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Kuwait in big financial trouble again: Large deficit and missing VAT

The good news is that a report from Kuwait Financial Center’s Markaz indicates that Kuwait was the best performing financial market in the Gulf region, achieving returns of 13% from the start of 2017 until October.

The not so good news is that something has got to change in the way Kuwait handles its state finances to reverse a trend that has plunged the country into a deficit for the 4th consecutive year.

The 2018 budget was announced with a $16.7bn deficit, or 13.5% of Kuwait’s GDP, a country with crude oil reserves of about 102 billion barrels, more than 6% of world reserves.

The budget deficit for 2017 which ends on March 31, 2018, and estimated on oil prices of $45 was calculated by Reuters at $22bn.

Kuwait needs to introduce VAT like Saudi and the UAE did in 2018, diversify non-oil revenues, lower its state budget on employee wages, and secure much needed financing over the next 5 years.

Is it doing any of that?

Top related: How does Kuwait reduce a $23.6bn budget deficit? Layoffs!

A reeling budget

Kuwait Finance Minister Nayef Al-Hajjraf told media the government will withdraw from the state reserve fund and borrow on the domestic and international debt markets to finance the budget deficit.

“The new budget projects revenues at $50bn, up 12% on last year, with oil income estimated at $44.3bn on 2.8 million bpd (from $39bn in 2017), while spending is projected at $66.7bn, marginally higher than 2017,” said Al-Hajjraf.

Development projects will get a paltry 18% of expenditures.

“Kuwait will not impose value-added tax or other taxation without parliamentary approval,” he added.

According to Reuters, the budget is based on average oil price of $50 per barrel and that the deficit would be before the transfer of 10% of revenues to Kuwait’s sovereign wealth fund (SWF).

“Hajjraf said that subsidies are projected at $11.5bn”, said Reuters and “Non-oil income is projected to remain almost flat at $5.35bn.”

Read: What do the numbers say about the Kuwaiti banking system?

Bloated government

Government wages and subsidies account for 73% of the budget which takes effect on April 1, 2017, but still needs approval by parliament.

Kuwaiti nationals make up 1.3 million out of 4.4 million total, of which 300,000 citizens are reported to be illegal, while 95,000 are old according to the Director of Elderly Health Care Department in the Ministry of Health.

Of the remaining, the total number of employees in the public sector as of the end of 2017 is 306,030 including 226,269 Kuwaitis (73 percent) and 79,761 expatriates, recent statistics showed.

According to the statistics, there are 143,530 Kuwaiti women working in the public sector and 82,739 Kuwaiti men. Among the expatriate employees in the public sector, there are 39,822 expatriate women and 39,939 expatriate men.

AMEinfo reported that Kuwait is preparing to restructure the salaries and incentives of all government sector workers by the start of 2019.

Read: Kuwait’s population could quickly drop by 300,000 as country cleans house

The study aimed to equalise incentives and salaries of government employees means the allocation for payroll in the 2016-2017 budget of $50bn, and 2017-2018 of $48bn will be higher in 2019.

This is especially significant since Kuwait has asked to make all public sectors run 100% by Kuwaitis.

A survey by the Kuwait Central Statistical Bureau showed the unemployment rate in Kuwait was 2.2% in 2017, the same as 2016.

Financing needs

According to Bloomberg, Kuwait will need $100bn of additional financing over the next five years as mandated contributions to its Future Generations Fund leave a fiscal deficit, quoting the International Monetary Fund (IMF).

Must read: Kuwait and Oman would have been wise not to delay VAT

Contributions to the fund, excluding investment income, will mean an annual deficit of about 15 percent of gross domestic product, the IMF said concluding its 2017 Article IV consultation.

“It tapped international debt markets for the first time — raising $8 billion in March 2017 and is also considering raising the debt ceiling, introducing an annual spending cap of $70bn average over the next 3 years and changing the law to allow the sale of 30-year bonds to help the government plan future debt sales,” Bloomberg said.

“Kuwait’s additional financing needs “will continue to be met through a limited amount of domestic borrowing, external borrowing, and drawdown” of assets in its General Reserve Fund,” the IMF said in the statement.

The economy will contract 0.5% in 2017, expand 2.3% in 2018 and 2.9% in 2019, according to a survey conducted by Bloomberg News.