Kuwait PM’s in-tray: public debt and budget reform

Reuters

• Four-year programme of projects announced
• New sovereign wealth fund for domestic investment
• Kuwait trying to pass long-stalled public debt law

Since Kuwait’s new government took office at the start of June, it has provided Kuwaitis – and many international investors – with much to consider.

After just six weeks in office, Prime Minister Sheikh Ahmad Nawaf al-Ahmad al-Sabah’s administration announced a four-year programme featuring 107 major projects.

These include completion of Kuwait’s stretch of the Gulf international railway and a KD200 million ($658 million) “entertainment city” in the seaside district Doha, on the western outskirts of Kuwait City.

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The programme also includes the opening of a new airport terminal, increasing oil and gas production, and the creation of a new sovereign wealth fund, Ciyada.

Ciyada is supposed to focus on domestic investment, according to reports.

It will take its place alongside Kuwait’s existing $700 billion Future Generations Fund (FGF) and smaller General Reserve Fund (GRF).

These are managed by the Kuwait Investment Authority – the world’s fifth-largest sovereign wealth fund. 

Also included in the programme – and likely to be a crucial test for the new government of Kuwait – is a commitment to pass a long-stalled public debt law during the first year of the new parliament. 

This law has long been advocated by international ratings agencies and the World Bank, as well as by many government supporters. Yet, it has also proved a tough nut to crack for successive administrations. 

“Governments have been trying to pass this for years,” Mohammad Al Jouan from the Kuwait Economic Society told AGBI.

“But the government hasn’t answered the three basic questions about debt: how much would the debt be for, how would you use it and how would you repay it?

“The law looks like a blank cheque and when you address it politically, the government loses miserably.” 

However, without such a law, Kuwait may face increasing difficulty in financing budget shortfalls – a continuous challenge for a country that has run a budget deficit for all but one of the last 10 years.

A recent low point occurred in 2020-2021, when oil prices tumbled as a result of the Covid-19 pandemic. The state came perilously close to being unable to pay its large public sector wage bill.

According to the IMF, 57 percent of government revenue and 78 percent of Kuwait’s export revenues came from oil and gas that year. 

Unable to raise financing on the international debt market without a public debt law, other statutes prevented the government from dipping into the long term savings of the FGF.

“The FGF is like a long term savings account at the bank,” says Al Jouan, “while the GRF is like the checking account.”

In 2020-2021, the GRF was practically empty as the government struggled to meet salaries and pay bills. A disaster was only averted by a combination of last-minute creative accountancy and rebounding oil prices.

Three possible solutions

Oil prices have remained comfortably high since. Future deficits, however, may need addressing if oil continues to drift down and efforts by oil producers to support prices by cutting production quotas persist.

To finance such deficits, the government has three options, according to Justin Alexander, director of Khalij Economics: “The first is to dramatically narrow its non-oil deficit by raising new revenue, such as VAT, and by cutting spending sharply.”

This is politically unpopular, with many Kuwaitis dependent on the public sector for jobs and incomes.

Plans to introduce VAT in January this year were also abandoned, and the new government work programme makes no mention of introducing it.

“The second option is to draw on income and assets from the FGF,” Alexander says.

However, the FGF is largely out of bounds due to a constitutional requirement to preserve funds for future generations.

“The third option is to raise debt,” Alexander adds. 

Which is where the new government’s parliamentary agenda comes in.

Kuwait remains a wealthy economy, running a $21 billion budget surplus this year and one of the lowest sovereign debt to GDP ratios globally, according to acting finance minister Saad Al-Barak. 

But while passing a debt law has proved too much for governments in the past, it may be even more difficult now.

“Back in 2021, when this was being debated, interest rates were very low,” Al Jouan says.

“Now they are high. It doesn’t make economic sense to be returning to the debt market at this time.”

Political opposition is also strong. Twenty Kuwaiti parliamentarians spoke out against the new debt law when the government introduced its programme to parliament on July 18.

The resignations of both the finance minister and the education minister in the last two weeks also suggest the government is facing challenges of its own. 

Now, with the parliament of Kuwait going into recess until October, the summer is likely to be filled with much behind-the-scenes manoeuvring, as the government tries to secure support for its programme – and for a new public debt law most of all.