WHAT A YEAR

Kuwait 2017 | DIPLOMACY | YEAR IN REVIEW

Kuwait, like its GCC neighbors, is attempting to reverse engineer its way out of the age-old dilemma of having just one basket and far too many eggs. For your average Kuwaiti, this means cuts to subsidies and the introduction of VAT.

Kuwait is OPEC's fifth-largest producer, and in late 2016 agreed to production cuts with the aim of driving the price of oil back up—in January, Kuwait cut production in line with an OPEC agreement, going from 2.838 million bpd in baseline production in October 2016 to 2.707 million. Low oil prices led to a budget deficit of USD15.3 billion in 2015-2016, a first after a staggering 16 years of surpluses. Oil contributes around two-thirds of GDP in Kuwait, and while revenues were down 45%, state spending fell just 15%, opening up a USD27 billion gap. The current year is also expected to be tough, with hydrocarbons accounting for over 90% of exports and over 80% of fiscal receipts. Looking further ahead, though, and real GDP is foreseen climbing from 2.1% in 2016 to 3.2% by 2021 based on higher consumption and state spending as oil prices strengthen. And while Kuwait's sovereign wealth fund has helped to diversify revenue sources somewhat, the government is keen to see further diversification, with the current five-year plan expected to result in non-oil growth of around 5% in the medium term, according to the IMF. One route to flushing the coffers once more is the age-old practice of belt tightening, which for the Kuwaiti on the street means an end to fuel and other subsidies and the introduction of a VAT later in 2017. It seems that despite Kuwait's significant fiscal reserves, reported at USD592 billion in mid 2015, the government is keen to cut spending and see its citizens living within the country's means.

According to Kuwait Times reporting in late 2016, Kuwait would begin preparing to impose VAT within six months, and its likely date of implementation is early 2018, with educational and banking services and basic foodstuff exempted. Further sources suggest the tax will not exceed 5%. For Kuwait, however, the larger problem remains how to stimulate the private sector, as well as encourage citizens to opt for private firms over historically comfortable public-sector jobs. Nationals in Kuwait, at 1.3 million in number, represent just one-third of the population as of 2015. Further official data shows that of the 2.4 million workers in 2015, only 16.7%, or 400,000, were Kuwaitis. This points to a resistance among the local population to participating in the private sector. Indeed, public-sector salaries and subsidies rose in cost by 540% from 2001 to 2011, with the IMF noting that the public sector accounts for close to half of the country's total budget.

Casting a gaze over the energy environment, one may expect to see a slowdown in investment, especially in line with OPEC agreements to cut production. However, Kuwait continues to expand its oil and gas infrastructure as part of a longer-term plan. Elsewhere on the energy front, Kuwait has become a net importer of natural gas as domestic consumption increases, prompting dialog over the development of more sustainable energy sources—currently, 71% of all electricity is produced in liquid fuel generators, although according to the country's grand Vision 2030 plan, renewable energy should represent 15% of generation by the time the big year rolls around.

According to BP's Statistical Review of World Energy 2016, Kuwait has 101.5 billion barrels of proven oil reserves, representing nearly 14 billion tons of oil, and a reserve-to-production ratio of 89.8. Kuwait is joined in production cuts by neighbor Saudi Arabia, which also slashed output in January by 486,000bpd to its 10.058 million bpd target. Kuwait is also a deft hand at adding a little value to its hydrocarbons, producing around 935,000bpd of refined products. According to OPEC, Kuwait's annual petroleum exports are worth nearly USD48.8 billion, and it exports more than 1.9 billion barrels of oil and more than 739,000 barrels of other petroleum exports per day. The majority of Kuwait's hydrocarbons exports, at 80%, are destined for Asia Pacific, with South Korea the largest recipient, at 21%, and China with 16%.

While Kuwait sets out on the long path to diversification, one sector piques interest, full of potential to attract increased revenues in the shorter term: tourism. While holidaying in Kuwait may not be first on everyone's bucket list, the sector's direct contribution to the economy has been increasing in recent years, contributing nearly 2.25% to GDP in 2016. So what's the big attraction? The Qurain Festival, the annual BookFair, and the Children's Cultural Festival are just some of the events drawing tourists in, while the Sheikh Jaber Al Ahmad Cultural Centre and the surrounding cultural district, currently under development, is set to include world-class theaters, concert halls, cinemas and an opera house, and a library archive, all reflecting the country's unique cultural and artistic heritage.

Kuwait stands ready to diversify its economy, but patiently awaits a rise in oil prices and seems happy to cooperate with OPEC to ensure that happens.