Major showdown looms as Kuwait's coffers run dry

(MENAFN- Asia Times) Kuwait's new government and parliament face a major showdown when the National Assembly re-opens on March 18, a month after the nation's ruler unceremoniously shut it down.

Immediately at stake is the future of the oil-rich Gulf state's finances, as a ballooning deficit and empty coffers threaten to leave public sector workers unpaid in April.

'We must address the scarcity of financial resources and the depletion of liquidity in the treasury (the General Reserve Fund) as soon as possible,' Finance Minister Khalifa Hamada said in a statement on March 10.

For many Kuwaitis, this crisis raises some difficult questions about how a state with some 7% of the entire world's crude oil supply managed to get into such a predicament.

'There was US$150 billion in the GRF,' Mohammad Al Joaun, a board member of the Kuwait Economics Society, told Asia Times. 'All of this has now gone. So, who is responsible? There should be clarification on how things have ended that way.'

Investments made by Kuwait's GRF – and the larger, perhaps $600 billion Future Generations Fund (FGF) – are major lynchpins in everything from London real estate to Chinese securities, making their future globally significant.

With the money in the GRF dried up, the government is now proposing to dip into the FGF too – something not done since Kuwait tried to rebuild after the 1991 Gulf War.

'Problems financing the deficit are now reaching a crunch point,' said James Swanson, MENA economist with Capital Economics, in a recent note to investors.

The Kuwaiti finance minister also said that steps to deal with the current crisis 'must be accompanied by radical economic and financial reforms that contribute to reducing expenditures and increasing non-oil revenues.'

This signals how the current crisis highlights deeper problems within the Kuwaiti economy.

'So many issues have been building up without ever being addressed,' Shaikha Al-Hashem, a researcher at the European Graduate School, told Asia Times. 'It's not just an argument between government and parliament now. It's much more than that.'

Kuwait's economy has long been dominated by oil, which, in 2020, accounted for some 90% of the country's export revenue and 60% of government budget revenue, according to Fitch.

About 80% of those exports went to the Asia-Pacific, with South Korea and China Kuwait's main markets.

The other major source of government income is the Kuwait Investment Authority (KIA), the sovereign wealth fund body which manages the GRF and FGF.

The exact size of these funds is unknown, however, along with the exact amounts that are earned as returns on the KIA's extensive – and mainly overseas – investments.

'Until now, there has been no public information about the performance of the sovereign wealth fund – and there never has been,' says Geoffrey Martin, a Canadian analyst, academic and entrepreneur based in Kuwait City.

Under a long-standing rule, 10% of the GRF is allocated to the FGF every year, to build up this future nest-egg for when the oil eventually runs out.

In August last year, however, as the GRF ran dry, the National Assembly passed legislation ending that payment.

Meanwhile, some 70% of the government budget goes on funding for the public sector – the source of employment for about 80% of all working Kuwaitis – and on an extensive system of subsidies for Kuwaiti citizens.

These include cheap electricity, petrol, water and other utilities, land for house building, free education and medical care.

The citizenry – Kuwaiti passport holders – account for about 30% of the country's 4.7 million population. The remaining 70% is made up of expats.

'Our economy is based on oil and migrant labor,' says Al-Hashem.

Both of these were hit badly by the Covid-19 pandemic.

The oil price tumbled, cutting oil revenues by around half, while expat workers lost jobs, with many leaving the country.

Official figures show that in 2020, Kuwait's population had its biggest decline in 30 years, with more than 130,000 foreigners leaving.

With the two fundamentals of the economy suffering, revenues started falling well below expenditure. The resulting deficit now stands at about $40 billion, according to Fitch.

While governments in other countries have been able to borrow to cover the costs of Covid, Kuwait has no law authorizing the government to do so.

Since last May, the government has therefore been trying to push a new public debt law through the National Assembly to allow this – without success.

The government now proposes it be allowed to dip into the FGF too, with a bill before parliament for withdrawing up to $16.54 billion per year from the fund.

Yet, 'if it really did that,' said one Western business observer in Kuwait City, who wished to remain anonymous, given the sensitivities of the issue, 'it would probably blow up parliament.'

Dipping into the FGF is a red line for many in the National Assembly, who see this as an unacceptable sacrifice of the nation's future welfare by a government that, they say, should do more to tackle issues such as wastage and corruption.

'Restating what a former minister of finance Dr Nayef Al Hajraf said in 2018,' says Al Joaun, 'about 40% of the budget is being wasted, so it is better to solve that before any economic reform. Money goes to over-priced projects, unused contracts with the public and private sector. In the budget, there are some ledgers that have very detailed breakdowns, while others are large projects with very small explanations for where the money's going.'

Disputes over the budget have added to the already-fractious atmosphere in Kuwait's parliament, with the Emir shutting it down on February 18, after the previous government resigned.

Prime Minister Sheikh Sabah al-Khalid Al-Sabah then put together a new cabinet, which has been approved by the Emir, but must also now be approved by the National Assembly, when it reconvenes on March 18. At that point, the prime minister may try to force through the public debt law again.

'The government is trying to play a game with parliament,' says Al Joaun, 'sending a message to the Assembly that if it doesn't approve the debt law, it will open up the FGF.'

Meanwhile, whatever the outcome of these political maneuvers, fundamental issues remain unaddressed.

'With Covid, we have seen the closure of many small and medium-sized businesses and the government has not responded to their pleas for help,' says Al Hashem.

'The government hasn't been able to diversify the economy, with most revenue going on public sector salaries, while our private sector is still small. For women, a lot of changes are needed too, both in legal reform and in representation.'

'People want to see real change,' she adds, 'not just more debates in parliament.'

MENAFN13032021000159011032ID1101745991