Seven decades of expanding oil production have led Kuwait to become one of the richest nations in the world, with strong oil revenues driving years of successive budget surpluses, leading the state’s young population to boast one of the world’s highest GDPs per capita. Kuwait’s generous welfare system has guaranteed free education, health care and housing to citizens, while subsidised electricity, water and fuel prices are offered to its nearly 4m residents, giving it one of the lowest costs of living in the GCC.

A resource-based economy is not without pitfalls, however, and the state is facing many challenges as it moves towards economic diversification and development of its non-oil sectors. Increasing energy and water consumption have put considerable strains on Kuwait’s power and desalination plants, as well as its domestic oil supply, and slow development of northern gas fields has led to an expansion of gas imports to meet new demand. At the same time, domestic and international stakeholders have warned that high government spending and heavy subsidisation are unsustainable, with policymakers now facing the challenge of reining in expenditures.


The government has implemented reforms to this end, increasing its efforts to expand private sector participation in development of oil and gas, electricity and water, and the non-oil segment through the introduction of new, business-friendly legislation. Substantial progress has been made in the past year, which saw several major contracts signed with foreign companies to roll out expansive mega-projects under the state’s multibillion-dollar National Development Plan (NDP), about half of which will be financed by private investors under public-private partnership (PPP) initiatives.

Planned Developments

In February 2010 the Kuwaiti parliament approved the ambitious NDP, which aims to transform the state into a financial and trade centre by 2035, while enhancing economic diversification through the increased participation by the private sector. The government listed five targets it hopes to reach by 2035, including increasing GDP and private sector investment, implementing population policies to support development, improving government and administrative efficiency, and expanding social and human development.

The NDP is composed of five five-year plans, with the first covering 2010-14. This plan aims to generate average GDP growth of 5.1%, while increasing investments to KD7.4bn ($26.02bn) annually over the period. The programme has seen some measure of success so far; GDP growth reached 6.3% in 2011 and 6.2% in 2012, according to IMF estimates, and Kuwait Finance House (KFH), a bank, reported in January 2014 that the country’s GDP growth reached 4.5% in 2013, and is expected to increase to 5% in 2014, significantly higher than IMF projections of 0.8% in 2013 and 2.6% in 2014.

At 5% growth, the local economy compares favourably to other GCC countries, and will rank second behind Saudi Arabia (5.3%), but ahead of Qatar (4.8%), Bahrain (4.5%) and the UAE (4.5%) in 2014, according to KFH. Expansion will be driven by oil production, which accounts for over 90% of government revenues, strong investment in infrastructure projects, and new legislation aimed at boosting foreign direct investment (FDI).

Public Finance

In 2012 the IMF warned that current public expenditure could lead the state to run a budget deficit as early as 2017/18, while Sheikh Salem Abdulaziz Al Sabah, the former central bank governor, warned in 2013 that Kuwait could see deficits reach KD13.25bn ($46.59bn) by 2030 if fiscal reforms are not implemented.

According to the IMF’s Article IV consultation report from November 2013, Kuwait is showing mixed progress in sustainable economic development. While the state’s fiscal position is strong within the GCC, with the 2012 budget surplus reaching 34% of output, double that of Saudi Arabia and the UAE, the IMF has forecast Kuwait’s surplus deterioration will be much faster than other GCC nations, dropping by 19% between 2012 and 2018, which is double the projected rate of decline in the GCC.

Scaling Down

The IMF has also voiced concerns over the quality of government spending in Kuwait, recommending the authorities implement a phased reduction in the non-oil fiscal deficit, lower spending growth in wages and subsidies, and increase its non-oil revenues, stressing that the government should commence reforms in the near term. However, current spending, which is composed largely of wages and salaries, is on an upward trajectory, while capital spending is expected to decline substantially in 2014 and 2015.

In March 2014 the Kuwaiti Cabinet approved a 2014/15 draft budget that includes a 3.2% increase in spending, with the projected rise driven entirely by current expenditures, which will grow by 7% to a record KD19.6bn ($68.92bn), while capital expenditure is budgeted to drop by 20% to reach KD2bn ($7.03bn), the largest cut on record. The National Bank of Kuwait (NBK) reports that the fall is led by declines in capital expenditure at the Ministry of Public Works and the Ministry of Electricity and Water, which are estimated at 44% and 19%, respectively.

