--------------CCA2A0BBD6D7A3B752D5AC85
Content-Type: text/html; charset=iso-8859-1; name="Kuwait.html"
Content-Transfer-Encoding: quoted-printable
Content-Disposition: inline; filename="Kuwait.html"
Content-Base: "file:///A|/Kuwait.html"
Kuwait
= Jaewook Song
= Oct. 5, 1998
I assumed Kuwait has high degree of vulnerability in her economic = structure per se. Even though Kuwait has shown a great deal of stability = in her practical managing, recently she has shown a couple of deregulatio= n, privatization, and re-structuring move. I suppose these changes have b= een brought from relevant structural weakness in facing new globalization= of economic and trade move.
What factors made the financial policy change? I dare to show some= influential elements that contribute to the change, even though gradual,= of the economic features.
Kuwait is a hereditary constitutional monarchy. The emir comes fro= m one of two branches of the al-Sabah family, which has fulfilled the rol= e of administrators of Kuwait since the middle of the 18th cen= tury. The current emir is Sheikh Jaber al-Ahmed al-Sabah who has been dem= oralized now. And there is internal feud between heir apparent, Saad Abda= llah, who is prime minister and Sabah al-Ahmad who comes from a rival bra= nch of the family and he is deputy prime minister. As a story shows, the = power strife is too grave to map out several necessary economic policies.= "When a committee headed by Sheikh Sabah recently approved an urgen= tly needed cut in the oil subsidy, Sheikh Saad said no."
One of the influential bloc in Kuwait is Islamists. Three main Isl= amic groupings are represented in Kuwait=92s parliament. Those are Islami= c Constitutional Movement( the local branch of the Muslim Brotherhood), I= slamic Popular Movement(akin to the Wahhabis of Saudi Arabia), and Nation= al Islamic Coalition(Shi=92i alliance). But those Islamist are concentra= ted on social issues like gender problem rather than pressing question of= economic adjustment.
The other political bloc is the Left. By large, there is two divis= ions in this bloc. One of them is Nationalist(Democratic Forum), and the = other is who are represented cosmopolitan merchant elite. Though both of = them accuse the dynasty of political corruption, they show different stan= d on government=92s privatization plan.
Given narrow enfranchise, male Kuwaitis over 21 (about a seventh o= f all citizens), and just 50 seats in Parliament, those two blocs have mu= ch less real power than the dynasty clan have. But none of these seem to = be interested in promoting a radical solution to the country=92s fiscal c= risis.
Banking services in Kuwait are primarily provided by domestic inst= itutions that operate in a relatively competitive environment. There are = six locally incorporated commercial banks in Kuwait, all of which are 100= % Kuwaiti owned, and one branch of a foreign bank, which have partnership= with Bahrain.
National Bank of Kuwait(NBK) is the largest commercial bank, and t= he only one that has foreign branches and subsidiaries in ten countries h= aving services related to international contracts and financing in Kuwait= =2E NBK has also played a key role in privatization program having underw= ritten or acted as agent in most of the privatization sales, mainly those= held by the Kuwait Investment Authority(KIA).
Likewise, commercial banks in Kuwait play an important role in the= capital markets. They are allowed by the Central Bank of Kuwait(CBK) to = purchase shares in other companies up to 50% of their capital. They are a= lso involved in underwriting securities, and trading on behalf of their c= lients.
Meanwhile, the banking sector is supervised and regulated by CBK, =
which is also responsible for setting and conducting monetary policy. Tr=
easury bills are now the most important instrument used by the CBK for da=
y-to-day liquidity management. Though CBK has done a number of deregulato=
ry measures in these days, interest rate ceilings on loans still exist.
Like this, Kuwait=92s banking system can be classified into German= type that relatively stresses autonomous private sector but, with univer= sal bank, structural power works through people rather than markets. Thou= gh political leverage plays important role still now, the patterns of the= system gradually move toward British model.
The exchange value of the Kuwaiti dinar(KD) is linked to a weighte= d basket of major currencies. It is believed that the US dollar comprises= the major part of the basket. Other than setting restrictions on domesti= c currency loans to non-residents, Kuwait has no direct controls on the f= low of capital into or out of the country. And Kuwait=92s tariffs are low= at a standard 4% compared to Saudi Arabia=92s with an average duty of 12= %.
4. Kuwait=92s economic structure
Kuwait owns 10% of global oil reserves and since the early 1= 990s. The oil industry has accounted for an average of 86% of annual gove= rnment income. Kuwait=92s crude oil production was 2.19 million b/d in De= cember 1997. Though international oil price still low, and despite OPEC=92= s quotas prevent her from increasing the production, Kuwait have so aggre= ssive program that it will increase to 2.5 million b/d by 2000, 3 million= b/d by 2005. Except for crude oil production, this industry needs divers= ification strategy, for example, in refinery or petrochemicals.
