Kuwait's economic diversification to invigorate private sector

Kuwait is a member of both the Organisation of the Petroleum Exporting Countries and the GCC. Additionally, the country is arguably the most politically dynamic in the Gulf, which has afforded it strong foundations to help tackle recent issues concerning parliamentary elections and accountability. By continuing with economic diversification efforts and reducing dependence on oil revenues, the country is also adding increased momentum to several large infrastructure projects. The tabled projects are set to help further integrate Kuwait into the global economy.

Development

Kuwait’s economic strength is derived from its oil reserves, which amount to more than 101.5bn barrels, with the government setting a production target of 4m barrels per day (bpd) by 2020, up from current levels of 3.1m bpd (see Energy chapter). Oil has fuelled development in Kuwait since the Second World War, and production took on a central role in the economy after the industry was nationalised in 1975.

Accounting for more than 60% of GDP and 95% of exports according to Kuwait’s Central Statistical Bureau, the country’s oil revenues have delivered strong public finances, consecutive annual budget surpluses and funded the development of a generous welfare system. Although the private sector has taken a limited role in the economy over the past four decades, Kuwait has produced globally successful firms, such as telecoms giant Zain and low-cost carrier Jazeera Airways.

Kuwait has been pursuing a programme of economic diversification that is set to re-energise the private sector via a boost in infrastructure projects. Approved by Parliament in February 2015, the five-year, $155bn Kuwait Development Plan (KDP) is the current iteration of the government’s blueprint to enhance the country’s role as a banking, trade and services hub within the Gulf by 2020.

With plans for upgraded infrastructure, expanded utilities and housing investments, more than 500 projects have been nominated under the KDP as growth catalysts to restore the balance between Kuwait’s public and private sectors, and accommodate the demands of its growing population. Given lower oil prices, the initiatives outlined by the KDP come at a critical time in terms of enhancing the state’s competitiveness concerning foreign direct investment.

History

Kuwait’s archaeological record begins in the second millennium BCE with the colonisation of an outlying island, Failaka, by the Mesopotamians and later by the Greeks. The region came under the Islamic caliphate during its expansion throughout the Arabian Peninsula in the 7th century. Permanently settled in the 17th century by the Bani Khalid tribe, the area prospered as a key trading hub on the silk route between India, Central Asia, the Middle East and Europe.

As its wealth grew, the city was fortified, which gave Kuwait its name, a diminutive of an Arabic word meaning “fortress built near water”. Faced with imperial interests from the Ottoman Empire in the 19th century, Kuwait’s ruling Al Sabah family courted British favour and formally agreed to become a protectorate in 1899. Formally declared an independent principality during the Second World War under British protection, Kuwait remained allied to the British until it declared independence in 1961.

Kuwait’s economic wealth and regional bonds grew in the latter half of the 20th century as it became a founding member of the GCC in 1981 alongside Bahrain, Oman, Qatar, Saudi Arabia and the UAE. However, its history in the latter part of the century was defined by Iraqi occupation in 1990-91, during which time some 749 oil wells were set alight and destroyed by occupying Iraqi forces. However, Kuwait made a strong recovery, but its economic agenda in the aftermath was largely and perhaps understandably focused on rebuilding the country. In subsequent years this focus has now shifted towards diversification and sustainable economic development.

Recent Growth 

Kuwait’s economy has been largely state-led since the nationalisation of the oil and gas industry in 1975, and the sector now accounts for over 60% of national GDP and 95% of exports. While this led to a golden era for Kuwait, security soon took precedence over economic development during the Iran-Iraq War in 1980-88 and the Iraqi occupation in 1990-91. While the two decades since have seen considerable stability and growing prosperity, economic and industrial development remains state-led.

Launched in 2015, the KDP follows its preceding National Development Plan (NDP) 2010-14, with over 500 projects tabled to upgrade infrastructure, utilities and housing while improving other services that are intended to re-energise the private sector. While progress with major projects has been a challenge in the past, with 421 projects being carried over from the previous NDP, the government has continued to invest heavily in key infrastructure spending.

