Kuwait's oil boom continues

In its latest economic brief public finance, National Bank of Kuwait reports that preliminary government budget figures for fiscal year 2002/03 (FY02/03) that closed last March suggest an increase in the budget surplus compared to the previous fiscal year.

In FY01/02, the budget was in surplus by KD 590 million before the allocation of 10% of revenues to the Reserve Fund for Future Generations. NBK expects the budget surplus for FY02/03 to fall between KD 1.3-1.4 billion before RFFG.

The monthly follow-up statement published by Ministry of Finance shows preliminary estimates of revenues and expenditures through end March. Even though these interim reports grossly underestimated expenditure figures that tend to undergo major adjustments in the preparation of the closing accounts, they can still provide good guidance about the actual outcome by comparing them with prior year reports.

A 21.5% increase in oil revenues was primarily behind the increase in the surplus. Government expenditures rose moderately after one time increases in some employment items and in transfers caused spending to surge in the previous fiscal year. On the other hand, capital expenditures continued to gain momentum after the government made that the focus of its economic program.

According to the NBK report, government revenues rose by 16.6% to KD 6.20 billion with oil revenues accounting for 89% of the total. A 24.2% increase in the average price of Kuwait export crude that reached $25.8 per barrel during FY02/03 more than made up for an estimated 2.1% decline in Kuwait's crude oil production.

Revenues exceeded budget projections for the full fiscal year by more than 85% as the latter were based on a price of $15 per barrel.

Non-oil revenues, however, dropped by 8.8% to KD 718 million, though the amount remained comfortably above budget due to KD 204 million in UN Compensations Committee (UNCC) payments to the government for losses due to the Iraqi invasion.

Still, UNCC payments that are reported under miscellaneous revenues were 43% lower than those received in the previous fiscal year. Other revenues as a whole actually increased by a rapid 14.4% albeit at a slower rate than last year.
NBK states that growth in non-oil revenues came primarily from customs duties and fees, land sales and corporate taxes. Taxes levied on foreign companies made their first recovery in several years increasing by 36%.

Revenues from services saw modest growth of 2.4% compared to an increase of 20.7% a year ago. Slower growth was primarily due to a large drop in revenues at the Ministry of Health.

Other service revenues saw healthy growth, including revenues from water and electricity charges, up 13%, and income from law enforcement and legal charges, up 32%. It is worth noting that service revenues are greatly affected by collection of past due fees and irregular reporting by various entities.

Growth in government spending moderated substantially to 2.3% compared to 22% a year ago. This mirrored the smaller increases in budget projections that averaged 3% compared to 10% in FY01/02.

Actual expenditures relative to budget projections were similar to last year at 76%. The spending rate for the full year should be significantly higher once adjustments are made to the closing accounts. For FY01/02 actual expenditures were 90% of the budget, in line with historical patterns.

The NBK report adds that slower growth in wages and salaries and, to a larger extent, cuts in transfers and in spending on goods and services were the main factors behind the reduced growth in expenditures. Coincidentally, these were also the areas that accounted for most of the spending increases in the previous fiscal year.

The drop in Transfers was mainly on housing loan forgiveness following an unusually large allocation in the previous fiscal year and a smaller drop in transfers abroad. Excluding these two items, the rise in government expenditures would come to 8.3% in the current fiscal year versus 15.9% a year ago.

òSpending on goods and services, a major contributor to overall spending increases in recent years, dropped by 14.4%. The drop arose primarily at the Ministry of Electricity & Water after several years of substantial spending increases on fuel for power generation.
Employment-related spending continued to dominate the budget representing 60% of total expenditures.

This includes wages and salaries in Chapter 1, wages of military personnel categorized in chapter 5, transfers to the Public Institution for Social Security (PIFSS) and expenditures as per the national labor support law.

Growth in employment-related spending was relatively high at 9.9%, though the pace of growth was slower than last year. Wages and salaries under Chapter 1 increased by 4.8%; wages and salaries of military personnel rose by 9.6%; while transfers to PIFSS continued to accelerate growing by roughly 20%.

NBK reports that overall, transfers to public institutions rose by 18% following a 6% decline in the previous year, notwithstanding the drop in housing loan forgiveness and transfers abroad. The final tally is likely to undergo large adjustments.

Capital expenditures rose markedly, up 23% (KD 50 million) compared to the same period last year. Much of the increase in capital expenditures was at the Ministry of Public Works and at the Ministry of Electricity and Water.

Still, spending was well below budget running at a rate of 40%. The spending rate is expected to be significantly higher by the close of the year as adjustments are expected to push it above last year's 70% rate.

Military procurement, expenditures on military equipment and hardware increased by KD 47 million or 30% following a substantial increase in the previous year. The KD 202 million reported spent during FY02/03 is about 1% above the budget projection for the period and could end up higher in the closing accounts.

In March, the National Assembly approved a supplemental appropriation bill worth KD 500 million in defense expenditures associated with the war on Iraq. The amount is likely to be spread between FY02/03 and FY03/04, if not beyond. It's full impact on last year's budget outcome is not clear at this point in time.