“Although the precise reason [for the declines in capital expenditure] is unclear, it could be partly related to the completion of a round of infrastructure projects. In any case, we think the outlook for growth in capital expenditure is better than these draft figures imply, not least because a number of delayed government projects are finally showing signs of getting off the ground,” NBK wrote in its March 2014 economic update.


NBK projects a KD9bn ($31.65bn) surplus in the 2014/15 fiscal year, representing about 20% of GDP, but this is a significant decrease from the record KD16bn ($56.26bn) surplus registered in the first 10 months of the 2013/14 fiscal year. Narrowing surpluses are driven by the government’s expansive welfare system, with heavily subsidises electricity and water contributing to unsustainable spending. In January 2014 the new finance minister, Anas Al Saleh, announced plans to form a committee that would review the state’s subsidy system.

The committee, which was established by Kuwait’s Supreme Council for Planning and Development, called for “reconsideration of expenditure and subsidies” in February 2014, reporting that salaries, benefits and subsidies account for 87% of oil revenue in the 2014/15 budget. Curbing this spending and introducing a more restrained fiscal policy poses a challenge to future economic expansion.

Private Partners

Privatisation remains a key priority of the Kuwaiti government, with a host of massive mega-projects slated to be undertaken in partnership with the private sector. Although the private sector is still dependent on government spending, businesses will benefit from the planned increase in PPPs, which are expected to become the state’s de facto model for infrastructure development.

After approving the NDP’s first five-year plan, the government announced a KD30.8bn ($108.3bn) spending plan which includes construction of new power plants, a $6bn airport terminal, new hospitals and universities, and the world’s largest crude refinery, Al Zour, which aims to involve private firms through PPPs utilising a build-operate-transfer (BOT) model, facilitated by the recently created Partnerships Technical Bureau (PTB).

Kuwait’s PPP law was passed in 2008, allowing the private sector new opportunities to invest in major energy and infrastructure projects, with the PTB created the same year to facilitate PPPs. In 2010 regulations for independent water and power projects (IWPPs) were further clarified with the introduction of the IWPP Law, opening further avenues.

At present, foreign investors still need to retain majority Kuwaiti partners, and the private sector’s participation in petroleum development has been limited due to a constitutional ban on foreign oil resource ownership. Red tape and delays have also posed challenges; tendering and spending procedures can take years to implement, and delays are common, with an estimated KD15.1bn ($53.09bn) of the government’s 2010 spending plan still waiting to be implemented as of January 2014. Private sector stakeholders have called for administrative procedures to evolve, which will create an easier working environment and improve efficiency.

The past decade has been marked by a number of high-profile deals being shelved or cancelled, most notably a 2008 joint venture between Kuwait’s Petroleum Investment Corporation (PIC) and Dow Chemicals, worth an estimated $2.5bn.

More recently, Kuwait’s National Industries paid KD500,000 ($1.76m) to bid on a tender for construction of 10,000 residential units and related facilities in 2012, only to lose to a competitor after a series of protracted re-tenders.

Picking Up The Pace

The government has recognised the need to implement its spending plan quickly and efficiently, making major strides in awarding contracts and enhancing private sector participation in 2013 and 2014. While many major projects have been put on hold as plans for privatisation are reviewed, recently reached agreements for power plants and refinery upgrades have brought a sense of optimism into Kuwait’s private sector.

Infrastructure comprises a significant proportion of the government’s spending package for 2010. The Ministry of Public Works has announced that 426 projects are being undertaken during the 2013/14 fiscal year, which marks an increase of 50 projects over the 376 ongoing the year before, at a cost of KD9.14bn ($32.14bn). In April 2013 Mandagolathur Raghu, the senior vice-president for research at the Kuwait Financial Centre (Markaz), told Times that the near-term pipeline of budgeted ministry projects stands at $10bn, with completion dates ranging between 2014 and 2016.

Exploring New Territory

In December 2013 the PTB made history when it signed the state’s first-ever PPP, for construction of the Al Zour North IWPP, a $1.8bn project that will be developed by a host of private firms, including GDF Suez, Sumitomo, and Abdullah Hamad Al Sagar & Brothers. When completed, Al Zour will provide 12% of Kuwait’s installed power generation capacity and around 23% of its installed desalination capacity (see Energy chapter).