Hydrocarbons revenues have enabled a universal and comprehensive welfare system to be established. This brings with it a number of challenges that the authorities are now seeking to address, not least of which is the issue of inflation driven by government spending. The growing burden on the state is also of concern, with the IMF warning in 2012 that revenues would be entirely committed by 2017 on current spending projections, and that this would prevent any future savings.

Moreover, as Kuwait has embraced more liberal socio-political concepts, including universal female suffrage in 2005, universal representation has become a focal point of contention, particularly among the state’s post-liberation generation. At the forefront of this challenge are the Bidoon, or stateless people, who number around 105,000 in the country. Additionally, while about 200,000 tribal and Bedouin people were granted nationality in the 1960s and 1970s, in some cases citizenship has not been extended to the second and third generations. Excluded from political, economic and social participation, the tribal groups now operate as para-political structures, and demonstrations have continued against the government’s policy towards them.

Parliament & Politics 

Agreements between Kuwait’s government, Parliament and opposition blocs have at times been somewhat volatile, and the contemporary political landscape is symptomatic of that relationship. The principal prerogative of Kuwait’s Parliament remains the oversight of ministerial policy and conduct. However, it is also able to exercise power over legislation that is not afforded to neighbouring national assemblies, such as the ratification and vetoing of laws proposed by the executive. Formal inquiries and questioning of ministers in the country have often been the precursor to votes of no confidence, the strongest measure available for Parliament to hold government accountable, although a declaration of “non-cooperation” by either party requires the emir to dissolve the legislature or executive. Kuwait’s parliamentarians have historically pursued these responsibilities with conviction and certainty, which brought them into confrontation with the government in 2009, when Parliament summoned then-Prime Minister (PM) Sheikh Nasser Mohammed Al Ahmed Al Sabah.

Between 2009 and 2011 Parliament forced Sheikh Nasser to resign four times, but in all four cases he was re-appointed by the emir. However, Sheikh Nasser was ultimately replaced by the current PM Sheikh Jaber Al Mubarak Al Hamad Al Sabah in December 2011, thereby reinforcing the constitutional integrity of Kuwait’s checks and balances. The emir’s dissolution of Parliament precipitated national elections that were held in February 2012. The elections heralded a new Parliament that embodied Kuwait’s disparate groupings. Adjourned in June 2012 when it called the ministers of finance and labour for questioning, the Constitutional Court (CC) ruled in the same month that the 2011 dissolution of Parliament was unconstitutional, rendering the February 2012 elections null and void. Since December 2013, Parliament has remained stable with no dissolutions, which has allowed projects to move forward.

Constitutional Constructs 

While the CC’s June 2012 ruling remains, outwardly, a reinforcement of the judiciary’s impartiality, the ramifications were less clear. The recall of the 2011 Parliament, which was seen as pro-government, was only avoided because many parliamentarians declined to return to office. However, the CC’s impartiality was reinforced in August 2012, when a government motion opposing electoral reforms that had reduced the number of voting districts from 25 to five was rejected. Opposition groups hailed the decision, having been critical of the 25-district framework, alleging that it was more open to misappropriation.

The key challenge for the CC and Kuwait’s imminent political fortunes came in June 2013, when the court ruled on the legitimacy of the emir’s October 2012 emergency decree that reduced the number of votes per person from four to one. While this had brought Kuwait into line with international norms, opposition groups condemned the move. The previous four-vote system had enabled voters to lend their support to disparate ballots, advantageous in a system without political parties, and to opposition groups that have long sought to break out from the back benches.

In June 2013 Kuwait’s top court dissolved Parliament and called for new elections, which were held on July 27, for the second time in eight months. The emir, Sheikh Sabah Al Ahmad Al Jaber Al Sabah, reappointed Sheikh Jaber Al Mubarak Al Hamad Al Sabah as PM and tasked him with forming a new Cabinet. The government and the Parliament have continued to work towards resolving their differences, with a stabilisation in relations taking place since, despite periodic occurrences of members of parliament (MPs) resigning in the wake of corruption and mismanagement allegations.

