KUWAIT CITY, Dec 1: According to a specialized economic report, despite the fact that Kuwait’s economic performance in 2020 would suffer from the double shock caused by the COVID-19 pandemic and the drop in oil prices, the actual growth decline started since 2014, reports Al-Nahar daily.
The report issued by the World Bank in October explained that the increase in the fiscal deficit due to the decrease in oil revenues, spending aimed at alleviating the severity of the crisis, and the financing needs of the Future Generations Fund, will lead to an exacerbation of pressures on financial reserves, especially in the absence of a debt law.
While Kuwait is less vulnerable in regard to the affected sectors internationally compared to its neighbors in the Gulf Cooperation Council, long-standing inactivity will impede adaptation to the shock of the COVID-19 pandemic.
GDP recorded a slight decrease of 1.1 percent in the first quarter of 2020, non-oil growth contracted 3.5 percent, and real oil GDP increased 0.1 percent with the end of the OPEC-Plus agreement.
Nonetheless, there are broad measures that were taken to contain the COVID-19 spread which included suspending flights, schools and universities, banning public gatherings, suspending unnecessary work, and imposing a 24-hour lockdown.
Kuwait continued the application of various forms of these measures for the longest periods of lockdown compared to various countries around the world.
These measures significantly affected private spending and GDP investment activity, starting in the second quarter of 2020.
The fiscal response to mitigate the effects of the pandemic and the public health response was minimal, and included additional budget allocations of USD 1.1 billion, postponement of social security and pension payments, and exemption from some fees.
The Central Bank of Kuwait provided a support package of USD 3.11 billion, which allowed for postponement of loan payments, reduced liquidity and capital adequacy requirements, and reduced risk weighting for small and medium enterprises, as well as mimicked the US Federal Reserve cuts.
KNet data shows a temporary increase in consumer spending due to the delay in repaying loans in June because of latent demand and the delay in repayment of loans with the easing of lockdown measures.
However, as in other countries, fears of a “second wave” may cause restrictions to be reimposed.
The fiscal deficit increased from 3.1 percent of GDP in the 2018/2019 fiscal year to 9.6 percent in the 2019/2020 fiscal year.
These figures exclude income from investment and are calculated prior to transfers to the Future Generations Fund.
However, these outcomes are better than the budget target of KD 6.1 billion – 6.13 percent of GDP – whereas the oil revenues fell by 16.6 percent on the back of a 15.7 percent drop in oil prices and a 2.2 percent decline in crude production.
On the other hand, spending fell slightly, driven by lower subsidies and capital spending.
Although Kuwait enjoys large financial reserves estimated at USD 500 billion to confront the current crisis, the continued withdrawal to finance the deficit and the continued transfer of ten of the budget revenues, according to the law to the Future Generations Fund, led to a decrease in the balances of the General Reserve Fund by 12 percent of the GDP in the 2019/2020 fiscal year.
Kuwait has not issued bonds since 2016, as it is waiting for the parliamentary approval for an increase in the borrowing limit. Consequently, the fiscal crisis facing many oil exporters is exacerbated by the financing needs necessary to implement the annual transfers to the Future Generations Fund.
The parliament recently approved legislation for making the annual transfers dependent on achieving a surplus in public finances, but the legislation did not specify any mechanism to achieve a surplus, or increase the forecasting of transfers to the Future Generations Fund.
In its review of the challenges and risks facing the economy, the World Bank report indicated that the differences between the legislative and executive authorities have led to frequent ministerial reshuffles, and that the parliamentary opposition is one of the challenges facing financial reforms.
It affirmed that Kuwait has huge assets that enable it to confront the COVID-19 crisis, but structural reforms are necessary to face the decline in oil prices, increase non-oil revenues, create job opportunities, enhance human capital, reform economic management, and enhance the role of the private sector.
The report stressed that the risks include the prolonged period of the COVID-19 pandemic and the continued volatility of oil prices, indicating that, in the event that the crisis is not controlled, a deterioration in public finances and a further decline in the preventive financial reserves can be expected.
The specialized economic report indicated that the double economic shock caused by the COVID-19 pandemic and the drop in oil prices has affected all aspects of the economies of the Middle East and North Africa, which are expected to contract by 5.2 percent in 2020, and the public debt in the Middle East will rise to 52 percent.