Kuwait=92s revenue structure is characterized by high depend= ence on oil revenues. Following invasion, the reduced importance of the s= tabilizer role of investment income deepens the bias. "In 1994/95-19= 95/96, oil revenues accounted for some 75% of total revenues rendering Ku= wait=92s revenue base extremely vulnerable to developments in the volatil= e international oil market."
Another important revenue is investment income. It has decli= ned significantly from about 27% of GDP in 1989-90 to less than 8% of GDP= in 1994-95. To pay wartime cost, government has had to liquidate more th= an half of the foreign investment. That is why the income has been reduce= d. Still less, the tax revenue have accounted for only around 2% of total= revenues.
Like its revenue structure, Kuwait=92s expenditure shows sig= nificant discrepancy in between current expenditure and capital one. Curr= ent government spending in Kuwait reaches at 50% of GDP in 1993-94, which= is significantly higher than other GCC nations which ranges from 11% to = 38%. In that, the largest component of the total is wages and salaries,= which cover 90% of all Kuwaiti labor forces who are working in public se= rvice. The spending has been increased to an average of 15% of GDP in bet= ween 93-96 fiscal years comparing with 6.6% of GDP in 1980-81.
Also wide array of budgetary subsidies and transfers is prov= ided to Kuwaiti nationals. In terms of GDP, Kuwait spends more than twice= as much as Oman and Saudi Arabia, averaging 11% of GDP in recent fiscal = years. In the immediate postwar years, however, they rose sharply to mor= e than 20% of GDP. "The dominant components of subsidies and transf= ers have been the transfers to the Social Security Institute; transfers t= o individuals- covering cancellations of housing and consumer loans, end = of contract payments to no-Kuwaitis etc., - and subsidies for electricity= , water, and petroleum products."
The budget in Kuwait's case is not the coordinating device. = That point of view presented by Mallakh and Atta in the boom period. "The= seemingly successful completion of the first five-year plan was due more= to the boom which increased oil revenues brought to the entire economy, = especially to the private sector, than to a conscious attempt on the part= of the government to expand capital expenditure in line with plan object= ives." It proves that Kuwait's budget plan is significantly distorted by = government's biased stand, and so the budget structure would not safe and= invulnerable in recession.
The two characteristics in demographic change after Iraqi inv= asion are important to labor market in Kuwait. The one is decrease in the= population community as a whole and increase the percentage of Kuwaitis,= the other is change of the ethnic structure of non-Kuwaitis. In 1993, th= e total population was 1.5 million compared to about 2 million in 1989, w= ith a 26.3% drop. This is due to large scale of expatriates' exodus with = a 42.5% drop during that period. Meanwhile, the Kuwaitis increased from 5= 50 thousand to 642 thousand, with increase percentage of 16.8%.
Given that, Kuwaiti=92s percentage have been increased in th= e total labor force, though continuous concentration of the national labo= r force in the public sector has been shown. And there was a significant = change in the composition of the expatriate labor force. "An increas= e in the number of Asian single workers with short-term contracts and a d= ecline in the number of skilled workers from Arab region who had previous= ly worked under longer-term contracts and generally brought their familie= s with them. The change in skill composition has put a premium on the dev= elopment of the educated indigenous labor force. It has also contributed = to a structural change in the current account of the balance of payments = with larger outward workers=92 remittances." And this change causes = some effects. On the supply side, labor markets have to suffer by the abs= ence of workers and the unavailability of certain skills. On demand side,= the reduction in aggregate demand occasioned by lower consumption as a r= esult of the fall in population.
Kuwait=92s exports are dominated by the oil tr= ade. Crude and oil products together accounted for over 95% of expor= t earnings in 1994. Meanwhile, 80% of the imports have been manufactures,= so its major suppliers have been the industrialized countries like U.S. = , Japan, Germany etc.
After the War, $5.5 billion sovereign loan was fully repaid in 19= 96, and the balance of payments changed to surplus by 1994. Likewise,&quo= t;there are indications that private Kuwaiti investors brought capital ba= ck to Kuwait. One of the indicators being the significant rise in activit= y of the local stock exchange. Its index rose 15% in the first quarter of= 1997 compared to the same period in 1996."
Several measures to induce foreign direct or indi= rect investment has been implemented these days, though the move still no= w limited by below 49% in any enterprises. That reflects a sort of divers= ification strategy. For instance, plans were approved for the development= of a free-trade zone to be constructed and managed by a private-sector c= ompany. The zone will offer tax-free investment opportunities primarily t= o re-exporters and small industrial companies.
