Dubai: The political situation in Kuwait is volatile and may play spoilsport to the country's plans to expand and broaden economic activity.
The feuding between the executive and the legislature is expected to continue in 2011, and relations between the government and parliament are likely to remain fraught. But they "do not threaten underlying political stability", according to the Economist Intelligence Unit.
Strained relations between the government and parliament have resulted in three dissolutions of the house of representatives since May 2006, stalling reforms and progress.
Dr Jarmo Kotilaine, chief economist at the Saudi Arabia-based National Commercial Bank, told Gulf News: "The political situation has been a bit of a millstone around the Kuwaiti economy's neck. It does constitute a sort of risk for investors, both domestic and international.
"If the posturing continues — and that's what it is, really, just posturing — it may make investors nervous. But [the situation] is better now than it was a year ago," he said.
While the approval of the four-year development plan highlights that the two sides have agreed on necessary changes, the positive political environment may not be sustained, and standoffs between parliament and government may re-emerge, said Nancy Fahim, economist at Standard Chartered bank, UAE.
EIU analysts added: "The form of the political system will be questioned, but the Al Sabahs' position will remain unchallenged. The government's renewed commitment to structural reform is expected to lead to some reduction in Kuwait's dependence on hydrocarbons and the state dominance of the economy."
When Moody's Investors Service assigned a negative outlook to Kuwait in June 2009, the rating agency stated that it would be ready to move the outlook back to stable if the relationship between the government and the parliament were to improve.
The rationale was that a better relationship would ease the formulation and implementation of policy and enable Kuwait to move forward in its efforts to develop and diversify its economy.
In Moody's opinion, this condition has been met.
"Since the formation of a new government in June 2009, a number of important pieces of econ-omic legislation have been passed by the Kuwaiti parliament," said Tristan Cooper, Moody's head analyst for Middle East sovereigns.
The new legislation includes a privatisation law, a four-year development plan, a capital markets law and a labour law.
Moody's believes that these laws, despite some limitations, should help to develop the country's limited private sector and attract foreign investment.
In Fahim's view, Kuwait's success in achieving sustainable growth will be determined by its ability to revamp laws to better suit its needs.
A long-awaited privatisation law was passed in May 2010, and the government announced plans in November to privatise the postal service within two years.
"This is an important step, but there are signs that reform will be gradual. Sectors such as health care, education and oil production — which might have particularly benefited from the contribution of private-sector (potentially foreign) expertise, are excluded from the law," Fahim said.
"While the pace of privatisation is uncertain, this law highlights the fact that change is coming to Kuwait," she said.
Employees now have the right to change employers only if the existing employer can be proven to have engaged in illegal behaviour; domestic workers are excluded from this amendment.
"Kuwait's image has suffered on the subject of human rights, and some countries have suspended exports of workers to Kuwait until their rights were seen as better protected," Fahim said.
