x Abu Dhabi, UAESunday 23 July 2017

Kuwait is in a tight spot over subsidies

Kuwait is stepping up efforts to persuade the public that it cannot afford to maintain one of the world’s most generous welfare systems.

A fruits and vegetables market in downtown Kuwait City. The IMF has repeatedly urged Kuwait to reduce subsidies as spending rises. Yasser Al Zayyat / AFP
A fruits and vegetables market in downtown Kuwait City. The IMF has repeatedly urged Kuwait to reduce subsidies as spending rises. Yasser Al Zayyat / AFP

Kuwait’s budget surplus adds up to almost US$40,000 per citizen, one reason it is hard to convince people such as Nouf Mohammed the government should spend less on services and subsidies for her.

Ms Mohammed, 36 and an accountant, says she has been waiting 12 years to get the state-provided house she is entitled to and finds education and health care so inadequate she says the government should focus on improving them instead of saving more.

“There’s no development, our money is wasted in a disorganised way,” she says.

Kuwait is stepping up efforts to persuade the public that it cannot afford to maintain one of the world’s most generous welfare systems. A committee set up to examine public finances advised the government to use social media to warn of a “terrifying future” if spending is not trimmed.

Ms Mohammed’s objections are widespread among Kuwaitis, though, and often voiced in a parliament. Underlining the obstacles to change, policymakers are pressing a bill popular with the public, and opposed by the government, that would increase child and housing allowances.

Jassim Al Saadoun, the head of Kuwait-based Al Shall Economic Consultants says he has been warning of the need for spending reform for two decades.

That argument is now “gaining momentum,” Mr Al Saadoun says. “But the problem is one of mismanagement, not diagnosis. Who is willing to take the unpopular decisions? I’m not sure this government can.”

IMF projections offer support for both sides of the argument. They show that Kuwait’s fiscal position is strong even by the standards of the Arabian Gulf oil states. Its surplus was 34 per cent of output in 2012, more than double that of Saudi Arabia or the UAE.

On the other hand, the IMF predicts a deterioration that is faster than all Gulf peers – a shift of about 19 percentage points between 2012 and 2018, almost double the GCC average.

The IMF has repeatedly urged Kuwait to reduce subsidies as spending rises. Saudi Arabia, which like Kuwait is trying to diversify an oil-reliant economy, announced slower spending growth in its 2014 budget. The IMF predicts the Saudis will join Oman and Bahrain in posting deficits by 2018.

Kuwait this week reported a surplus of 14.3 billion dinars (Dh183.65bn) in the first nine months of the fiscal year that ends on March 31– about $40,000 per citizen, based on the latest Kuwait population figures. The surplus typically narrows in the final quarter as spending rises. National Bank of Kuwait last month estimated a fiscal surplus of 11.8bn to 13.3bn dinars.

Spending is due to rise 3.2 per cent next year – enough for an official committee to warn of a “terrifying future for the general state budget in the next few years if financial waste continues as is without a serious stand”. According to the committee report, salaries, benefits and subsidies account for 87 per cent of oil revenue in the 2014/15 budget. The state depends on oil for more than 90 per cent of its income.

The committee, set up by Kuwait’s Supreme Council for Planning and Development, called for “reconsideration of expenditure and subsidies” in a report published on February 2 by Kuwaiti newspapers, which said the government approved it. The Finance Minister Anas Al Saleh told the cabinet last month measures are needed to curb spending.

Another committee is reviewing subsidies that include free health care and education for citizens, and cheap fuel and energy for all residents. Kuwait’s Public Authority for Civil Information says there are 1.25 million Kuwaiti nationals out of a total population of 4 million.

The committee also said the government should examine whether policymakers, who have championed bailouts of indebted citizens, have the right to pass laws that deplete public funds.

Saleh Al Jasser, a state-employed engineer, says Kuwaitis “are hostile to even discussing this matter”.

“Money is being handed out to foreign countries without any reference to public opinion,” he says.

“So if the government is dealing with public funds in this way, why do you ask me to be reasonable and make sacrifices to support the government?”

Kuwait has pledged US$4bn to Egypt since the army removed an Islamist government last year.

Opposition by policymakers has delayed initiatives including a $110bn development plan. That has led to slower growth than in the rest of the GCC. Last year, Kuwait’s economy expanded 0.8 per cent, compared with 3.6 per cent for Saudi Arabia and 4 per cent in the UAE, according to the IMF.

For the government to implement a “proactive reform programme” would be “somewhat surprising, given Kuwait’s slow record for policy making and the comfortable fiscal position,” says Liz Martins, a Dubai-based senior Middle East economist at HSBC. Such a move could also revive political tensions, she says.

Khalid Al Sahli,30 and a financial industry worker, says he views subsidy cuts as “one solution but not the first thing” the government should do, and doubts whether action will be taken.

“Kuwaitis feel the government is incompetent and they know the same problem is discussed over and over again,” he said.

The task of convincing citizens cuts in spending are needed has now fallen to Mr Al Saleh, who said shortly after his appointment last month that a plan to review the lavish subsidy system should be ready later this year.

Thanks to subsidies, it costs as little as 5.2 dinars to fill an 80-litre petrol tank. Electricity costs just 2 fils per kilowatt hour, a fraction of what it costs to produce.

Economists say such cheap prices, available to Kuwaitis and foreigners alike, encourage waste. Building managers complain of people leaving their air conditioning on while they are on holiday so that their home is cool when they return.

But any marked reduction in subsidies could erode stability since Kuwaitis have a recent history of street protests and industrial action to voice dissatisfaction with the government.

“Kuwaitis will cope with anything, but don’t come too close to their wallets and chequebooks. They will really put up a big fight,” says Abdullah Al Shayji, political science faculty chief at Kuwait University.

Subsidies are difficult to reduce, despite warnings that spending at the current rate could outpace Kuwait’s revenues as early as 2017-18, according to the worst-case scenario from the IMF.

“With risks to oil markets skewed to the downside, so are risks to the public finances,” says Farouk Soussa, the chief Middle East economist at Citigroup, who says Kuwait needs to make progress on fiscal reform.

But many Kuwaitis, such as Samaher Usama, 20 and a student, who like more than half of Kuwaitis is under 25, are confused by the idea of shaving subsidies given the large budget surpluses of the past decade.

“Why do they do this? We have a lot of money and it is to our advantage,” she says.

“We should spend it.”