Last week, Kuwaiti legislators finally approved state budget for 2010/2011, nearly two months after start of the fiscal year. Similar to Qatar, Kuwait's fiscal year commences in April. The delay reflected conflicting objectives of the executive and legislative branches with regards to spending.

Not surprisingly, a number of MPs pressed for steady spending as a means of creating governmental jobs for nationals and thus constituents.

Eventually, the hawks largely obtained what they wanted, with approved budget showing a hefty 33.5 per cent rise in spending. Thereby, the projected spending figures for fiscal years 2010/2011 and 2009/2010 stand at $56.2 billion and $42.1 billion, respectively.

Yet, stronger spending only strengthens the state's role in the economy, which is against the stated goal of making way for private sector investors. Kuwait's gross domestic product (GDP) was estimated at $115 billion in 2009. As the figures suggest, Kuwait's economic well-being is too dependent on public sector spending.

Still, projected revenues amount to $33.5 billion up by 19.2 per cent from the previous year's $28.1 billion. The change reflects higher assumed average oil price, namely $43 and $35 per barrel in fiscal years 2010/2011 and 2009/2010, respectively.

Energy sector

The oil sector is projected to contribute nearly 89 per cent or $29.7 billion of total budgetary revenues. Certainly, the extraordinary reliance on the petroleum sector places Kuwaiti economy at the mercy of developments in international oil markets. Of all Gulf Cooperation Council (GCC) states, Kuwait's fiscal system remains the most dependent on oil income.

The projected deficit for fiscal year 2010/2011 amounts to $22.7 billion. This is sizable amount by virtue of making up 20 per cent of the country's GDP, undoubtedly in violation of Gulf Monetary Union (GMU) project. In 2010, four GCC states commenced the process of implementing GMU, which amongst others restricts budget deficit to three per cent of GDP.

The final results of fiscal year 2010/2011 would most likely be a replica of the traditional formula, namely growing actual revenues together with declining expenditures and hence reversing budget deficit into surplus.

For fiscal year 2009/2010, the authorities projected shortfall of $14 billion, but some local press reports are now projecting a surplus of $28 billion or as high as $34 billion. The change relates to actual oil price being considerably higher than the assumed rate of $35 per barrel.

It is believed that the authorities intentionally assumed relatively low price for fiscal year 2009/2010 in order to fend off requests by legislators for steady increase in pay for Kuwaitis working in the public sector. About 92 per cent of Kuwaiti nationals work in governmental departments and state-owned establishments.

Surplus

The combined surpluses of nearly $140 billion achieved over the last ten fiscal years should serve as caution while reforming the economy. Amongst others, the authorities need to press legislators to reopen debates about the stalled privatisation programme. The plan includes selling off shares in institutions the government purchased through the Kuwait Investment Authority following the collapse of the unofficial stock market in 1982 and Iraqi invasion in 1990. The privatisation drive should help broaden sources of revenue, and consequently reduce reliance on oil.

All said, Kuwait stands out amongst GCC countries by setting aside 10 per cent of annual treasury income for the Reserve Fund for Future Generations. The plan aims at ensuring sustainable means for quality of life for Kuwaiti nationals for years to come. The scheme proved successful in 1990 when the authorities used part of the reserves to finance the liberation war. The Iraq invasion in August 1990 was a turning point in subsequent regional geo-political developments.

 

The writer is a Member of the Parliament in Bahrain.