The Strategist

Kuwait and the oil crisis: Not save but spend as much as possible

05/20/2016 - 17:01

Kuwait's Deputy Prime Minister Anas al-Saleh said that the second richest country in the Middle East is responding to the oil crisis not by cutting costs, but with a concept "spend as much as possible" to support economic growth.

He noted that the government will not cancel any projects. At the same time, the authorities are trying to reduce unnecessary costs to cope with the budget deficit, which in 2016 could exceed 13% of GDP.

Al-Saleh is also the Minister of Finance and Acting Minister of Oil in Kuwait. He is trying to achieve a reduction in dependence on oil sales. For this, he is planning to cut subsidies and introduce corporate taxes, merge some state agencies to reduce the government, as well as to raise funds in the domestic and international debt markets.

"We are determined to go ahead and do as much as possible for our economy and infrastructure, - said Al-Saleh. Reducing the budget deficit is also a priority."

According to the official, Kuwait has sufficient financial strength to gradually reduce the negative impact of low prices on its economy. 

Kuwait's sovereign fund has assets of $ 592 billion. In 2015, the country's GDP, adjusted for exchange rates, amounted to more than $ 70 thousand per capita, placing Kuwait to sixth place in the world on this indicator. Only Qatar’s GDP per capita in bigger in the Arab world.

The oil crisis has clearly shown structural problems of the Kuwaiti economy. However, the stable budget, low debt, and sufficient stock of international reserves enable the government to carry out reforms without aggressive steps such as cutting spending too much.

The problem is that all last efforts have failed due to a combination of wealth and political bickering.

Parliament is opposed to the previous government's plans to stimulate investment and cost containment. In 2013, legislators have simply tried to write off interest payments on bank loans, which citizens received in five years to cope with non-payments.

Al-Saleh said that now key elements of the current government's plan does not require approval of Parliament.

In any case, it is necessary to finance the deficit. That is why the government has launched a bond issue program. So far, it involved only the domestic market, but the government wants to attract global investors as well.

The country consulted with the IMF, and hired consulting company Oliver Wyman & Co. to create a strategy for the debt management.

Officials noted that the Kuwaiti assets produce strong interest from local and international investors.

But, of course, the government anchors their highest hopes on Kuwait Investment Authority, which is considered the oldest National Welfare Fund in the world. It is focused on global infrastructure projects.

Although the authorities have used this fund to finance the budget deficit, they have maintained a policy whereby 10% of the income goes to the so-called fund of future generations.