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Friday , January 17 2020

Commercial companies face payment ‘delays’ from govt – Low oil price bites oil-producing countries

Kamal Al-Harami
Kamal Al-Harami

According to some local media reports, commercial companies are facing delays of up to 180 days and even a year in some cases in receiving payments from the government sector following the completion of their projects.

This is becoming a usual phenomenon in almost all oil-producing countries, more apparently in Nigeria and Venezuela, because of the direct and immediate impact of the low oil prices on the daily income of all oil-producing countries which has been reduced by more than 70 percent in less than a year. This has in turn led to huge deficits in the cash flow, and the governments are unable to cope with such sudden fall of oil revenues and cash deficits. They have not realized that their main source of income is on the verge of disappearing and they have to live with very limited resources.

The main factor behind this problem is definitely the high governmental expenditures and the high annual budgets for which the required revenues can be earned only if the oil price is $100 per barrel. This is the case with those two countries which are unable to meet the current demand and have thus taken some drastic decisions. For example, Venezuela has decided to cut down the number of working days to three days per week. It has been reducing anything and everything just to cut down costs.

We in Kuwait are also facing similar problem of acute shortage in income but not at a very large scale. This is the reason why there have been delays in paying companies and contractors which have business with various governmental offices and ministries. The problem here is the timing and the way to cope without cash flow.

Our current budget is estimated to be KD 20 billion based on a crude oil price of $25 per barrel. This amounts to shortage of KD 1 billion per month. Again, this figure is hypothetical as our daily income exceeds the income earned when the oil price is $30 per barrel. However, the cash is not readily available to make a difference, which means everyone has to wait. This in turn will lead to delays in payments to most of the commercial companies.

Our economy is strong and backed up with huge cash reserves and overseas investments, which means that decisions on what to cash or how much to borrow will be the way to solve this acute problem.

There is definitely shortage of daily income because of the low oil revenues in meeting our budget price of $65 per barrel for balancing the current budget of KD 20 billion. The government has to slash its budget by almost KD 5 billion to achieve the breakeven budget; otherwise, we may have to live with delays in payments like the rest of the oil-producing countries worldwide.

email: naftikuwaiti@yahoo.com

By Kamel Al-Harami

Independent Oil Analyst

 

 

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