Thousands of small and medium Kuwaiti businesses (SMEs) could be lost, after being unable to withstand work stoppages due to the pandemic despite government support, Reuters reported.
Kuwait, which spends over 50% of its annual budget salaries for citizens who mostly work in state jobs, has encouraged citizens to set up their own businesses over the past decade in an effort to engineer a private sector.
The aim has been to ease state finances, reduce reliance on the imported labor of expatriates who make up most of the population, and also help Kuwait diversify away from oil, where 90% of state revenues originate.
In those past 10 years, Kuwait spent around $500 million to finance SMEs, efforts that were mostly undone by the COVID-19 outbreak.
Most of the 25,000 to 30,000 SMEs in Kuwait were operating with limited cash reserves even before the pandemic struck, investment management firm Markaz said.
Abdulaziz al-Mubarak, head of the Kuwait Federation for Small and Medium Enterprises, said that about 8,600 entrepreneurs were currently switching from working in the private sector to the government. He warned that the cash crunch could “end the whole sector.”
SMEs generate 11.9% of Kuwait’s GDP, employ tens of thousands of people, and play an important role in sectors like wholesale and retail trade, food and drinks, hospitality, and construction.
Expatriates, mostly from Arabic and Asian nations, make up about 70% of the 4.6 million-strong population of Kuwait.
Kuwait’s economy shrank 8% last year, but still, on March 30, 2021, parliament passed a financing law for SMEs.
The law gives those affected by the pandemic access to funding of up to 250,000 dinars ($830,289), of which the government guarantees 80%. Reuters said the repayment period is five years with a possible additional two years of grace.
A senior government source told Reuters that some SMEs were reluctant to make use of the law because it offered loans rather than compensation, as the state didn’t fully guarantee the financing and the limit on the repayment time.
An amendment to Kuwait’s bankruptcy law, which began to be implemented last month and freed SME owners from the threat of imprisonment from debt defaults, has offered some relief.
Yet entrepreneurs are still exposed to risks such as seizure of assets or insolvency if they can’t settle their debts, said Fawaz Khaled Alkhateeb, an academic at the Kuwait International Law School.
Kuwait budget cuts
Kuwait’s Cabinet recently ordered a spending cut to reduce spending from the current fiscal year (2021/2022) budget by no less than 10%, it said in a recent statement.
It also agreed to raise the efficiency of collecting government debts due.
It will also ask the Public Authority for Manpower to study the possibility of stopping the disbursement of national labor support to workers in the private sector whose total salary reaches $9,993 or more.
The World Bank expects Kuwait’s economy to grow by 2.4% this year, driven by the oil sector, followed by a rise of 3.2% in 2022 and 2023.
Issam Abousleiman, World Bank GCC Regional Director, said structural reforms and strategic investments, particularly in digitalization and telecommunications, were needed to further boost economic diversification.
Trade and investment analyst Kevin Carey expected Kuwait, Oman, and Bahrain’s budget deficits to continue between 2021 and 2023, but at lower rates than 2020.
Kuwait’s budget includes financing 14 major public projects with a total value of approximately $59 billion and four partnership projects worth nearly $3.2 bn, the Kuwaiti Alanba newspaper reported, citing official data. The country approved $65 bn for infrastructure, health, environment, and power projects for the 2021-2022 financial year, with 5% of them based on partnerships with the private sector.
The projects comprise mainly the airport expansion, the Silk City, island development, trans-Kuwait rail network and rail link with nearby Gulf countries, Matla City, and the Clean Fuel Project. The report showed nearly 50% of the projects covering economic diversification while 16% involve infrastructure, and the rest cover health, environment, power, and other sectors.
Non-oil GDP is expected to account for the bulk of Kuwait’s anticipated 2.5% GDP growth this year, according to the Oxford Economic Insight report, commissioned by ICAEW. It said that in 2021, non-oil growth is expected to reach 3.1%, and by 2022 it should hit 4.7%.
Kuwait’s budget deficit jumped 174.8% in the past financial year to $35.5 bn, the finance ministry said. It has widened to nearly 29% of GDP and is one of the largest globally. Revenue fell 38.9% to $34.9 bn dinars in the 12 months to March 31, while expenditure increased 0.7% to 70.74 bn, the ministry said in a statement reported by state news agency KUNA. Kuwait’s Finance Minister Khalifa Hamade said 71.6% of expenditure is allocated for job support.
Building logistics cities for SMEs
Kuwait plans to establish logistic cities to support SMEs and attract foreign investment, Kuwait Ports Authority (KPA) announced recently.
Sheikh Yousef Al-Abdullah Al-Sabah, KPA Director-General, said that these cities will be built on an area of 2 million sqms and designed to ensure high standards that will support e-commerce.
The project of logistics cities is keen to find a logistical solution in competitive prices for foreign companies that wish to store their goods regionally in Kuwait, and attract foreign investment and fulfill economic growth as well as support diversification drive in the sources of income, he said.
Kuwait will turn into a re-export and shipping center to neighboring countries, in addition to providing job opportunities for citizens in the fields of storing, artificial intelligence, and warehousing logistics, he added.