists say these conditions are unattractive to local and foreign investors, hindering the diversification of financial resources and the private sector’s contribution to economic activity, which remains limited mostly to industrial fields.

Despite announcing its 2035 Vision a few years ago, Kuwait has not been able to free itself from dependence on oil revenue to finance government jobs. More than 75% of Kuwaiti citizens work in the public sector and often benefit from lavish government subsidies.

Experts believe that Kuwait’s reform programme, first introduced in 2010, to diversify the economy and reduce dependence on oil revenue, government spending and the role of the public sector in employing citizens has brought no significant changes so far.