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Kuwait: | Global Finance Magazine

Kuwait responded swiftly to the pandemic, but political feuds are slowing the reform agenda and increasing macroeconomic vulnerabilities.



In November 2021, 37-year-old Kuwaiti Abdulwahab Al-Rushaid—an outspoken private-sector critic of the economic policies of the ruling class—fired off another tweet on the world wide web: “Economic reform is an urgent need, not a luxury.” A few weeks later, he got a call from the prime minister’s office and, in a plot twist unique to Kuwait’s democratic system, was invited to take the matter in his own hands—as finance minister.


Golden opportunity or poisoned gift? Since 2012, the Ministry of Finance has become a revolving door. Al-Rushaid, 37, is the eighth minister to take up the post in only ten years. To make a difference, he will have to walk a fine line between his aspiration for reform and the reality of Kuwaiti politics.


The tiny emirate is bolstered by enormous wealth. With 8.5% of global oil reserves and just over a million citizens, Kuwait ranks in the top five richest nations in terms of GDP per capita. With ample financial buffers, the country entered the pandemic from a position of strength. Growth picked up slowly in 2021 and should increase to 4.3% this year.


But unlike other hydrocarbon producers, Kuwait has done little to diversify its economy—and this is where its biggest weakness lies. Oil exports still account for over 90% of revenue, 90% of exports and 50% of GDP, making the country extremely vulnerable to price fluctuations. Following the energy price drop of 2020, Kuwait posted a historic $36 billion budget deficit, up 175% from 2019.


“The problem with the Kuwaiti economy has nothing to do with the pandemic shock,” says Abdulaziz Al-Osaimi, assistant professor of economics at Kuwait’s Gulf University for Science and Technology. “It’s coming from structural reasons.”


Structural Agenda


One of the top priorities on the agenda is the debt law. Contrary to most countries, Kuwait can’t borrow money on international markets, for lack of legislation. Being the only Gulf Cooperation Council (GCC) member with a fully elected parliament, Kuwait has a rare freedom of expression and vivid political life, but a complicated decision-making process. Most reforms have been in a deadlock for years, as negotiations are constantly overshadowed by corruption and fraud scandals.


For Al-Osaimi, “this is a matter of trust. People don’t trust the government to manage debt wisely.”


In the absence of reform, the country must pick from its piggy bank to fund its large spending habits. Although Kuwait’s sovereign wealth fund is allegedly the third-largest in the world with over $700 billion, it is meant to support future generations when oil runs out, not everyday expenditures.   


“The lack of debt law means managing any fiscal deficit through reserve drawdown,” says Ali Khalil, CEO of Kuwait Financial Centre Markaz. “[Such] gaps in financing cannot be allowed to continue—and with or without a debt law, the government must implement reforms on the revenue side and on the expenditure side.”


To restore its fiscal position, Kuwait needs to reduce public spending, especially on wages. The state currently employs over 80% of Kuwaitis. Their salaries, along with subsidies and special allowances, account for 70% of the budget and keeps increasing each year, despite international pressure to limit further public-sector job creation and encourage private-sector growth.


“This will explode,” says Al-Osaimi. “The government is competing with the private sector by offering better salaries, and I think the underlying reason is that the ruling class is drawing legitimacy from being the largest employer in the country.”


Initiatives to introduce new taxes, such as an income tax on individuals or a value added tax on purchases, have also hit a dead end in Parliament.


“The Kuwaiti lifestyle is a sensitive topic and it’s not going to be easy to change overnight,” says Manaf Al-Hajeri, an independent investment adviser and former CEO of Markaz. “But there is so much inefficiency in the system that productivity could witness an enormous gain, [even] while people continue to enjoy their privileges.”


The difficulty in enacting reform is also hampering Kuwait’s capacity to expand into non-oil economic activities. The country’s strategy for diversification, Vision 2035, includes large infrastructure plans—like brand-new islands, ports and cities—to turn the emirate into a regional hub and create up to 400,000 jobs.


