Kuwait underspends budget

In its latest economic brief on public finance, National Bank of Kuwait reports that the preliminary government budget figures released by the Ministry of Finance for the first six months of fiscal year 2003/04 (FY03/04) show a surplus of KD 1.69 billion before allocation for the Reserve Fund for Future Generations (RFFG), and KD 1.34 billion after RFFG.

The result reflects major improvement: A sizeable rise in oil revenues coupled with an unanticipated drop in spending contributed to widening the surplus by 70% compared with the first six months of FY02/03.

The interim figures contrast sharply with budget projections of a KD 1.16 billion deficit, primarily arising from an extra-conservative assumption on oil prices and production levels in addition to steady growth in planned expenditures.

However, the present fiscal year started as war on Iraq was at its climax, causing the suspension of numerous activities including projects and schools, not to mention hiring. In effect, a substantial part of the population traveled abroad to wait on the war. As a result, spending took a nosedive. On the other hand, growth in oil production combined with an increase in oil prices boosted revenues.

According to the NBK report, total revenues rose by roughly 21% from a year ago to reach KD 3.51 billion, double the amount projected for the period. The increase was driven by higher oil revenues, which rose by 20% to stand at KD 3.09 billion by September 2003.

Much of the growth came from increased oil production rather than oil prices, as the $25.6 average price of oil over the first half of FY03/04 was merely 3.2% higher than a year ago, while Kuwait's export crude (KEC) production level increased by 19.4%.

NBK reports that non-oil revenues also rose sharply, far exceeding projections at KD 419 million. While the projected increase was only 6%, the actual increase amounted to 31%. The main contributors to the increment were KD 63 million in additional miscellaneous revenues, mostly from higher payments by the United Nations Compensation Committee, and a KD 22.5 million increase in transportation and communication service charges, which in turn reflect growth in telephone revenues.

Among relatively smaller service revenues, charges for housing and public facilities increased by 20%. Revenues from law enforcement and justice also increased, yet at a slower rate compared with last year.

Still, a few service charges moved backwards, the NBK report states. Revenues from water and electricity were projected to increase by 7%, but they actually declined by 13%, following a 36% increase last year. Such comparison may denote that collections were either exceptional last year or delayed this year.

Revenues from healthcare have also been falling sharply over the past two years, realizing as little as 18% of the amount projected in the budget. Moreover, revenues from educational and cultural services decreased faster than planned, although they had seen a proportionally considerable increase over the same period last year.

Income tax revenues increased by 36% during the first half of FY03/04. They reached almost KD 21.6 million and exceeded the budget by 60%, despite being allocated a 9.6% budget decrease for the period. The increase came from the National Labor Support Tax levied on companies listed in the Kuwait Stock Exchange, as corporate profits more than doubled over the period. The tax generated about KD 10.7 million for the government, exceeding the budget by about 65%. Meanwhile, revenues from income taxes on foreign companies went down by 7.5%.

Customs fees increased by almost 26% over last year, reaching about KD 57.6 million. The increase accompanied the growth of imports by 24% during the first 9 months of 2003. Property fees rose by 14%, while registration fees decreased by 26% in line with budget projections.

NBK says that total expenditures dropped by 4.7% compared with last year, despite a 7% projected increase in government spending. Actual spending stood at 37% of the budget prorated for the period. The drop came mainly from lower reported transfers and military procurement that do not have a direct impact on domestic demand or economic activity.

Excluding such items, spending remained level with last year. Furthermore, large closing adjustments are normally awaited on a number of expenditure accounts after the end of the fiscal year. Therefore, while the level of spending may not present a complete picture, the pattern of change relative to the same period last year reveals how government plans are being implemented.

Overall, employment-related spending, which tends to cover two-thirds of total expenditures, decreased by 1.7% over last year, mostly due to a slowdown in the growth of wages and salaries and a reduction in transfers to the Public Institute for Social Security (PIFSS).

Neither is indicative of a trend, however, as reporting delays are quite common in interim reports. According to the NBK report, indeed, wages and salaries of ministries and attached bodies grew by only 2.8% over the first 6 months, compared with a 9.4% increase during the same period last year.

A 6.5% increase was recorded by the Ministry of Education, which is the leading employer, whereas no growth was reported by the Ministry of Interior. However, the Ministry of Public Health, which is the third largest public employer, measured an 8.6% drop in wages and salaries, compared with a noticeable 118% rise last year.

Transfers and miscellaneous expenditures, which constitute over half of total government spending, decreased by 8% relative to last year. The main factor was a 10% drop in transfers to public institutions, primarily to the PIFSS. Transfers abroad were also slashed by 62%, while households received a small increase. Transfers under the National Labor Support Program increased considerably, yet at a much slower rate than last year.

Miscellaneous expenditures, of which a good part is related to the Ministry of Defense, also went down by 5.6% but could be revised upwards in the closing accounts. Under this category, spending on military procurement dropped by 23%, while being allocated a budget increase of 55% for this fiscal year.

Military salaries, which equally belong to this chapter, also fell by 2.7%, in contrast with a 13% increase in budget allocation. Not shown in the figures are expenditures under the KD 500 million emergency appropriation for the war on Iraq, which was approved in the last fiscal year. Official announcements indicate that more than KD 300 million have been spent to date. It is not clear, nonetheless, whether such spending is meant to substitute for on-budget items.

NBK's report states that spending on projects and maintenance slowed down compared with last year's growth rate, though remaining at about 24% of their budget allocation for the period. Expenditures on electricity and water projects went down, coming in second place after public works. Exceptionally however, smaller spending on telephone and telegraph more than doubled, though covering only 20% of their budget provision.

Spending on goods and services declined by a noticeable 22%. Fuel costs incurred by the Ministry of Electricity and Water are the largest expenditure item under this category. Knowing the upward trend in consumption and oil prices, the decrease in spending must be due to reporting delays. Once more, fuel cost settlements are expected to show in the closing accounts.