Recording of an exceptionally strong exceptional budgetary surplus is at best a mixed blessing for Kuwaiti economy. Pluses include maintaining an attractive credit rating and absence of inflationary pressures. Yet, the adverse effects entail limited economic growth rates on the back of relatively cautious spending, with all implications for foreign investors.

Similar to Gulf Cooperation Council (GCC) fellow state of Qatar, the fiscal year in Kuwait runs from April to March. The practice is partly meant to provide members of executive and legislative branches sufficient time to sort out details of the budget at the start of the calendar year.

Sadly, the two branches are known for their public disputes over policy choices and spending priorities. The country has experienced six government resignations and shakeups over the past few years reflecting deficiency of a functioning relationship with successive chamber of deputies.

The notable surplus achieved for 2011-12 fiscal year serves as testimony of the lingering disagreements between the appointed cabinet and elected parliament. More specifically, a record surplus of US$47 billion registered for the fiscal year ending in March.

The resulting surplus, compromising about a quarter of the country’s gross domestic product (GDP), is attributed to a combination of higher and lower actual revenues and spending, respectively. Understandably, the stronger revenues reflect firm oil prices and hike petroleum production, a welcoming development.

However, actual spending fell by 12.5 per cent due to inability of making good on promised expenditures on infrastructure projects including road network and further development of the airport. To be sure, developments such as these only undermine Kuwait’s ability to attract foreign direct investments (FDI).

Kuwait’s performance in the World Investment Report 2012, issued by the UN Conference on Trade and Development (Unctad), is more noted for outflows rather inflows of FDI. According to the recently released report, Kuwait attracted FDI of around $400 million compared to $781 million in the case of Bahrain, $7.7 billion in the UAE and $16.4 billion for Saudi Arabia.

Conversely, Kuwait led GCC states in the amount of outgoing investments, standing at a hefty $8.7 billion in 2011. As such, Kuwait is suffering from the phenomenon of outgoing at the expense of incoming foreign investments.

By the same token, the IMF considers Kuwait’s economic growth levels the lowest within the six-nation GCC partly due to political differences in the country. Put differently, the IMF projects a real GDP growth rate of 4.5 per cent in 2012, albeit strong but not by regional standards.

In fact, this notable growth rate is partially the result of stronger oil production, thereby confirming the significant role of petroleum sector in the local economy.

On the other hand, on a positive note, the strong budgetary surplus together with limited surge in spending, had served the purpose of controlling inflation. At 2.8 per cent in July and June of this year, inflation rate in Kuwait remains the lowest within the past two years.

All indications suggest that Kuwait’s economy is not reeling under inflationary pressures on the back of limited growth prospects, in turn partly the result of restricted spending.

At the same time, repeated budgetary surpluses are credited for helping maintaining widely sought credit rating by ensuring availability of financial cushion. Kuwait enjoys credit rating of AA minus together with stable outlook from Standard & Poor’s.

All told, the right policy for Kuwait would be to use the extra oil proceeds to diversify the economy away from the petroleum sector. Kuwait has the ability to do so by capping all its advantages and resources.