REFORM GAP WIDENS SINCE 2015 OIL PRICE SHOCK

KUWAIT CITY, July 6: Moody’s Investors Service has reported that despite two severe oil price shocks since 2015, the Kuwaiti government has shown limited ability to control or reduce spending to curb the fiscal deficit, reports Al-Rai daily. The agency pointed out in an annual credit analysis that Kuwait suffered from a continuous fiscal deficit between 2015 and 2021 — at times oil prices were weak or oil production was restricted by “OPEC +” cuts — due to the strict government spending structure and parliamentary opposition to new measures to increase revenues, noting that the gap between Kuwait and the GCC countries, including the UAE and Saudi Arabia, in the progress of fiscal reform has steadily increased since the oil price shock of 2015. The agency noted that revenues are still highly dependent on oil revenues, which amount to 80-90 percent of total government revenues and lead to fluctuations in the fiscal balance, indicating that progress in diversifying the non-oil revenue base has been very slow, partly driven by politics.

The agency added, “The implementation of the 5 percent value-added tax, which came as a response to the oil price shock at the level of the Gulf Cooperation Council countries, is the largest measure that the government has explored for reaping revenue, but the National Assembly has not yet ratified the treaty that precedes any legislation for value-added tax,” ruling out the application of value-added tax in Kuwait during the next two years, as oil prices remain supportive of that. “Moody’s” suggested that large-scale taxes would be less popular compared to corporate taxes, noting that the government was also planning to impose selective taxes on sweetened drinks and tobacco, which would increase revenues by about 25 percent of the revenues collected through the application of the value added tax, but also carried over from the original scheduled implementation schedule for the fiscal year that ended in March 2021 (FY2020).

The agency pointed out that Kuwait is the only one among the Gulf Cooperation Council states that did not impose selective taxes, and the only one, besides Qatar, that did not apply valueadded tax. On the other hand, Moody’s expected that Kuwait’s oil production capacity would reach 3.1 million barrels per day by the end of 2023, which enhances growth prospects in the medium term. The agency suggested that the continuous capital investments from the Kuwait Petroleum Corporation would increase the country’s production capacity to 3.5 million barrels per day in the medium term, while the company’s strategic plan is to increase production capacity to 4 million barrels per day by 2035.

Moody’s noted that KPC aims at the same time to increase its current daily production of associated and non-associated gas by 1.9 billion cubic feet to 3.5 billion cubic feet by 2030, noting that natural gas production has faced difficulties in keeping up with domestic consumption, as Kuwait is a net importer of gas since 2009. Moody’s pointed out that the Kuwaiti economy remains one of the least diversified economies in the GCC, with the oil sector (hydrocarbons) accounting for an estimated 52 percent of nominal GDP and more than 80 percent of exports in 2022, noting the non-oil sector is considered vulnerable to fluctuations in oil and gas production or its prices, because a large part of it depends on the government, directly or indirectly, through the distribution of oil gains through public sector salaries.

The agency emphasized that the low level of economic diversification away from oil leads to large fluctuations in the growth of real GDP, especially nominal GDP, during periods of fluctuating global oil prices, indicating that the volatility in real GDP growth is exacerbated in part by periodic implementation and cancellation of OPEC + production ceilings. It stated that the volatility of real GDP growth in Kuwait during the period 2013-2022 was relatively higher than its peers, although Moody’s believes that the increase in volatility caused by the pandemic is not a structural feature of the economy.

The agency believes that economic diversification will continue to be a major challenge for Kuwait, driven by social and political factors that restrict institutional effectiveness and private sector-led development, noting, for example, that the public sector generally has shorter working hours and more days off than the private sector. “Although the government provides employment support to citizens working in the private sector to equalize wages, the differences in unpaid benefits (working hours and paid leave) are still significant. These differences would discourage citizens from working in the private secto,” says Moody’s, noting that the private sector mainly employs expatriates, while the public sector mostly employs Kuwaiti citizens.

Moody’s stated that Kuwait’s infrastructure is less developed than its regional counterparts such as the UAE and Qatar, pointing out that Kuwaitization and the lack of skilled technicians also restrict the economy’s competitiveness and diversification prospects. Meanwhile, Moody’s pointed out in its analysis that the parliament’s disagreement extends to financing issues, as delays in approving the new public debt law continue to limit government financing options, although this is more relevant when the government is facing a fiscal deficit. big. Moody’s stated that Kuwait’s credit position is supported by the country’s exceptionally large financial reserves, as well as huge oil and gas reserves with low production costs and very high levels of income. Moody’s assumes that no major reform measures can be implemented until the relationship between the government and the National Assembly becomes constructive.