The oil price climb to $80 on the road to $100 claimed its first victim: Kuwait.
The GCC country, which had originally delayed VAT implementation to 2019 despite agreeing as part of 6 Arab oil exporting countries to introduce a 5% levy at start 2018, has now pushed it to 2021, parliament’s budget committee said in a statement posted on the assembly’s website on Tuesday.
Only Saudi and the UAE did so, while Bahrain and Oman have indicated they will do so in 2019, unless they choose to copycat Kuwait.
Kuwait will push ahead with excise tax on select products such as tobacco, energy drinks and carbonated drinks, during its next session, which begins in October, Reuters reported.
Committee head Adnan Abdul-Samad said the Kuwait finance ministry saw the need to speed up the implementation of excise as $663 millions in revenues could be generated.
But the damage is done.
VAT Revenues lost
Though Kuwaiti cabinet officials have called for faster tax and spending reforms, the decision is likely to stick, as the oil rich country is less worried about returns, Reuters opined.
The International Monetary Fund (IMF) has estimated VAT in the UAE will eventually rake in 1.5% of GDP.
The levy could help generate additional revenue in the range of about 1.5-3.0 percentage points of non-oil GDP in both Saudi and the UAE, the IMF said.
But Kuwait’s state finances are among the strongest in the region and oil prices have surged in the last several months, so the Kuwaiti government has little immediate need for fresh revenues.
Kuwait’s oil budget
Oil prices neared $80 a barrel on Tuesday, making the prospect of introducing a new levy in a country unused to taxation is even less appealing, according to Arab News.
“The combination of Kuwait having among the lowest fiscal and external breakevens in the region, and the vast sovereign assets of the Kuwait Investment Authority have always reduced the urgency for the government to introduce new revenue-raising measures compared to other sovereigns in the region such as Saudi Arabia and Oman,” said Thaddeus Best, analyst at Moody’s Investors Service.
“The recent rise in oil prices has also likely further sapped reform momentum,” he told Arab News.
Kuwait’s state budget for the fiscal year ending March 31, 2019 forecasts $50 billion in revenue, based on an average price of oil at just $50 per barrel, but oil has traded above the $50 a barrel mark since July 2017.
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 ended on March 31, 2018, and estimated on oil prices of $45 was calculated by Reuters at $22bn.
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 IMF.
Contributions to the fund, excluding investment income, will mean an annual deficit of about 15% of GDP, the IMF said concluding its 2017 Article IV consultation.
Other reforms in danger?
When oil prices hit rock bottom to $28 levels from $150 at highest peaks, and after tapping into $100s of billions from foreign reserves in government coffers to cover for resulting budget deficits, Saudi, the UAE, and the entire GCC began a drive towards reforms and economies away from oil.
Saudi reforms ranged from giving women deserved rights, investing in social infrastructure, boosting youth employment, introducing VAT and gradual removing energy subsidies, which are all efforts aimed at boosting revenues and cutting public expenditures.
Gulf economies are expected to experience a 2.8% GDP growth in 2018 from 1.7% in 2017, according to the IMF, and crude prices on the move towards $80.
Could Saudi change the pace of its reforms?
The UAE has led the reform process and shows no signsof slowing down.
Higher oil prices won’t change the pace of Saudi Arabia’s reforms, Saudi Finance Minister Mohammed bin Abdullah Al-Jadaan told CNBC, recently.