NBK forecasts solid 2002

According to the latest economic brief published by National Bank of Kuwait, the fiscal accounts of the State of Kuwait saw a KD 1.15 billion surplus during the first six months of the current fiscal year 2001/02, compared to a projected deficit in the budget of KD 721 million.

However, the surplus is significantly lower than the KD 1.93 billion realized over the same period a year ago. Behind this is a clear decline in government revenues and an increase in the level of expenditures. Total revenues fell 16% to KD 2.94 billion, while spending grew by 14% to reach KD 1.79 billion.

Almost 90% of the increase in spending was on transfers or defense/security related. Excluding such items that have limited direct effects on domestic activity, spending growth was a milder 4.3%. Looking ahead for the full fiscal year, NBK expects the surplus to disappear due to weaker oil prices in the second half.

The NBK report says oil revenues came to KD 2.56 billion for the six-month period, down 22% from the same period in the prior fiscal year. A 12.8% drop in the price of Kuwaiti crude coupled with a 6.5% decline in Kuwait's oil production was behind this drop. The price of Kuwaiti crude fell to $23.2 per barrel during the first six months of FY01/02 versus $26.6 during the first six months of FY00/01.

Countering this decrease was an increase in the government's non-oil revenues, which rose by KD 163 million to KD 376 million, a 76% increase. Of this increase, KD 41 million came from higher revenues from service charges, which grew by 32%. These were driven mainly by increases in healthcare services (up KD 16 million) and transportation and communications fees (up KD 9.5 million).

Most of the remainder of the increase was in miscellaneous revenues (up KD 114 million), though customs fees and corporate income tax revenues saw modest increases that partly reversed their retreat in the prior year.

NBK notes that higher spending came primarily from increases in transfers and miscellaneous expenditures, which rose 22% to KD 1.09 billion. More than half of this increase was accounted for by a rise in housing loan forgiveness, which was up by KD 62.5 million.

Another KD 35.6 million was due to servicing the government's outstanding Government Debt Bonds used to purchase bad debts from the private sector. Increases of KD 39 million and KD 30 million were also seen in miscellaneous expenditures at the Ministry of Defense - most likely in wages and salaries to military personnel - and in spending on military hardware, respectively.

Wages and salaries increased by KD 21 million or 4%. This was largely due to increases at the Ministries of Education, Social Affairs, Interior and Information. Wages and salaries fell at two service-oriented ministries that hire many non-Kuwaitis, namely the Ministry of Electricity and Water and the Postal Department at the Ministry of Communications.

Even though the budget allocation for development and maintenance projects was raised by 25% for this fiscal year, there was a 9.4% drop in this spending category. The prorated budget allocation for the period was KD 292 million, of which only 22% (KD 65 million) was spent.

The delayed approval of the FY01/02 budget may lie behind the drop. The budget was passed in late June 2001, three months into FY01/02. Typically, if a fiscal year begins before a budget is approved, the government operates within the parameters of the previous year's budget, while the implementation of new projects is put on hold until their appropriations are approved. This is unlikely to be the sole factor behind the slippage in implementing planned projects. However, the government has not offered a reasonable explanation to date.

Separately, some items in this chapter, such as land purchases for which KD 83 million has been budgeted, are not entered in the books until the end of the fiscal year. Consequently, the expected growth in this chapter may not appear until later in the fiscal year.

According to the NBK report, by the close of FY01/02 the surplus indicated in the interim figures is likely to vanish. Weaker oil prices and reduced crude oil output have already negatively impacted revenues during the first half of FY01/02. Sharper declines since October are expected to cause the variance from last year's revenues for the year as a whole to be even greater.

Revenues are expected to stand at KD 4.65 - 4.71 billion, down by 29% - 30% from FY00/01 on an annualized basis. Still we expect actual revenues to exceed budget estimates that were based on a hypothetical price of $15 a barrel. In contrast, we estimate the average price of Kuwait crude to range between $19.5 and $20 for the full fiscal year even with the average for the first quarter of 2002 remaining in the range of $15 - $17.

NBK economists reckon that if spending comes in at budget, the government could realize a deficit ranging between KD 565 million and 620 million. This is still well below the KD 1.44 billion deficit projected in the official budget. However, if spending comes in 10% below budget as it did last year, this could mean a small deficit of KD 38 - 93 million before the allocation for the Reserve Fund for Future Generations (RFFG).

Thus, the government's desire to avoid a deficit this year does not appear to require any extraordinary measures to cut spending. At this point in time, proceeding with contingency plans to cut unnecessary spending that the Minister of Finance alluded to before OPEC approved its latest output cut could prove detrimental for the economy and unnecessary for producing a balanced budget.