Kuwait entered 2024 in a generally robust economic position thanks to improved fiscal and external balances. Following a formal change in executive leadership in late 2023, policymakers have the opportunity to build on recent gains to foster long-term, sustainable growth – provided they can navigate the prevailing challenges in the domestic and global markets.
National & Global Context
Kuwait’s economic recovery from the Covid-19 pandemic has been aided by high oil prices, with inflation remaining under control. Non-oil GDP growth increased to an estimated 3.4% in 2021 due to a recovery in both domestic and external demand, and further rose to 4% in 2022. Alongside an increase in oil production, this resulted in overall real GDP growth rebounding to 8.2% in 2022. Although oil expansion was expected to decrease in 2023 due to oil production cuts, non-oil growth was expected to stay robust, driven by domestic demand, and is projected to remain steady in the medium term. After peaking at 4.7% year-on-year in April 2022, headline inflation fell to 3.7% in May 2023.
However, the global economic recovery following the pandemic is showing signs of weakening. Excess savings are depleted and non-service activity is slowing, with global growth forecast to decrease from 3.5% in 2022 to 3% in 2023. The medium-term global growth rate of 3% is the lowest in decades.
While worldwide inflation is expected to decline from 8.7% in 2022 to 5.8% in 2024, it is higher than anticipated. Despite the effectiveness of central banks’ monetary tightening worldwide, core inflation remained above target as of January 2024, which may result in prolonged higher rates. Risks are primarily downward, stemming from factors such as volatile food and energy prices, continuous core inflation and potential growth loss in China. Specifically, reduced hydrocarbons prices due to subdued global activity in the short term, and a quicker shift in demand for fossil fuels in the medium to long term due to global decarbonisation efforts, could decrease oil demand, putting pressure on oil prices and production. Geoeconomic fragmentation, meanwhile, could further undermine multilateral cooperation, investment and trade.
Kuwait faces domestic challenges amplifying the impact of global issues. Delays in necessary fiscal and structural reforms could lead to unbalanced non-prudential fiscal policy and undermine investor confidence. Such delays would also hinder progress towards diversifying the economy, making it more vulnerable to climate change. On the upside, a resolution to Kuwait’s political gridlock could accelerate needed fiscal and structural reforms, boosting investor confidence as well as stimulating private investment.
Political & Fiscal Environment
Although Kuwait has a political system that is relatively liberal by regional standards, the country has been long affected by political deadlock and delays in passing key laws. Formally head of state since December 2023, the Emir, Sheikh Mishal Al Ahmad Al Jaber Al Sabah, has the task of addressing Kuwait’s long-standing economic and political challenges. The new ruler has an opportunity to form a new government, including the designation of a new crown prince as successor capable of improving dynamics between the executive, composed of members of the royal family, and the elected Parliament. Delivering a more positive political environment is fundamental, since significant change – such as the introduction of a value-added tax (VAT), the privatisation of public assets and the reallocation of public spending – requires the approval of Parliament.
Despite potential challenges, Kuwait maintains a positive financial outlook. Fiscal and external balances have improved, and external buffers are growing. The overall fiscal balance transitioned into a surplus of 6.5% of GDP in FY 2021/22. Elsewhere, the non-oil balance less investment income improved by roughly 9% of non-oil GDP to register at -90.1%, reducing fiscal financing needs. Meanwhile, the fiscal surplus is expected to have risen to 23.4% of GDP in FY 2022/23. This improvement is primarily due to high oil revenue and expenditure restraint, boosting the non-oil balance by around 2% of non-oil GDP to around -88.3%.
However, the oil price boom appears to have been curtailed by decisions by members of the Organisation of the Petroleum Exporting Countries (OPEC) and other producers, collectively called OPEC+, and global demand downturn. Oil production cuts were projected to decrease the GCC’s GDP growth to 1.5% in 2023. This significant reduction from the 7.9% growth recorded in 2022 due primarily to the effects of oil production cuts on hydrocarbons GDP. The GCC’s hydrocarbons GDP grew by 7.8% in 2022, driven by global cyclical momentum. However, it was projected to experience negative growth of approximately 1% in 2023 due to oil production cuts, as per the OPEC+ agreement.
Consolidation & Diversification
Kuwait, similar to other GCC economies, has sufficient fiscal space to manoeuvre. Comprehensive and growth-friendly consolidation is required to strengthen fiscal sustainability and promote intergenerational equity. The fiscal expansion planned in the draft FY 2023/24 budget is suitable given the negative non-oil output gap. From the next fiscal year, consolidation should aim to boost non-oil revenue and address spending rigidity, while enhancing capital outlays to enhance growth.
Revenue measures could encompass introducing excise taxes and VAT across the GCC, and expanding corporate income taxation to include domestic firms. Expenditure measures could also focus on reducing the wage bill and phasing out energy subsidies gradually, while improving targeted income support. Pursuing fiscal consolidation to promote intergenerational equity and structural reforms to diversify the economy is key. Such measures would strengthen Kuwait’s external position, which is weaker than the level suggested by fundamentals; and support the country’s currency peg, which has proven to be beneficial in recent years.
However, the introduction of VAT may not be on the agenda, despite the IMF’s recommendation and an agreement to follow a broader GCC tax framework. The adoption of VAT or excise tax on selected items – such as tobacco, sweet drinks or luxury goods – may not be feasible unless the political climate improves enough to secure parliamentary approval. Conversely, a general corporate tax framework might be more achievable, with the government aiming to implement one in 2024.
Aside from taxation, further structural policies aimed at diversifying Kuwait’s economy from hydrocarbons would be welcome. In addition to reform efforts that enhance product market regulations, labour markets and governance for growth stimulation, efficient investment in infrastructure, digital and green initiatives, and service sectors such as tourism could speed transformation and support the energy transition.
In July 2023 Kuwait announced plans to establish a new sovereign wealth fund, Ciyada Development Fund, to accelerate development, attract investment and stimulate the economy. This entity will supplement the efforts of Kuwait Investment Authority, the world’s oldest sovereign wealth fund with $800bn in managed assets as of mid-2023. Ciyada’s goal is to forge strategic partnerships, localise technology and manage significant projects in collaboration with the private sector. The feasibility study for the fund is expected to be completed within a year, and it is supposed to operate within a transparent governance framework.
The government’s four-year work programme spanning 2023-27 also includes 107 major projects across various sectors. Notably, the transport, tourism and entertainment sectors received significant attention in the programme, which was still under parliamentary review as of early 2024. In aviation, plans are under way to open a new terminal at Kuwait International Airport and increase the country’s annual air transport volume from 240,000 to 650,000 flights by developing three runways. The government also plans to open Kuwait Air Cargo City in partnership with a global operator. Regarding land transport, contributions are being made to the regional GCC Railway project. In the tourism sector, an amusement park is set to open west of Kuwait City. Additionally, Failaka Island – home to relics from the Bronze Age, Dilmun, and Hellenistic periods – will open as a tourist and cultural attraction.
Prospects
Looking to 2024, Kuwait’s economic landscape will be characterised by hurdles and potential wins. While the implications of reduced oil demand, worldwide decarbonisation initiatives and local political issues pose challenges, the financial prospects for the country are generally positive thanks to improved fiscal and external balances. Opportunities are ripe in areas such as fiscal and structural reforms, diversification and strategic investment. Initiatives like the Ciyada Development Fund and the proposed four-year work programme mark important strides towards stimulating the economy and attracting investment. However, unlocking the full potential of these opportunities hinges on resolving political disagreements and rolling out key reforms, potentially including new taxes.
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