KUWAIT CITY, Nov 14, (Agencies): Public sector wages in Kuwait are equivalent to about 85 percent of the country’s oil revenues, its finance minister was quoted by state news agency KUNA as saying.
“This reflects the seriousness of the situation, if the rapid increase in wages continues,” Mustapha Al-Shamali told parliament, citing a government statement, before the house approved financial benefits for teachers on Monday.

Oil income in the world’s sixth largest oil exporter provides more than 90 percent of its budget revenues.
Shamali added that wage increases posed a “real danger” to the state budget, and that a fast rise in spending might cause a budget deficit. The country might then have to lower the value of its currency, liquidate investments or make withdrawals from state reserves, he said.

Since 2004, Kuwait’s budgeted spending has tripled to a record 19.4 billion dinars ($70.3 billion) planned for the 2011-12 fiscal year, which started in April, with expenditure on wages rising almost as fast.
With Brent crude oil prices holding above $100 a barrel, there appears to be little danger for now of Kuwait running into budget difficulties. Its budget surplus rose to 8.9 billion dinars in the first half of the fiscal year from 5.4 billion dinars in the year-earlier period; revenues came in at 13.9 billion dinars with spending at 5.1 billion dinars, according to finance ministry data.

But Kuwait’s ruler and its central bank governor called on the government this summer to correct imbalances in the oil-reliant economy and trim budget waste. Much budgeted spending does not get disbursed because of delays in the political process.

A string of strikes in Kuwait in the past several months has added to upward pressure on wages. Employees of the national airline briefly went on strike in late October; earlier in the month, customs service employees staged a two-day strike, halting oil shipments from ports.

Allotments for payments are not restricted to the section of ministries and government departments’ salaries, for there are allocations included in the fifth section, viewed as salaries too, namely the payments for personnel of the ministry of defense, the judiciary, the ministry of justice, affiliate and independent authorities, Al-Shimali said.

Among the allocations, there are also contributions of the public budget in the social insurance, actuarial deficit, increasing ceiling of payments from KD 1,250 to KD 1,500, supporting national employees in the private sector, social care, the KD 50 hike for some civil servants with retroactive effect since 2008.
Elaborating, the minister said the salaries, and alike payments, constitute a large proportion of the expenditure allocations, some 50 percent of the budget allotments. They also consume a large portion of the oil returns, reaching up to 85 percent, “and this reflects how grave the situation is, especially if such a rapid and continuous pace of payments’ hikes pursues.” “Although we appreciate and understand the social ramifications of the relevant policies adopted by the government and the National Assembly, as well as the noble goals behind the endorsement of the hikes of salaries and payments for the citizens to lift their standards of living, we warn against such a rapid and high pace of increases and failure to link them to inflation rates, exceeding 3.3 percent.

Hikes
We also note that the average hikes of the payments per annum reaches approximately eight percent, higher than the actual need of the citizens to cover the soaring cost of living,” Al-Shimali explained.
Al-Shimali said such dramatic hike of the payments’ hikes has become “serious hazards for the state budget,” with looming dire consequences.

Among the negative outcomes is insufficient public returns to pay liabilities and cover spending, with real budget deficit, he said, warning that the state might be compelled to resort “to hard options” such as depreciating the Kuwaiti dinar with the aim of slashing the actual cost of the salaries, or liquidating some investments or withdrawing from of the public reserves.

Shedding more light on the negative results of this approach, Al-Shimali noted inability of the state to encourage the citizens work in the private sector, nationals’ preference to work in the public sector and decline of the investment spending in favor of the current expenditure.
In shadow of the actual budget deficit, the financial decision makers may be compelled to slash the investment spending to cover the salaries, he added.

Al-Shimali, in his detailed explanation of the negative dimensions of the financial problem, urged the government and the parliament to view seriously the negative outcome of endorsing further financial allocations. Such an action is warranted to spare the country possible future “shocking” steps to tackle the issue.

He noted further that hikes of payments should be linked to rates of inflation and production, not to the returns of oil that fluctuate upward and downward, as a result of global economic growth and demand for the crude on the international market.

Economy
In other news, Kuwait’s economy grew 16.9 percent in nominal terms last year as higher oil prices helped the country to recover from a sharp downturn suffered in the previous year, central bank data showed on Monday.

Gross domestic product at current prices fell by a revised 23.1 percent in 2009, after the global credit crunch sent crude oil prices plunging. Previously, the world’s No. 6 oil exporter had reported a 21.2 percent nominal GDP fall for 2009.

Kuwait authorities often publish economic data long after the period in question has ended. The central bank’s latest figures did not include inflation-adjusted GDP data for Kuwait, which depends on income from crude oil for around 93 percent of its government budget.

The International Monetary Fund has estimated Kuwait’s economic output expanded 3.4 percent in real terms last year after a 5.2 percent contraction in 2009, which was its most severe shrinkage since the Gulf war ended in 1991.

Despite a fall in crude oil prices over the past six months, Kuwait’s real economic growth is expected to accelerate to 4.7 percent this year, a Reuters poll of analysts showed in September.
“The average oil prices in 2011 are higher than 2010 which will push nominal GDP higher,” said Mahdi Mattar, chief economist at CAPM Investment.

“So the increase in quantity and increase in prices will definitely mean that 2011 will have a much higher GDP in nominal as well as real terms,” he said.

Output of the hydrocarbon sector, which accounts for over 51 percent of Kuwait’s economy, jumped 22 percent at current prices in 2010 after a 36.2 percent plunge in the previous year, the central bank data showed.

Household consumption, which makes up around a third of GDP, rose 6.4 percent in nominal terms last year after an 8.5 percent fall in 2009. Gross fixed capital formation soared 24.1 percent after a 21.6 percent slump.

Kuwait’s central bank governor told Reuters last month that he was greatly concerned by Europe’s debt crisis and its possible impact on the stability of banks there, but he believed local banks were in good enough shape to withstand big global shocks.

The country’s top policymakers called on the government this summer to correct imbalances in the economy and trim budget waste, though analysts say political friction between the cabinet and parliament may slow that push.

Despite its wealth, the state-dominated economy has drawn few foreign investors, unlike nearby Qatar and the United Arab Emirates.

Kuwait’s central bank released the following 2010 nominal gross domestic product (GDP) data for the OPEC country on Monday.

KUWAIT GDP (current prices)    2010 2009
pct change year/year    +16.9     -23.1    (-21.2)
bln dinars    35.634    30.478    (31.500)

NOTE. Previously released figures for 2009 in brackets. The central bank did not release the real GDP data for 2010. Analysts polled by Reuters in September forecast that Kuwait’s economy would expand by 4.7 percent in real terms in 2011 and 2012.