Indeed, the state’s growing power demands require rapid forward movement on a host of ambitious new power plants, including renewable energy projects. The government hopes to meet 15% of its energy needs by 2030 from sustainable sources, through developments such as the Shagaya Solar Park and Al Abdaliya combined-cycle solar plant.

The outlook for PPPs in Kuwait has improved significantly in 2014. High oil prices have also increased banks’ liquidity, while the PTB is hoping to establish a number of additional PPPs for projects such as the South Al Jahra Labour City housing project; Kuwait Failaka Island Development, an educational, commercial, cultural and entertainment centre; a 500-bed hospital in Al Andalus; solar and gas-fired power plants at Al Zour, Al Abdaliya and Al Khairan; and the Umm Al Hayman wastewater project.


Boasting one of the oldest and most-established sectors in the region, Kuwait has seen strong growth in its banking sector in recent years. The state is home to a dozen local banks, with Islamic finance becoming increasingly popular and currently comprising half of the institutions operating in Kuwait after the most recent entrant, Saudi Arabia’s Al Rajhi, opened its first branch in 2010.

The IMF projects that non-oil activities made up 12.1% of total GDP in 2013, with investment income representing 8.1%, the largest portion of non-oil growth. Driven by expanding asset holdings and credit growth, the financial sector grew by 6.9% in 2013, or 7.9% excluding securities trading, according to NBK. Total bank assets stood at KD51.49bn ($181.04bn) in 2013, increasing by 9.2% over 2012.

The Central Bank of Kuwait (CBK) reduced its benchmark discount rate to 2% in October 2012, which brought down the weighted average deposit and lending rates to 1.53% and 4.86%, respectively, by June 2013. As of December 2013, commercial banks’ prime lending rates stood at 4.9%.

Positive Signs

Credit growth showed a strong performance in 2013, increasing by 8.1% to reach KD28.96bn ($101.83bn) in 2013, and demonstrating ongoing recovery in lending. One key factor in banks’ rising loan activity is consumer demand, with personal loans growing by 12.2% in 2013 to reach some KD11.28bn ($39.66bn.) In 2013 the IMF praised the Kuwaiti financial sector’s accommodative monetary policy, reporting that current liquidity conditions are supportive of emerging demand for credit, while warning against overheated growth in lending.

“Banks should continue to be vigilant toward credit risks and continue to strengthen risk management. In the context of the currency basket exchange rate peg, in the event of a tightening of global financial conditions, the authorities should continue to be proactive in liquidity management and the use of macro-prudential policies to contain emerging financial risks,” noted its November 2013 paper.

Earnings reports from the third quarter of 2013 found major institutions to be performing well. NBK, the state’s largest lender, posted net profits of $702m, a 34.7% year-on-year (y-o-y) increase, while assets rose by 15% to reach $67bn, and loan activity grew 9.3%. Burgan Bank saw a 21% y-o-y increase in profits, to reach $373m, with loans expanding by 17% and deposits rising 20%. Others, including Gulf Bank, Boubyan Bank and KFH, witnessed profit growth of 7%, 22%, and 17%, respectively.

Banks in Kuwait have high levels of provisions set aside to cover non-performing loans (NPLs) and high capital adequacy ratios (CARs), with some reporting coverage well in excess of 150% of inactive credits. Many noted a drop in the proportion of banks’ loans that are non-performing in recent years, falling from 11.5% in 2009 to 4.6% in 2013.

In February 2014 Mohammad Al Hashel, the central bank governor, announced that the CBK’s board of directors will adopt Basel III standards for CAR, setting it at a minimum of 13% by 2016, following incremental reforms to reach 12% in 2014, and 12.5% in 2015, while KFH reported in May 2013 that banks’ CARs averaged 19.6% in 2012, which is well above Basel III minimum standards.

Stock Exchange

The Kuwait Stock Exchange (KSE) made considerable gains in 2013, although NBK reports that it still underperforms its international and regional peers. Market capitalisation hit KD29.6bn ($104.08bn) in 2013, an increase of KD500m ($1.76bn), with a strong small caps rally boosting the price index performance, which ended the year up 27%. The value-weighted index, which better reflects overall market conditions, was up 8.4% by the end of 2013, with trading volumes improving to reach their highest level in three years.

