KUWAIT CITY, July 3: According to ICAEW’s latest report (Economic Insight: Middle East Q2 2018), Kuwait economy is on track to recover from a difficult year in 2017, when growth contracted by 2.7 percent. Overall, Kuwait’s GDP growth is expected to rebound to 2.4 percent in 2018 and stabilize around 3 percent in 2020-2021. However, the accountancy and finance body is concerned about the negative effects of the ongoing dispute between government and Parliament.
Economic Insight: Middle East Q2 2018, produced by Oxford Economics, ICAEW’s partner and economic forecaster, attributes the positive growth to higher oil prices and increased project spending amid diversification efforts. Authorities are strengthening efforts to incentivise foreign direct investment, helped by reforms for full foreign ownership of companies outside of the special economic zones and reforms to tackle corruption.
While the country’s economy remains highly reliant on oil proceeds, which make up 90 percent of overall revenues, higher oil prices facilitate a more expansionary stance in 2018. Improving liquidity and a steady flow of infrastructure projects involving private funding will also support faster non-oil growth. The report expects the oil price to stand at $71pb in 2018, almost 30 percent higher than the 2017 average of $54bp. Kuwait’s oil output is expected to grow by a modest 0.5 percent this year, after a 6.1 percent fall in 2017.
However, combined with higher oil prices and expansion in refining capacity, the country’s oil sector growth should accelerate to 1.4 percent in 2018. As a result of the higher oil price, the budget gap will fall from 9.9 percent of GDP in 2017 to about 0.8 percent in fiscal year 2018/19 then moving into a small surplus. The non-oil economy on the other hand should continue to recover with the pace picking up to 3.5 percent in 2018, from an estimated 2.5 percent in 2017 and 2 percent in 2016. This will reflect a renewed commitment to capital spending as well as push to attract FDI.
Both are enshrined in the New Kuwait 2035 programme announced in January 2017 and development plan for 2015-20, which sets $116bn of spending through key mega-projects, improving infrastructure including education and health as well as increasing housing supply.
The government will also continue to press ahead with measures aimed at reducing its dependence on migrant labour, in part by restricting work permits for young graduates in the private and oil sectors. Maya Senussi, ICAEW Economic Advisor and Senior Economist for Kuwait at Oxford Economics, said: “Kuwait’s economy looks stable in the short term but more efforts are needed in order to build a sustainable and competitive economy.
The government must increase its revenue base outside of the oil sector. However, the discord between the government and Parliament will continue to present challenges to overall project spending and to the economy as a whole.” The Kuwaiti Parliament has approved expat remittances levies, which have the potential to add $230m a year to government revenues (about 0.5 percent of total).
However, it is yet to pass the selective tax bill and the introduction of VAT, which Parliament members oppose, has been postponed until at least 2019.
Middle Eastern economies are also on track to recover from a difficult year in 2017, when growth slowed to an 8-year low at only 1.0 percent. Overall, the Middle East’s GDP is expected to grow 2.4 percent in 2018, despite a relatively slow start in the first quarter and a heightened geopolitical environment. However, the outlooks and risk profiles for Middle Eastern economies vary.
According to the report, GCC’s economic prospects are promising this year thanks to rising oil prices, higher government spending and steady progress of economic reform. Overall, the GCC’s GDP is expected to grow 2.3 percent this year, up from 0.1 percent last year. And as OPEC increases oil production, GDP growth is expected to accelerate further for oil exporters this year and in 2019. Mohamed Bardastani, ICAEW Economic Advisor and Senior Economist for Middle East at Oxford Economics, said: “Middle East economies will see pick up in GDP growth this year and in 2019 but this doesn’t mean we should let complacency set in. With growing global trade tensions, geopolitical risks and rising interest rates, economic reforms are more necessary than ever in order to ensure stronger, sustainable and inclusive growth.”