Diversification Difficulties


To fund these gigantic dreams, the authorities bet on a boom in public-private partnerships and a 300% increase in foreign direct investment (FDI). But so far, few deals have materialized, and most projects are suffering delays.


Despite efforts to improve the business environment with a new bankruptcy law, tax exemptions and 100% foreign ownership of companies, the bidding process for major projects remains under scrutiny from Parliament—which extends and complicates negotiations. Overall, inbound FDI remains below target, and Kuwait invests more money abroad than it receives. Last year, the country invested $32 billion abroad while it only attracted $14 billion, according to the IMF.


Western IT and logistics companies that wish to expand their footprint in the MENA region have been among the most recent investors. US aerospace giant Boeing opened a new office, Amazon Web Services (AWS) is due to follow shortly with a data center and, according to local media reports, Google has also signed a deal to set up regional data and cloud operations.


On the local scene, the small and midsize enterprise (SME) sector is taking time to rebound, despite the $7 billion special fund set up in 2013. There are some success stories, especially in foodtech, but overall Kuwait’s startup ecosystem still lacks accelerators, mentorship, VC fund and angel networks. Many entrepreneurs complain that a lack of government support drives businesses out of the country when they look to scale. [See interview with Sharifa Al-Sulaity, prior page.]


But all is not lost. When the time is right, large financial reserves and a strong banking sector will allow Kuwait to implement reforms from a position of strength, the IMF points out in its latest Article IV assessment.


The Kuwaiti banking sector remains one of the strongest in the region and a pillar for growth. Banks enjoy high levels of capitalization and ample liquidity. In the first half of 2021, the liquidity coverage ratio stood at 174% while the capital adequacy ratio reached 18.7%, well above the required levels.


“The banking sector remains resilient, with stable profitability and unaffected asset quality,” says Abdulwahab Al-Rushood, acting Group CEO of Kuwait Finance House, the country’s second-largest bank. 


While most economic actors have faced some fallout from the oil-price-induced decline in state revenue, banks navigated the pandemic rather smoothly, thanks to solid cushions and prudent policies from the administration.


“The central bank took measures to reform the financial sector years before the pandemic,” explains George Richani, Group CEO of Ahli Bank of Kuwait. “It was very strict in terms of liquidity and capital, so when Covid-19 hit, we were ready.”


Al-Hajeri, who sees room for growth from addressing inefficiencies throughout the economy, suggests that finance may offer a road map for both policymakers and corporate decision-makers. “The financial sector is the best-regulated sector in Kuwait thanks to the capital markets authority and the central bank,” he says. “This is a role model that should be adopted by other sectors.”


The Future Is Talent


Undamaged by the recent events, Kuwait’s financial sector is ready to take on new challenges, such as developing human resources and innovation.


“As the banking industry goes through its radical transition to beyond banking business model, local banks will need to widen their pool of recruits and attract new types of talent,” says Abdullah Al Tuwaijri, CEO of Bank Boubyan. “They will need new skillsets in line with their shifting business models and to better understand their customers. Banks will need data scientists, researchers, artificial-intelligence specialists, visual designers, digital marketing and media experts, developers and customer experience professionals. They will also need to recruit psychologists, graduates of philosophy majors and other diversified skills that can bring in new perspectives.”


“The past two years have taught us many lessons about adapting to change, coping with crises, having different attitudes toward risk and redesigning priorities. Most importantly, we learned that digital transformation is not a choice but a must, and that what matters most is to offer customers uninterrupted services” adds Al-Rushood.


While the central bank remains cautious when it comes to cryptocurrencies, new payment gateways and cross-border fintech services, it has been encouraging local players to develop digital banking tools. In November, NBK, the country’s biggest lender, launched Weyay, an online bank targeting young customers. A few months earlier, Bank Boubyan opened Nomo, one of the world’s first Islamic digital banks.


The long-term economic outlook remains uncertain for Kuwait if it depends on oil prices. But if it manages to overcome political impediments, the country has all it takes to turn its luck around and catch up with GCC neighbors.

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