In light of the decline in international oil prices due to the development of new techniques of extracting shale oil, which led to the reduction of the cost of its production and the high demand for natural gas, the oil producing countries – especially the majority of the GCC countries – face a big problem in dealing with the budget deficit. Thus, making it is necessary to come up with some innovative solutions to this problem.
Theoretically, when there is a budget deficit in any country, governments usually react by issuing sovereign bonds as a way of raising money to finance the governments’ programs, reducing income tax or even attract direct foreign investment into the country. The aim of these options is to create a balance in the country’s economy, whether to create new jobs in the labor market or to direct part of individuals’ income towards consumptive expenditure within the country, to lead to a rapid recovery in the local economy. For example, in 2009, US Congress passed the Recovery and Reinvestment Act, which focused on infrastructure spending, middle-class tax cuts, and saving millions of jobs in the country as an attempt to address the economic crisis that took place in 2008.
However, injecting funds into the state and increasing government subsidies would definitely lead to an increase in inflation, which could cause another crisis because of the rise in the cost of living caused by inflation.
Hence, Kuwait’s Ministry of Finance restructuring of subsidies project studies the impact of reducing government support for 42 commodities in 11 areas such as housing, health, education and electricity which cost nearly $14 billion annually and it is considered one of the highest expenditures as percentage GDP across the Gulf, and growing at a CAGR of 7.5%.
Accordingly, the Ministry of Finance has contracted with a group of Kuwaiti economic advisors with the support of experts from international consulting firms based in Kuwait to develop a vision for the reforms and assess the economic and social impacts resulting from the restructuring program. In addition, such work will definitely benefit the investment on the human capital in the country.
Food for Thought
A program can be established to support Kuwaiti families working in the private sector, taking into account the differences the monthly income of each family. Cash subsidy, or so-called cash aid, is more efficient than the premium subsidies that the government is currently giving. The reason being is the consumer would have the freedom of using cash subsidy/aid to their needs, hence low-income families will be able to adapt to the economic reform plan and the government subsidy program. This program focus on all family members who are working in the private sector as a stimulus to work in this sector, in addition to existing subsidies. This proposed subsidy will encourage those families in saving some of while the government continues to work on the economic reforms plan.
Nevertheless, we have to take into consideration the rights of expatriates, since lifting government subsidies will affect expats living in Kuwait both directly and in directly. For instance, rents will rise for them and this correlates in other domains such as healthcare and education leading to economic instability on their end.
By Abdulaziz Al-Othman