Ministry of finance

Equities started 2013 on a strong note, rallying in the first half before losing steam from June onwards. The KSE’s value-weighted index gained as much as 14% at its peak in May, before declining 4.9% by the end of the year. Liquidity in the market saw a notable boost in 2013, with the value of traded shares rising by 54% compared to the year before.

A daily average of KD44m ($154.71m) was traded during the year, the highest level witnessed since 2010, although still well below 2008 levels of KD148m ($520.38m). Despite the improvement in trading activity, levels were not sustained, and in the fourth quarter of 2013, the value of traded shares was down slightly on the year before.

Domestic shares benefitted from a calmer political environment and increased consumer confidence that a pickup in project implementation is under way; by the second half of 2013, however, this optimism had faded somewhat, with the market’s rally hindered by increased geopolitical tensions, despite a marked improvement in corporate profits. The average price-to-earnings ratio declined to end 2013 at 12, down from 17 in 2012, according to NBK.

Analysts also noted that there was an uptick in investment from Saudi Arabia and the UAE during the first half of 2013. Recent stock market reforms, including the creation of the Capital Markets Authority (CMA) in 2011, may have played a part in attracting more foreign investors.

Privatisation of the bourse remains a challenge. Although the CMA signed an agreement with HSBC to oversee the KSE’s privatisation in 2012, the process hit a hurdle later in the year. Under the privatisation terms, 50% of the exchange would be sold to listed companies, with the balance offered to Kuwaitis via an initial public offering. However, a clause in the legislation establishing the CMA prevents it from conducting commercial activities. Parliament will need to amend the CMA’s governing act before the KSE can be privatised, a step that has yet to be taken.

Oil & Gas

The US Energy Information Administration (EIA) reported that, as of 2013, Kuwait’s territorial boundaries contained approximately 102bn barrels of proven oil reserves, or about 6% of the global total, with an additional 2bn located in a partitioned neutral zone that the country shares with Saudi Arabia. Kuwait ranks sixth in terms of overall oil reserves worldwide, and exports the third-largest volume of oil out of all Organisation of Petroleum Exporting Countries (OPEC) members.

Kuwait is also heavily dependent on petroleum export revenues, which accounted for 65% of GDP and 95% of total export revenues as of 2013. OPEC pegged the total value of petroleum exports in the country at $112.93bn in 2013, and stated that it expects Kuwait will remain among the world’s top producers in the medium term.

Oil exports edged down to KD30.8bn ($108.30bn) in 2013, a 3% decline from 2012, due to lower prices, as oil markets eased in 2013 on the back of rising non-OPEC supplies and modest growth in global demand. Kuwait’s export crude prices averaged $105 per barrel during the year, approximately $4 lower than in 2012. In January 2014 the International Energy Agency forecast oil demand would increase by 1.2m barrels per day (bpd) in 2014, up from earlier forecasts of 1.1m bpd. In the same month, KFH announced that it anticipates 4% growth in the country’s oil sector over the course of the year.

Factoring In Oil Prices

The NBK reported in March 2014 that the government projects oil output will remain the same as 2013/14, with revenues expected to reach KD18.8bn ($66.10bn) in 2014/15. However, government budgets have tended to underestimate the price of oil, with the 2014/15 budget projecting prices of $75 per barrel, compared to analyst expectations of $100 per barrel.

This is still an improvement over the 2013/14 budget, which pegged oil prices at $70 per barrel. Underestimating oil prices has generally contributed to challenges addressing fiscal reforms, with low projections resulting in record surpluses which then create a public expectation that generous government subsidies should be increased. This year’s projected increase could be construed as an attempt to manage public expectations.

Raising Production

In an effort to bolster oil revenues and increase its budget surplus, the government announced plans to raise crude production to 4m bpd by 2020, up from present levels of 3m bpd. These plans have exacerbated ongoing challenges facing the industry; the nation’s power grid is already struggling to meet present demand, while laws limiting foreign participation in oil development have slowed exploration and production plans.

