Shannon McGarry | Middle East and North Africa Fellow
While populations around the world lined up for food donations after lockdown, Kuwaiti citizens instead lined up to buy Cartier jewellery. Kuwait is renowned for its wealthy government-funded citizens, but this may change as Kuwait faces economic disaster due to “a perfect storm” caused by the combination of COVID-19, low oil prices and the liquidity crisis. These circumstances forced the government to take on unsustainable debt to support its population as 90 per cent of citizens are on the public payroll. Kuwait’s national bank warned that the deficit could reach 40 per cent of GDP, the highest since the 1990 Gulf War, after OPEC issued its largest-ever cut of 9.7 million barrels per day. The pandemic exposed Kuwait's fragility, illustrating it cannot live beyond its means forever and highlighting the importance of Kuwait's Vision 2035 Development Plan (2035 Plan) to diversify its economy. However, the current crisis may potentially render the 2035 Plan a mere lofty aspiration.
Article 41 of the Kuwaiti Constitution grants all Kuwaitis the right to work, consequently transforming the government into the state’s largest employer with salaries and subsidies accounting for 76 per cent of its budget. Until now, this was covered by oil revenue, however, the Kuwaiti Financial Centre stated that due to lowered oil demand, Kuwait’s current spending rate and the failure to implement reforms the reserve will likely dry up soon. Finance Minister, Barak al-Sheetan, warned that this means Kuwait will be unable to pay its citizens’ salaries as, in order to break even, Kuwait must be selling oil at $86 per barrel; currently it is only reaching $40 per barrel. When functioning, Kuwait’s rentier state structure offers some protection against unrest, as illustrated during the Arab Spring where non-rentier states were more susceptible to an uprising.
In a rentier state system, the government takes on a ‘benefactor’ role; collecting oil revenues and distributing the proceeds in a welfare-like fashion supplying employment, shelter, healthcare and education, thus reducing the desire for drastic change as citizens are reliant upon them. However, if Kuwait’s oil revenues fail to sustain its population, it may increase unrest with citizens more inclined to respond to the widespread government corruption and the mistreatment of foreign workers under its kafala system. The resignation of former Finance Minister Mariam al-Aqueel, after public outrage over suggesting salary cuts and taxes to reduce the deficit, illustrates this growing discontent.
The $533 billion Kuwait Investment Authority has been floated as a means to alleviate the debt; however, Kuwait must borrow $65 billion to relieve the crisis while the current legal mechanism only allows for deficit spending of up to $33 billion. Further spending requires parliament's approval, which has been rocked by corruption and scandals, including millions of dollars missing from a military fund. Independent lawmaker Omar al-Tabtabaee called “the whole system corrupt”, yet despite the scandals, not a single minister is in prison, causing further public mistrust of national governance.
Kuwait’s best opportunity to diversify its economy is its 2035 Plan. The long-term gradual shift away from carbon energy has accelerated the predicted global peak of oil demand to 2028, with an expected 102 million barrels per day required amounting to a loss of $340 billion over the coming eight years. Therefore, even without COVID-19, Kuwait ought to diversify their current economy to protect their future economy. The 2035 Plan seeks to achieve this by transforming Kuwait into a financial and trade hub with a private-sector focus, thus, reducing its reliance on oil, which currently accounts for 90 per cent of Kuwait’s exports. Kuwait hopes to achieve this using its strategic geographic location, a collaborative legislative body and balanced international foreign policy.
However, the 2035 plan has been criticised for its similarities to its failed 2010 predecessor. This criticism has been amplified due to the 2035 Plan’s failure to acknowledge the competition presented by existing Gulf hubs in the UAE, Qatar and Saudi Arabia, and the high levels of corruption in the Kuwaiti government, which only make the 2035 plan more difficult to implement.
One aspect of the 2035 Plan seeks to increase its tourism, business and foreign investment through the construction of a new city, Madinat al-Hareer. This construction is dependent upon expatriate workers, who make up 84 per cent of the population. However, many expatriates have returned to their countries due to the pandemic, with another 750,000 of the four-million-strong population expected to leave over the next twelve months. This mass-emigration makes it nearly impossible for Madinat al-Hareer to be constructed on time as few Kuwaiti’s have the education and technical training to immediately take over the role, assuming they can be persuaded to leave the public payroll at all.
If Kuwait is to achieve its 2035 Plan it ought to reform the kafala system to provide more rights to expatriates, thus incentivising them to remain in the country. Kuwait will also need to prioritise economic liberalisation by reducing its strict restrictions, particularly in the land sector, to encourage domestic growth and foreign investment. Kuwait needs to take bold steps to escape its oil dependency and meet its 2035 Plan, however, with corruption and the current economic crisis it’s likely the 2035 Plan will fail as its 2010 counterpart did.
Shannon McGarry is the Middle East and North Africa Fellow for Young Australians in International Affairs.