The state Kuwait is in

The FTSE Russell index provided a major boost to the fortunes of the Kuwait Stock Exchange when it upgraded the bourse to emerging market status this year. The KSE will represent 0.5 per cent of the benchmark and see investments valued at $822m flow into the market.

The move will help raise Kuwait’s profile as an international investor destination and encourage domestic companies to list on the market that has international appeal and exposure.

But other reform measures are slow to get off the ground. Kuwait, along with other Gulf governments, had pledged to start implementing value added tax this year to increase non-oil revenues.

While Saudi Arabia and the UAE have already taken the plunge, Kuwait’s efforts have been delayed due to administrative issues. In May, the National Assembly’s budget committee said the government had indicated the tax would be delayed until 2021.

The Parliamentary Financial and Economic Affairs Committee (PFEAC) also recently approved a bill to tax expatriate remittances that could potentially net the government $200m, according to the International Monetary Fund.

Other reforms have slowed as Kuwait’s sovereign wealth fund and reserves of more than $560bn – or 460 per cent of GDP – has been a source of comfort, but has also paradoxically weakened resolve to invest in new sectors, such as technology, logistics, tourism, light manufacturing and services; all necessary to develop the non-oil economy.

“Significant underspending due to inefficiencies, combined with higher hydrocarbon revenue, resulted in a smaller-than-expected fiscal deficit of 11.9 per cent of GDP last year, compared with to 17.7 per cent in 2016,” according to the Institute of International Finance.

Fitch Ratings, which maintained its long-term AA rating on the country in May, says progress on reforms remains slow as the government aims to be balance public finances, improve the business environment and boost the role of the private sector as a provider of economic growth and jobs for Kuwaiti nationals.

“It is focusing its efforts on regulatory and administrative measures that do not require approval from parliament, which in turn is trying to minimise the immediate costs to its constituents of any reform,” Krisjanis Krustins, the Hong Kong-based director at Fitch, said in a note.

But there are many low-hanging fruits for Kuwaiti authorities if they wish to drive efficiencies and economic growth away from crude oil revenues.

As the last oil shock reverberated through the GCC, most Gulf governments cut energy and fuel subsidies, streamlined public sector spending and actively encouraged citizens to seek private sector employment to reduce the government wage bill.

Kuwait implemented some energy reforms in 2016, but it remains committed to being a welfare state that does not nurture entrepreneurial initiatives and disincentives citizens to set up businesses or seek private sector jobs. As such Kuwait’ government wage bill accounts for 56 per cent of its GDP, compared to 25 per cent for most emerging markets.

Indeed, spending on wages have forced the country to cut capital expenditure, which has fallen to around 4.3 per cent over the past decade, according to the International Monetary Fund, compared to 6.5 per cent in the prior decade.

“The main challenge for the authorities is to formulate a sequence and pace of reforms that generate concrete results under a reasonable timeframe while maintaining consensus in favour of economic transformation,” the IMF said.

The IMF proposes the economy can benefit from a multitude of measures that may be politically challenging but are vital for future generations of Kuwaitis.

These include eliminating fuel subsidies that will save 0.4 per cent of GDP, and raising water and electricity subsidies by half by 2022 to add 2 per cent in GDP savings. Streamlining the wage bill will lead to savings of another 2.3 per cent. These measures are vital, and less controversial as they are already under way in other Gulf economies.

Kuwait’s government has shown some movement towards reform, and efforts by oil exporters such as Saudi Arabia to boost the non-oil economy should spark a debate to find new revenue streams.

But there are concerns a new wave of $75 oil per barrel could dampen the enthusiasm for radical change once again.

Full article – http://gulfbusiness.com/kuwait-oil-habits-hard-break/

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