Discoveries of non-associated gas in 2006 have brightened energy prospects, with the nation’s northern Jurassic fields estimated to contain 35trn cu feet of gas, representing a promising source of future supply, although these fields have not yet reached government production targets.

The participation of international oil companies in natural gas and heavy oil development will be critical to increasing output. The Jurassic project has been described as one of the most technically challenging in the world, and with the Burgan fields starting to decline after decades of production, private sector participation in the introduction of enhanced oil recovery has been identified as a key strategy for boosting future production (see Energy chapter).

Clean Investments

Downstream, refining capacity stood at 936,000 bpd in 2013, the third-largest capacity in the Middle East. Kuwait refines about a third of its current crude production, and exports about 660,000 bpd, according to OPEC, with activities carried out at three major refineries: Mina Abdullah, Mina Ahmadi and Shuaiba. Significant progress has already been made on the Clean Fuels Project, which will allow the state to produce low-sulphur fuels, and involves substantial refinery upgrades.

In February 2014 the government announced it had approved bids worth a total of $12bn for the Clean Fuels Project, for upgrades at Mina Abdullah and Mina Ahmadi. The Ministry of Oil plans to build the $14.5bn Al Zour refinery, with an expected capacity of 615,000 bpd, which will allow the government to close the ageing Shuaiba refinery, while helping to meet domestic demand and export of ultra-low-sulphur products including diesel, kerosene and petrochemicals feedstock. Once completed, Al Zour will be the largest refinery in the Middle East.


Recovery in the non-oil sector, which was negatively affected by the global financial crisis, should also underpin GDP growth. The IMF reports that non-oil GDP expansion increased from 0.9% in 2011 to 2.2% in 2012, after three years of negative growth between 2008 and 2010.

According to the CBK, the country’s non-oil economy is projected to have grown by 5% in 2013, while the IMF expects the non-oil sector will expand by 4.4% in 2014. Non-oil revenues have also shown sharp increases in recent years, growing some 23.9% y-o-y during the first 10 months of the 2013/14 fiscal year to reach a record total of KD1.9bn ($6.68bn), up from KD1.5bn ($5.27bn) in 2012/13, although this expansion still represents just 7% of total revenues.

Non-oil exports climbed to a record KD1.9bn ($6.68bn) in 2013, driven by higher exports of ethylene products, which grew by 16%, according to NBK. Ethylene products’ contribution to non-oil exports has risen significantly over the past few years, from 12% in 2008 to 40% by 2013, partly due to capacity expansion in the petrochemicals sector.

Although many facets of the NDP remain to be implemented, it has already had an impact on nonoil growth. The manufacturing sector grew 28% in 2013, while key sectors such as transportation, construction, communications and finance, which are dominated by the private sector, increased by a collective 6% in 2013, compared to 1% growth in 2011, and contraction in the years before.

Real Estate

Following several years of decline in the wake of the global financial crisis, Kuwait’s real estate sector has rallied to become one of the best-performing non-oil sectors in the state. Real estate growth in 2013 was driven by sales in the investment segment, increasing by 24% in 2013 to reach KD1.4bn ($4.92bn), with the number of transactions rose by 10% over 2012. The investment segment grew to a record KD207m ($727.83m) in December 2013, representing 79% y-o-y growth, and surpassing the previous sales record of KD184m ($646.96m) from April 2007, indicating that the sector has staged a strong recovery from the 2008/09 crisis.

Residential sales continue to account for the largest segment of Kuwaiti real estate; sales rose 6% in 2013 to reach KD1.8bn ($6.33bn), despite the number of transactions dropping by 20% to hit 6325, with limited housing supply pushing prices higher. Sales of land plots, as opposed to buildings, accounted for 57% of all residential transactions.

Meanwhile, sales in the commercial sector bounced back from previously slow years, with transaction sizes increasing 12% in 2013. Indeed, 2013 was an exceptional year for the commercial sector, with total sales reaching KD440m ($1.55bn), up 75% compared to 2012. Growth was driven by a large number of transactions in the segment, which doubled 2012 levels to reach 178 in 2013.