Population 

Pressures from Kuwait’s population growth are adding to the need for greater economic diversification and development. The nation’s population grew by 3.6% in 2015, according to the World Bank, while the Public Authority for Civil Information (PACI) reported that 56% of Kuwaitis were under the age of 25 as of 2015. Kuwait’s current total population is approximately 4.24m, according to the PACI, with 69% made up of foreign nationals, who originate largely from MENA and South Asia. Expatriate staff are estimated to account for 84% of the labour market, but in a pragmatic reversal of policy Kuwait is set to reduce the number of foreign workers by 1m from 2013 to 2023 at a rate of 100,000 per year. This should help to create market and labour opportunities for Kuwait’s youth and provide the necessary economic stimulus for further expansion. At present, some 36% of Kuwaitis are under the age of 15 (see analysis).

Religion & Culture 

Islam is the official state religion, but freedom of worship is enshrined in the country’s constitution, and the country has sizeable Christian, Hindu and Buddhist communities. Kuwait’s religious majority demographic is Sunni, but its Shia minority, at around 30% of the population, are well integrated in the community. Sharia law is one of the key sources of legislation, but law and government regulations remain largely secular. While Kuwait’s adherence to Islamic strictures is strict in some respects (for example, a total ban on alcohol), the country granted universal suffrage in 2005 and female MPs were elected in both 2009 and 2013.

Language

Kuwait’s official language is Arabic, in which all government announcements and documentation are issued. However, English is widely spoken, especially within business and academia. The Kuwait Times and Arab Times are the country’s two main English-language newspapers, while regional English-language publications including Gulf News, Gulf Times and Arabian Business also provide coverage and are widely circulated.

Education 

Schooling is compulsory for all children between the ages of six and 14. Considerable budget surpluses have enabled Kuwait to develop a comprehensive education system, and it has achieved 100% enrolment in primary and secondary schooling across both genders. The education system, divided into three tiers (elementary, intermediate and secondary), is overseen by the Ministry of Education, while post-secondary schooling is handled by the Ministry of Higher Education. Domestic enrolment is notably lower at the tertiary level, as many Kuwaitis choose to study abroad. At all tiers, public schools are segregated by gender and are free of charge for nationals.

Pressure to reform the education system to be more in line with current economic needs is increasing, which has been manifest in part by the growing popularity of international schools providing Western curricula. Catering to the domestic market, Kuwait University remains the country’s sole public higher education institution. Private tertiary institutions including Gulf Institute of Science and Technology, the American University of Kuwait, the Arab Open University, Kuwait Asia University and the Australian College of Kuwait also cater to private education demand.

Geography & Climate

Kuwait’s total landmass covers an area of 17,818 sq km. Its territory includes nine islands that lie just off its coast, the largest of which is Boubyan Island, north of Kuwait City and site of the Mubarak Al Kabir port, which is currently under development. Kuwait City is based on a natural deepwater port, but extensive dredging works have been undertaken to deepen maritime access to other port facilities. Kuwait is predominantly a desert plain with a maximum elevation of 306 metres and shares land borders with Saudi Arabia and Iraq, as well as a maritime border with Iran. The southern portion of the country is a neutral zone shared with Saudi Arabia, which is now under joint administration and an important oil-producing region. Oilfields straddling Kuwait’s northern borders with Iraq are expected to undergo joint redevelopment in the near term as relations between the two countries improve.

Kuwait’s desert climate, with average temperatures reaching as high as 48°C in summer, makes most of the country unsuitable for cultivation. Just 20% of Kuwait is inhabited and most settlements are located along the 500-km coastline, with 98% of the population residing in urban areas. Annual rainfall is negligible and 90% of the current water requirements are met by desalinisation plants.

Natural Resources

Kuwait’s oil reserves remain abundant, but as its oilfields mature, they have become harder to access. Current output levels have tapered, putting pressure on the economy, but plans to increase production up to 4m bpd by 2020 require substantial infrastructure upgrades – a central part of the NDP. Kuwait is also host to a number of cement manufacturers that use local resources, and the country’s coastal waters also support a small local fishing industry.

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This article is from the Country Profile chapter of The Report: Kuwait 2016. Explore other chapters from this report.