Kuwait’s emir reappointed Sheikh Sabah al-Khalid al-Sabah as prime minister after the cabinet resigned recently in a standoff with parliament over its vote to question the premier on issues including his choice of ministers.
Emir Sheikh Nawaf al-Ahmed al-Sabah, facing his first big political challenge since taking power in September, tasked Sheikh Sabah with nominating a new cabinet for approval, state news agency KUNA said.
The situation has complicated efforts to tackle a severe liquidity crunch in the wealthy OPEC member state caused by low oil prices and the coronavirus pandemic.
Frequent rows and deadlocks between the cabinet and the elected assembly have led to successive government reshuffles and dissolutions of parliament over decades, hampering investment and economic and fiscal reform.
Kuwait has the most vibrant political system among Gulf Arab states, with a parliament able to pass, and block, legislation and question ministers. However, senior government posts are occupied by members of Kuwait’s ruling family, and the emir has the final say in state matters.
Kuwait projects a $40 bn deficit
On January 25, 2021, Kuwait forecast its eighth consecutive budget deficit for the year starting April 1, unveiling a fiscal plan that sees a near 7% rise in spending as political bickering delays reforms and stymies borrowing, according to Bloomberg.
The shortfall is projected at $40 billion, 13.8% below the current year’s estimate of $46.3 bn, according to the finance ministry.
Kuwait won’t be transferring 10% of total revenue to the Future Generations Fund, or wealth fund, in line with a law passed by parliament last year to halt such transfers in years of deficit.
The budget “is not immune to the global challenges brought on by the COVID-19 pandemic and lower oil prices,” Finance Minister Khalifa Hamada said in a statement last Monday. “We are in a transitional phase that requires concerted efforts for economic recovery and growth.” Budgeted capital expenditure is up 20% on the current year’s estimate, he said.
Around 80% of Kuwaitis work for the state, and their salaries account for 52% of state expenditure. Although the country has about $550 bn in assets saved away in the Future Generations Fund, Kuwait’s parliament refuses to renew a debt law that was passed in 2017.
Lawmakers have opposed borrowing to cover the deficit and say the government should better manage finances before resorting to debt. That’s left investors facing uncertainty.
S&P Global Ratings said it could downgrade the Gulf nation over the next six to 12 months “if Kuwait’s institutional settings prevent the government from finding a long-term solution to its funding needs.”
Highlights for next budget year
- Spending in 2021/2022 is estimated at $76 bn, 6.9% higher than the current year
- Revenue is seen at $36 bn
- Oil income is expected to be $30 bn, or 83% of income.
- Non-oil revenue is seen at 45.95 bn
- Calculations are based on oil at $45 a barrel, up from the current $30, and a daily production rate of 2.4 million barrels per day; Kuwait would need crude to average $90 to balance the budget
- Wages and subsidies account for 71.6% of the budget; capital expenditure represent 15% of total spending
Kuwait’s oil vulnerable
Kuwait’s vulnerability to oil-price unpredictability is more prominent than in any other hydrocarbon-dependent GCC countries, unsurprisingly since oil income accounts for approximately 85%-90% of total revenues and exports.
COVID-19 depressed global energy demand and oil prices. According to the IMF, Kuwait’s economy is set to contract by an estimated 8.1%.
Kuwait unveiled a budget for its coming fiscal year with a breakeven crude price of $90/b and significant deficit spending.
The budget, released by the finance ministry, expects crude production to average 2.4 million bpd for the year starting April 1, earning an average of $45/b. That compares to 2.5 million b/d at $30/b in the 2020-21 fiscal year.
Kuwait is currently bound by the OPEC+ supply accord with a quota of 2.329 million bpd through the end of the first quarter.
No large oil and gas projects are scheduled in the budget for the forthcoming year, the budget presentation states.
Hydrocarbon production costs are projected to be $10.5 bn.