Kuwait: good just got better (page 1 of 4)

In its most recent Economic and Financial Review, National Bank of Kuwait notes that with war in Iraq over and stability returning to the region, an already promising picture for the Kuwaiti economy looks better than ever.

The growth possibilities are substantial as Iraq rebuilds and promises to play an important role in the economy of the region in the coming few years. For Kuwait this not only means increased trade and investment opportunities in the neighbor to the north, but more importantly improved prospects for internal growth in an era of increased regional stability.

This year has already proved to be very positive as the price of oil remained strong and the local equity market surged on strong investor confidence. Private sector activity that was already showing strong signs of recovery in 2002, benefited from increased demand for logistical supplies and support services by coalition forces.

However, these positive indicators can conceal the real challenges that lie ahead. For Kuwait's economy to make the most of the improved conditions, a bold attitude must be embraced to deepen the steps towards economic reforms that have been studied in great detail.

The foreign direct investment law passed in 2000 is only now being implemented with the issuing of the supporting regulations early in 2003. Still pending are reforms of the tax regime as well as the long-awaited privatization law. Pushing those along urgently this year can pave the way for real growth in the coming years, the only sure way to satisfy the ever-increasing need to create employment opportunities for nationals.

Progress on other liberalization initiatives has also been slow including most importantly Project Kuwait which has been delayed for far too long. In 2003 this initiative to allow international oil companies to participate in the development and operation of northern oil fields has been revived and promises to provide concrete results before the year is out. Still, the political factor will continue to cast a cloud of uncertainty on its prospects despite its strategic importance in helping Kuwait maintain its share in the global oil market.

Even before the optimism born of the overthrow of the Saddam regime in Iraq, Kuwait was already benefiting from an improved economic environment. Driving the growth in economic activity has been an expansionary fiscal policy, which has boosted both current and capital spending over the last two years. A highly liquid environment benefiting from UN compensations for losses due to the 1990 Iraqi invasion has also been a boon, especially in driving activity in the local stock and real estate markets.

Economic activity recovered in 2002 as gross domestic product (GDP) grew by 2.3% to KD 10.74 billion despite a drop in value added from crude oil production. Traditional private sector activities including wholesale and retail trade, real estate and business services, formed an important part of this pick-up, though the public sector continued to be an important driver as well.

Overall, growth in non-oil GDP accelerated to 6.2% raising its share of the total to 55%. Oil GDP shrank mildly despite higher oil prices as Kuwait reduced its crude oil production in line with cuts in the OPEC quota. The recovery in petroleum refining offset part of this drop as repairs to Kuwait's largest refinery that was damaged by a June 2000 accident were completed in September of last year.

NBK expects the sector's output should be even higher this year barring a sharp drop in refining margins as it operated below its original capacity during most of last year.

Kuwaiti crude averaged $23.6 per barrel in 2002.