Lending Rises

The Credit and Savings Bank, renamed the Kuwait Credit Bank in January 2014, approved KD395m ($1.39bn) of loans in 2013, the highest level since 2002. Compared to 2012, the value of approved loans more than doubled, while their number rose 88% y-o-y. Independent ratings agency Capital Standards reported in June 2013 that the government will soon raise limits on maximum home loans, with the Cabinet instructing the Kuwait Credit Bank to amend mortgage legislation, allowing maximum loans to rise to KD500,000 ($1.76m) from KD300,000 ($1.05m). This increase in purchasing power is expected to continue to drive growth.

Looking To Trade

A March 2014 NBK report found that Kuwait’s trade surplus declined from a record KD25.7bn ($90.36bn) in 2012 to reach some KD24.3bn ($85.44bn) in 2013. The surplus, estimated at around 48% of 2013 GDP, was dampened slightly by lower oil export receipts during the year, although it is still the second highest on record, and extremely large by international standards. Imports grew by 9% in 2013 to reach an all-time high of KD8.3bn ($29.18bn), and remain an important growth driver of domestic economic activity.

In 2014 NBK expects the trade balance to shrink further, though still remain large. According to some analysts, oil markets could soften somewhat in 2014, putting downward pressure on prices and reducing oil export receipts, while the import outlook is mixed. A faster execution of stalled projects could provide a much-needed boost to the economy, and consumer spending is expected to remain relatively strong, supporting further growth in imports.

Bringing In FDI

Foreign investment inflows averaged less than 1% of GDP between 2005 and 2011, well below the GCC average of 6%, according to the IMF. The government has worked to push investments in hospitals, schools, infrastructure and refineries, but has so far spent only half of its five-year development plan funding, 50% of which is meant to be supplied by the private sector. While Kuwait’s FDI figures were up in 2012, far more capital still leaves the country each year than enters it.

According to a June 2013 report issued by the UN Conference on Trade and Development (UNCTAD), Kuwait attracted almost $1.9bn of FDI in 2012, a 117% increase on the previous year. In its “World Investment Report 2013”, UNCTAD reported that the state had not only more than doubled its own FDI total, but had outperformed several of its neighbours, including Oman, Bahrain and Qatar.

These positive results were driven almost entirely by a one-off investment, however, reached when Qatar Telecom doubled its stake in the state’s second mobile operator, Wataniya. The investment was worth an estimated $1.8bn, nearly all of Kuwait’s 2012 inflows. In 2011 the state reported $854.9m of FDI inflows, according to the World Bank, and 2013/14 could see similar levels.

FDI outflows continue to exceed inflows, with outward FDI totalling $7.56bn in 2012. This was by far the highest of any of the GCC states, with only Saudi Arabia coming close, at around $4.5bn. While Kuwait attracts just 1% of investments coming into the Arab world, according to a report published by consultancy Leaders Group, the state accounts for 35% of Arab FDI within the region, with the CIA World Factbook estimating Kuwait’s stock of foreign investment abroad stood at $60.76bn in December 2013, a 13.5% increase over $52.59bn in 2012.

Kuwait is moving to boost FDI inflows, with the Ministry of Commerce and Industry announcing in May 2013 that it would establish a new agency to attract foreign investment. The Kuwait Foreign Investment Bureau was replaced by the Kuwait Direct Investment Promotion Authority in December, and will assist in implementing new legislation aimed at promoting foreign investment, including a set of executive regulations expected to clarify the state’s long-awaited New FDI Law, unveiled in June 2013.


With a handful of new PPP plans and deals, 2014 is showing promising signs of being a landmark year for economic growth and expansion in Kuwait. Although much of the budget for the state’s five-year plan remains to be spent, the government has made promising progress recently on new energy and oil projects that will be critical to meet new demand and future output targets. The construction and real estate sectors are poised for significant expansion as well, on the back of new affordable housing initiatives and planned mega-projects that are inching closer towards breaking ground. The sustainability of this growth remains in question however – while Kuwaitis enjoy a far-reaching welfare system that ensures free housing, health care, education, and subsidised electricity, government spending at current levels is unsustainable.

Fiscal reforms will go a long way towards ensuring the government maintains its strong surpluses and generous social spending. As the non-oil economy continues its recovery, plans to support economic diversification should prove fruitful in the long term, bolstered by increased FDI and legislation aimed at improving the fiscal and business environment.