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Monday , February 6 2023

Rise in oil prices may not benefit Kuwait economy … as expected

This post has been read 15984 times!

KUWAIT CITY, March 15: While the oil prices have been recording daily historical levels in the recent period, reaching about $130 per barrel, some believe that this trend is healthy for the general budget due to the additional revenues recorded above the estimated breakeven price per barrel for the current fiscal year at $90, reports Al-Rai daily. On the surface, this hypothesis seems realistic, considering the flow of an additional $40 to the budget for each barrel at least in the last two months of the fiscal year.

However, in accounting, this calculation is illogical, as the rise of the recorded oil will expose the budget to shock the bill for financing the consumption of food and construction goods, which in turn has reached price limits and threaten to swallow the oil gains reaped by the public budget. From here the story begins. With a simple review of the movement of prices of goods exported from and imported to Kuwait, the optimistic view of the positive repercussions of the rise in oil on the budget seems impractical. The figures indicate that for every additional dollar recorded by the general budget of oil in the past three weeks, it will lose a dollar, by virtue of having to direct it to fi- nance the jumps in price of food and construction commodities, which makes Kuwait’s gains from the rise in oil invisible on the book.

Considering that Kuwait is among the countries most exposed to the risks of rising food prices due to its almost total dependence on imports, it will be equally exposed to increased spending on what it imports. It will result in additional spending on consumer goods, the prices of which have skyrocketed to levels some describe as “insane”. During the Russian military invasion of Ukraine, global food prices soared to a record high in nominal terms and reached their highest level since 1974 in real terms. This will have negative effects on consumption, government finance, and balance of payments at an even greater rate in low-income and middle-income countries.

The disruption of food supplies from Russia and Ukraine, which account for 26 percent of global wheat exports according to 2020 statistics , is likely to increase infl ationary pressures. According to Moody’s, high food prices will affect the balance of payments, infl ation and government finances, exacerbating macroeconomic challenges and external and financial imbalances. Food represents 19 percent of merchandise imports in the Middle East and North Africa (excluding the high-income countries) and 14 percent in sub- Saharan Africa, a higher proportion than other non-island regions. According to the Food and Agriculture Organization (FAO) of the United Nations, the movement of global food prices showed a record high in February.

The unpleasant news here is that exposure to the rising wave of infl ation will most likely not be temporary, but rather long-term in consideration of what is happening with companies and the pricing mechanism globally. These expectations remain present until the facts and stats change that cannot curb the acceleration of infl ation globally, given that even before the outbreak of the military confl ict, climate change and the rising costs of fertilizers and energy indicated that this trend will continue throughout the year. However, the question that seems legitimate in this regard is related to the fact that, if the food prices are so closely related to the movement of energy, why did they not record the same jump that oil achieved only in the past weeks?

The reason is simply that the prices of primary commodities are usually supported by supply and demand factors, including the acceleration of global growth, which raises the demand for most industrial commodities. With the registration of unusual requests for consumer goods in exchange for increasing restrictions on their supply, food and construction costs are growing. Also, the oil price level was previously supported by production cuts from OPEC and some non-OPEC countries since January 2017, which improved oil consumption at its real rates.

However, something has changed since the opening of serious talk about the date of the Russian invasion of Ukraine, as oil prices have since started gaining great momentum, not because it is linked to the escalation of its consumption, but to its storage, for geopolitical considerations, which is the same reason that motivated countries importing food, including Kuwait, to raise their demand for what they consume, at a time when the cost of transportation is experiencing unusually high levels, due to the slowdown in supply chains globally. The Kuwait Investment Authority was an avid investor last year, as it participated in the IPO of TPG for private equity in the United States. It also bought an additional stake in BlackRock from BNC Financial in 2020. Its stake became 5.2 percent in the world’s largest asset manager as of the end of March 2021.

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