Small and medium-sized enterprises (SMEs) are set to play an increasingly important role in Kuwait’s economic diversification, following the recent government decision to roll out a multibillion-dollar SME fund aimed at reducing youth unemployment and encouraging entrepreneurship. Although SMEs comprise the majority of registered companies in the state, they attract limited investment, and young entrepreneurs have struggled to access start-up funding for new businesses. As the government moves to implement its latest SME project, while simultaneously scaling back the number of expatriates working in Kuwait, the state and its young population are poised to benefit from an increasingly investment- and business-friendly environment.
Labour Force
A June 2013 report published by the National Bank of Kuwait (NBK) found that the population of Kuwaiti nationals grew by 2.5% in 2012 to reach 1.21m, and Kuwait’s population remains youthful by global standards. According to NBK, over a third of Kuwaitis are under 15 years old, compared to a global average of 27%, and 22% for wealthy economies, while Kuwait Finance House (KFH) estimates that 51% of the population is under 21 years old. Unemployment fell to an all-time low of 3.1% in June 2013, with overall employment growing by 3.2% in 2012 to reach 2.25m residents, of which 83% were expatriates. Kuwaiti job growth increased by 4.4% in 2012, with a net rise of 12,300 jobs. The government continues to employ 76% of all Kuwaiti workers, with the largely government-owned oil sector accounting for an additional 5%, although the public sector generated fewer jobs in 2012 – 8500, compared to 9750 in 2011.
In the private sector, Kuwaitiisation continues to show progress; nearly 3000 more Kuwaitis worked in the private sector by the end of 2012 than in 2011, representing a 5.9% increase in private sector employment, compared to a rise of 1.7% in 2011. However, the proportion of nationals working in the private sector remained at 18% in 2012, maintaining a long-term trend that has seen Kuwaitiisation remain below 20%, despite government efforts to reach between 10% and 65% across various sectors.
NBK reports that Kuwaitis accounted for 17% of total employment in 2012, and although this is an increase from 15% in 2007, there is plenty of room for improvement. Youth unemployment also remains high, and stood at 24% as of 2012, according to Gulf Investment Corporation, while Saudi Arabia’s National Commercial Bank reported that 36.3% of unemployed Kuwaitis were between 20 and 24 years old in 2011.
SME Growth
Since SMEs do not require substantial investment in, or development of, infrastructure, they are more flexible and dynamic. Japan, China and Germany have built their modern industrial sectors on SME growth, while thousands of American SMEs produce under contracts for major automotive, electronic and food companies, with the IMF estimating that SMEs represent 25-35% of international exports of finished goods. With small projects that are often less affected by economic crises, SMEs are flexible enough to adapt quickly to market fluctuations, and respond quickly to commercial opportunities. As a result, projects have the ability to grow and create job opportunities, even during periods of economic malaise.
In Kuwait, where national employment remains a challenge, SMEs represent an important vehicle for the state to foster entrepreneurship, increase nationals’ employment in the private sector, and bolster overall economic development and diversification. With some MPs calling for a reduction in expatriate workers by 280,000 annually until 2020, SME innovation could also help the state mitigate the challenges it would face in the wake of a dramatically reduced labour force.
While the World Bank defines an SME as any business employing fewer than 100 people, the Kuwait Small Projects Development Company (KSPDC), a state-financed fund established in 1997 to promote SME development, considers projects with capital up to KD150,000 ($527,415) as small, and less than KD500,000 ($1.76m) as medium-sized, while employees do not appear to be used as a criterion. In 2012 the KSPDC financed 41 firms for a total investment of KD7m ($24.61m), and reported that between 2007 and 2012, it helped to establish 125 new enterprises.
According to a 2013 report titled “The Structure of SMEs in the GCC” and published by the Arab-EU Business Facilitation Network, Kuwait’s SME stock was estimated at 33,000 companies in 2007, representing 90% of total registered firms. The report found that enterprises employing less than 10 people were concentrated in the retail/wholesale and hospitality industries, which represent 40% of the total, followed by construction and industry, at 33%. The remaining 27% of SMEs are distributed in finance, industry and services.
SME Fund
In March 2013 parliament approved a new law establishing the National Fund for the Support and Development of SMEs, which aims to provide financing for small businesses set up by Kuwaiti citizens, enhancing private sector activity and increasing employment among nationals. Initially expected to provide funding of KD1bn ($3.52bn), the government has since announced that the project will receive KD2bn ($7.03bn), expected during the second half of 2014. Sectors covered under the proposed funding include industrial, business, agriculture, handicraft, service and intellectual activities, as well as any projects that directly contribute to diversifying the national economy.
In February 2014 the finance minister, Anas Al Saleh, told state news agency KUNA that the government is currently working on a detailed legal framework for the plan, during a meeting of the fund’s Supreme Advisory Council. According to Al Saleh, the government is increasingly focusing on SMEs to encourage Kuwaiti entrepreneurship, with the fund expected to give SMEs a cushion of time and resources while they evolve into commercially viable businesses. Al Saleh highlighted lack of starting capital as the primary obstacle, telling KUNA that Kuwaitis working in the public sector will be given the opportunity to tap into the fund while starting a small business, but retain their public sector positions, using government SME funding to grow their businesses while continuing to benefit from a regular salary.
KFH has applauded the government’s SME initiative, which is expected to primarily benefit the services sector, but eventually include capital and technology projects, in addition to supporting the long-term growth of the non-oil sector through increased private consumption. According to KFH, the fund will also boost economic and commercial production, allow for rapid uptake of new technology and reduce pressure on the public sector, which has seen salaries triple between 2013 and 2014. “We do not expect the SME fund to have an immediate impact on the overall economy in the near-term as the utilisation of funds and subsequent hiring by businesses requires time to be implemented, however, we think the government is on the right track as this plan deals directly with the structural issues faced by the country,” read the KFH April 2013 report.
Read More from OBG