5. Macroeconomic policy after Gulf War
In the aftermath of the Gulf War, IMF and the World Bank advised o= n how to deal with the country=92s fiscal crisis. These institutions urge= d the Kuwaitis to slash their various consumer subsidies, to raise tax re= venues dramatically and to privatize all state-controlled economic enterp= rises except for the oil industry. These recommendations were a call for = the kind of structural adjustment policies which it has prescribed for he= avily indebted developing countries in that time.
But Kuwait has shown remarkably speedy rehabilitation. After liber= ation, they could resume the oil production in a year, and reconstruct al= most all looted facilities and infrastructure around by two years. Also t= hey overcome twin deficit much more quickly than others imagined. Accordi= ngly, by 1995, Kuwait=92s oil production, capacity, and exports were abov= e their preinvasion levels.
Kuwait emerged from the crisis, however, with a seriously weaker f= iscal structure- "an important determinant of future macroeconomic b= alances given the role that fiscal policy plays in this small, open econo= my." And the invasion contributed to "an upward shift in govern= ment spending and more limited flexibility." Without the revenue- st= abilizer role of investment income, they are to vulnerable to these glob= alization economic trend as well as to fluctuation, even downturn, of oil= market price.
Given these structural adjustments is essential and necessary, tho= ugh all of the political blocs seem to be reluctant, they take a couple o= f prudent reform measures in these days. And there has been some inductiv= e plan for foreign participation. In July 1992, the Offset Program was es= tablished whereby all foreign contractors awarded government-supply contr= acts in excess of $3.3 million are required to incur an investment oblig= ation equal to 30% of the contract value over an eight-year period.
In 1996, the syndicated long-term loan package to Equate Petrochem= ical Company was signed. These expansion from crude oil to other manufact= uring has been shown as follows. "In a move designed to increase the= value of Kuwait=92s crude oil reserves, boost revenues, and protect reve= nues when crude oil prices fall, Kuwait Petroleum Corp.(KPC) is targeting= expansion of the country=92s relatively small petrochemical industry.&qu= ot;
It is noteworthy that Kuwait want to share the investment risks, a= t the same time, solve the security problem suffering from Iraq=92s threa= tening through opening and joint partnership with multi national cooperat= ions. We can assume that in an officer=92s saying, "no longer do we = feel that it is always to our benefit to take 100% ownership positions an= d to bear all the risk."
Notwithstanding, the efforts of opening and privatization has not = been radically promoted. Deregulation has been delayed yet. Following sho= ws that trend clearly. The privatization law of 1996 guarantees the right= of most workers to retain their former jobs after privatization. Likewis= e, the sale of these firms will not reduce government expenditures signif= icantly, since the enterprises eligible for privatization employ only a t= iny share of the public sector workforce- whose salaries form the largest= single item of government expenditure and consume about 30% of its budge= t.
Diversification, also, has not been promoted rapidly. As Henry put= it that "if manufacturing is the motor force of industrial developm= ent, likewise most of the MENA economies, despite or perhaps because of t= heir petroleum resources, (Kuwait=92s) economy seems to be at a strategic= disadvantage," Kuwait=92s economic structure are now facing a sort = of dilemma. Even though they can meet Kuwaiti=92s demand of well-being, t= hey are needed to be adjust and restructure their relatively weaker econo= mic and political stand in long-term steadfastness.
----Bibliography----
Clement M. Henry, "The financial Arms of industrial and political= activity," a paper prepared for international conference, Tunis: 30= August - 2 September 1998., p. 3
Economist, June 6, 1998., p. 46
Euromoney (The 1997 Guide to Banking Services in the Middle East Suppl= ement), December 1996., p. 8
Kuwait and Social Development, Ministry of Planning & Cente= r for Research and Studies on Kuwait, 1995., pp. 183-89
Kuwait: From Reconstruction to Accumulation for Future Generations<= /I>, International Monetary Fund, April 1997., p. 11
Oil & Gas Journal, March 16, 1998., pp. 27-30
Ragaei El Mallakh and Jacob K. Atta, The Absorptive Capacity of Kuw= ait, Lexington, (Lexington books, 1981), p. 45
The Economist Intelligence Unit, Country Profile; Kuwait, 1992-93.
=
The Economist Intelligence Unit, Country Profile; Kuwait, 1995-96., p= =2E3
World Trade, Jan 1998., pp. 58-60
Yahya Sadowski, "The end of the Counterrevolution? The Politics o= f Economic Adjustment in Kuwait," in Middle East Report, July-Septem= ber 1997., p. 9
--------------CCA2A0BBD6D7A3B752D5AC85--