LET’S MIX IT UP
Giant petrochemical industries along with SMEs are Kuwait's best bet for ushering in an era of economic diversification.
In 1938 Kuwait's first drilling well reached oil in the Burgan field, and by 1946 the shipment of crude oil was inaugurated, which—as the world knows—changed everything for Kuwaitis. Kuwait, however, like its oil exporting neighbors, has had a complicated relationship with its hydrocarbon wealth.
While oil revenues kickstarted Kuwait's modern economy in the second half of the 20th century and gave the nation enviable living standards, one of the highest per capita incomes in the world, and good infrastructure, they dampened the organic growth of sectors such as industry and manufacturing.
It is estimated that 40-60% of GDP growth in Kuwait and almost all economic growth is driven by oil revenues; however, the golden age of petroleum industry is coming to an end, and it is quite probable that there will be no other oil boom in the world ever. Kuwait must adapt to this new reality and diversify away from a single-sector economy which has been in place since the petroleum industry's nationalization in 1975.
The experience of Norway, for instance, shows that it is possible to have a diversified economy as well as an oil and gas industry. The recent fluctuation in the price of crude oil has been yet another warning that traditional oil-based economies should look for alternative sources of revenue.
Kuwaiti businesses, however, have had mixed feelings about the country's transition to a post-oil economy. Although the country's private sector is keen to play a more central role, it is reluctant to shoulder the government's current burden, especially in areas such as job creation. At the same time, sudden changes in Kuwait's business ecosystem can render the existing business models used by the private sector out of place.
Diversification, however, will not happen overnight. Almost all of Kuwait's neighbors have been trying to get over their oil-dependence for years, but with limited success. The shift is, in part, slowed down by obstacles pertaining to regulations and national policies.
Fortunately, the New Kuwait development plan, launched in January 2017, has addressed such issues; the plan strives to, among other things, reduce the country's dependence on expat workers, capitalize on the nation's strengths for wealth-generation, and direct more foreign and domestic investment toward Kuwaiti industries.
If all goes according to plan, by 2035 Kuwait's overall state revenue will jump to approximately USD165 billion from the current figure of USD44 billion. This leap will be, in part, aided by the expansion of the industry sector.
One readymade area for industrial expansion is petrochemicals, given that Kuwait is already a manufacturer of petrochemicals and fertilizers. Focusing on the petrochemical industry is an ideal transitional move, because while it is a legitimate industry with notable added value, it requires affordable crude oil as its main input—of which Kuwait has a lot.
Other forms of manufacturing should not be taken lightly. The manufacturing sector currently accounts for under 6% of Kuwait's GDP. The New Kuwait plan is expected to stimulate the manufacturing of construction materials required for the country's ambitious infrastructure expansion program.
What is more, a number of major PPPs are about to be announced soon, according to the Kuwait Authority for Partnership Projects (KAPP). These energy and infrastructure projects are also expected to strengthen the value chain in the industry sector.
The industry sector is by no means limited to major initiatives. Indeed, one of the weaknesses of Kuwait's industry is the downplayed role of SME. According to the World Bank, Kuwait has a large number of SMEs in non-financial areas, including industry, which have not reached their full potential in the context of the country's economy, while SMEs account for 40-50% of GDP in both high-income and emerging economies.
Industrial SMEs, as one of the most influential agents of change in emerging economies, representy an opportunity. Fortunately, in 2013 Kuwait launched a national fund for the development of SMEs with a capital of USD7 billion, which is the first entity of its kind in the Gulf and has been empowering the country's SMEs ever since.
Moving away from oil is best achieved by targeted diversification, because as Warren Buffett once observed, “Wide diversification is only required when investors do not understand what they are doing." And, the industry sector seems to be just the right target for Kuwait's economic diversification agenda.
LET’S MIX IT UP
TABLE OF CONTENTS
Interview
Adel Abdul Wahab Al-Majed , Chairman, Kuwait Banking Association (KBA)
Through a broad array of information, specialized committees, staff expertise, and other resources, KBA supports Kuwait's banks as they perform their critical role in energizing the economy and helping communities thrive.
read articleInterview
Sheikh Dr. Meshaal Jaber Al-Ahmed Al-Sabah, Director General, Kuwait Direct Investment Promotion Authority (KDIPA)
KDIPA adopts a proactive approach to attract value-added direct investments supported by an integrated promotional strategy serving Kuwait's developmental goals in line with its National Vision 2035.
read articleCommuniqué
Legal Reform and Infrastructure Projects Spell Opportunity for Foreign Investors
Along with the introduction and modernization of new laws and regulations, the vision of His Highness Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah to transform Kuwait into an international center for commerce and industry by 2035 is already being implemented through Kuwait's National Development Plan. Coupled with the promulgation of progressive FDI regulations, these new opportunities spell positive news for foreign companies looking to conduct business in Kuwait.
read articleFocus: Developing connectivity
Connecting the Dots
Today, connectivity is hardly indispensible for individuals and the companies where they work. Kuwait's smart cities, considered elsewhere in the book, will thrive on it, and meanwhile the nation continues to register notable business deals from the informatics sector.
read articleInterview
Khalid Abbas , Country Manager-Kuwait, Unilever
Contributing to the improved health and wellbeing of communities and reducing environmental footprint are key priorities for Unilever, which is committed to improving the health and wellbeing of up to 1 billion people globally by 2020.
read articleInterview
Mohammed Yousif Soud Al-Sabah , Board Chairman & Director, Public Authority of Agriculture Affairs and Fish Resources (PAAAFR)
PAAAFR has adapted a package of policies to face challenges inherent to deserts, hot climate, and water scarcity, bringing Kuwait closer to achieving national food security, one step at a time.
read articleInterview
Yang Chunsen, Vice President/ Chief Representative, China State Construction Engineering Corporation Middle East (CSCME) Kuwait
CSCME is a technology-driven company that leverages its R&D and long-standing partnership with the government to increase its participation in the future development of Kuwait.
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