Kuwait

major macro economic indicators

(e): Estimate (f): Forecast *includes inv income, latest budget figure is for 2023/2024 **General government gross debt

Risk assessment

Recovery is expected to be gradual

In line with the opening up of the economy, private consumption (about 40% of GDP) reached almost a decade-high level in 2021. It should continue expanding in 2022 as well, but at a slower pace because of the maturing recovery and fading base effect. Exports will become the key contributor to growth. Indeed, oil production will rise by nearly 13% in 2022 after falling in 2020 and 2021 consecutively due to the OPEC+ agreement. Due to the lack of economic diversification, trends in the oil sector will continue to be determinant for the Kuwaiti economy. Thanks to the rise in oil prices and increased global hydrocarbon demand, net exports will support growth in 2022. Investments (20% of GDP) will inch up in 2022 on the back of the completion of several refineries, such as the Al-Zour refinery project, and LNG import facilities Other construction projects, such as the development of Sheikh Jaber Al-Ahmad Al-Sabah Causeway, within Kuwait’s 2035 Vision program will also sustain investments. Government spending will also edge up in 2022, in line with higher oil prices and national savings (30% of GDP), which will alleviate pressure on the government to restrain expenditure, like cutting the public sector wage bill or introduce revenue measures such as a 5% VAT. These factors will be also supportive for domestic demand. Despite the low level of inflation, the central bank of Kuwait is expected to tighten its policy by raising its discount rate from its 1.5% level to follow the U.S. Fed’s example, as the Kuwaiti dinar is pegged to a basket of currencies dominated by the US dollar. 

Net creditor to the world with solid public accounts

Hydrocarbon exports (90% of total merchandise exports) will continue to remain an important source of revenue in line with high oil prices. This will feed into the sovereign wealth funds. The Kuwait Investment Authority (KIA) is responsible for the management and administration of Kuwait’s General Reserve Fund (GRF) and its Future Generations Fund (FGF). The GRF is the main repository of all of the state’s oil revenues and income, and acts like the state treasury account, while the second is an intergenerational savings platform. The FGF’s assets cannot be withdrawn unless sanctioned by law. Some media reports suggest that assets in the sovereign wealth fund exceed USD 700 billion, over five times Kuwait’s GDP. Despite rising exports, the fact that imports will also increase on the back of better economic conditions and higher level of income will weigh on current account surplus expansion in 2022.

 
After plunging into deficit in fiscal year (FY) 2019-2020, the fiscal balance improved and returned to positive territory in FY 2021-2022, reflecting the rebound in hydrocarbon revenues (two-thirds of total fiscal revenues) and removal of some COVID-19 related measures. The parliament will also work on passing a drafted debt law that envisages a debt ceiling of 60% of GDP, leaving flexibility for debt management and tap into global debt markets. In the absence of the debt law, financing of the deficit has relied mainly on the usage of the GRF’s liquid assets, which explains the low level of debt.

Tensions between the cabinet and the parliament will persist

The continuous struggle arising from tensions between Kuwait’s executive and legislative branches is a source of instability that weighs on the investment environment and the reform process. The National Assembly is made up of 50 elected members, officially independent, as political parties do not exist, and 16 government-appointed ministers. After the resignation of its government in early November 2021, Sheikh Sabah Al Khaled Al Hamad Al Sabah was re-appointed as the prime minister. That resignation came as several opposition lawmakers wanted to question the prime minister over various issues, including his handling of the COVID-19 pandemic. Al Sabah had already resigned twice in 2020 before being re-appointed each time by royal decree. However, the appointment of the same prime minister to form a third government may not be enough to calm opposition leaders. Having said that, these continuous cabinet reshuffles do not threaten the political stability in the country. Indeed, Kuwait benefits from the existence of a more independent legislative compared with its neighbours in the region. However, it will continue to delay important legislation, such as the passage of the debt law, and slow the development of the private sector and the kuwaitization of its workforce, which would facilitate the reduction of the governmental sector staff that employs 80% of Kuwaiti nationals.

Last updated: February 2022