Kuwait building more diversified economy, eyeing support for national workforce
KUWAIT CITY, Dec 24: Kuwait like its oil-producing counterparts, is trying to build a more diversified economy, but is also eyeing support for the national workforce, according to a wealth management company Endosius, reports Al- Anba daily.
As such, the number of expatriates may drop by 1.5 million over the next seven years, according to recent reports, with a population of 4.2 million. “These demographic changes will not go without affecting economic growth, which is ultimately a combination of population growth and productivity,” the company said in an analysis by French economist Crédit Agricole. It seems it is almost impossible to complete the process of replacing a large number of foreign workers with Kuwaitis in less than a generation.
A much simpler reform was also envisaged: the implementation of VAT of 5% in 2019, but has been postponed until 2021. This would represent a decrease in the revenues of Kuwaiti government against a framework of generous welfare provided by the state, including subsidies for fuel, electricity, water and the large economic role of the public sector. It is clear that this loss in non-oil revenues will be exacerbated by the recent drop in oil prices and shows that the pace of reforms has stopped to some extent.
However, the country still has one of the lowest levels of oil price parity, the ratio of public debt to GDP is around 20%, while the country’s foreign exchange reserves reached $34.2 billion in September 2018, external debt reached $59.6 billion, or 50% of GDP. What is noted is that the recent strength of the dollar and the tightening of monetary policy by the Federal Reserve are not a concern for the Central Bank of Kuwait because the Kuwaiti dinar is linked to a basket of currencies, not just dollars, since May 20, 2007 when its exchange rate was pegged to a basket of currencies that were not disclosed by Kuwait’s partner countries in trade and finance.
The return to exchange rate policy, which prevailed before 2003, aims to protect the purchasing power of the national currency and to contain the infl ationary pressures affecting the local economy. Thus, the Central Bank kept the discount rate unchanged at 3% on September 27, 2018 despite a decision to raise the federal funds rate two days ago. Since the beginning of the year, the base rate has increased by only 25 basis points, while the US Federal Reserve raised it three times by a total of 75 basis points.