GCC Insights: Kuwait adopts bold economic initiatives

In the last few weeks, the Kuwaiti authorities revealed plans to invigorate the economy. The measures include opening up the economy to foreign investors.

As part of sweeping economic reforms, the government has decided to open up most of the economy to international investors and, in certain cases, allow full foreign ownership. Foreign investors can now invest in numerous economic activities including infrastructure projects in electricity, water, telecommunications and sewerage treatment.

Also, foreign investors are allowed to own schemes in housing, real estate and entertainment. The same privileges are granted for investing in banking, investment firms and foreign exchange houses subject to government approval.

In a separate decision, for the first time foreign investors can establish 100 per cent Kuwaiti companies provided that they provide for transfer of technology, create jobs and promote exports.

In an earlier step, the government set up the Executive Authority for the Development of Kuwaiti Islands, Divided Zones and Major Projects. The goals include enticing investments worth $10 billion in a span of 25 years.

Building on growing optimism, the government has decided to augment spending by a hefty $2 billion for additional projects in the fiscal year 2003-04.

Strangely enough, the Kuwaiti economy has developed a unique habit of actually spending less than planned outlay.

Substantial surplus

For example, in 2001-02, the budget recorded a substantial surplus of $14.1 billion partly due to lower than planned expenditure. Possibly there was an understandable reason for this, as Kuwait had lived for some 13 years under the shadow of former Iraqi dictator Saddam Hussain since the 1990 invasion by Iraq.

Nevertheless, Kuwait needs to overcome other critical economic impediments including allowing foreign investments in oil and passage of a privatisation plan. The new decree on foreign investments bars participation in oil and gas exploration and production.

Current production stands at 2.04 million barrels per day (bpd) but the oil officials would like to raise this to the three million barrels level by 2005.

But an ambitious plan calls for increasing production at a higher level, which in turns requires speedy opening up of the upstream segment. One scheme known as Project Kuwait aims at generating an additional 450,000 bpd from fields close to Iraq, which require an investment of $7 billion over a 20-year period.

The project was unveiled in the late 1990s and the government prepared a draft law in April, 2000, but has since experienced resistance in the National Assembly.

The sticking point is a clause within the Kuwaiti constitution which bars foreign ownership of the country's hydrocarbon resources. However, the chances are good of the authorities succeeding in convincing the weary parliamentarians now that Iraq no longer poses a threat to the country's security.

Additionally, the long-awaited privatisation law remains deadlocked at the National Assembly. Amongst others, the programme will sell government shares in banks, insurance companies and light industries that the government had purchased through the Kuwait Investment Authority following the collapse of the unofficial stock market in 1982 and the Iraqi invasion in 1990.

Also, on the privatisation list are activities such as postal services and ground communications stations as well as laboratories, X-rays and security at public hospitals. The government has indicated its desire to sell parts of Kuwait Petroleum Corp besides certain functions of Kuwait Airways Corp, as well as buses operated by Kuwait Public Transport Co.

The ultimate objective of the privatisation program-me is making the best possible utilisation of scarce resources.

The writer is assistant professor, College of Business Administration, University of Bahrain