When the prime minister of Kuwait warns Kuwaitis that the current welfare state is “unsustainable”, his words echo across the Arabian Peninsula. Speaking at the start of the week, Sheikh Jaber Al Mubarak Al Sabah said: “Everyone must understand that the existing welfare state that Kuwaitis are used to cannot continue. It’s necessary that Kuwaiti society shifts from a consumer of the nation’s resources to a productive people.”
Those words come after the International Monetary Fund warned last year that spending levels in the country would outpace revenues from oil by 2017. This in the country that is estimated to have the second largest oil reserves in the GCC and just over a million citizens.
As in Kuwait, so in the rest of the GCC. Every GCC country uses the cushion of energy reserves to provide a range of benefits for citizens. Even those countries, such as Oman, where oil production is modest compared to, say, Saudi Arabia, offer some subsidies.
Subsidies across the GCC are a real problem, and one that the leadership is well-aware of. But reducing them is only part of the solution: another is diversifying the economy, to provide additional revenue streams other than oil and gas.
The UAE has moved rapidly towards diversification, spending billions to develop strategic sectors such as tourism, aviation and the financial sector. Hydrocarbons now make up 36 per cent of GDP, the lowest in the GCC.
Where the UAE has led, first Saudi and then Qatar have followed, rapidly attempting to diversify their economies. Indeed of the richest four GCC countries, excluding Bahrain and Oman, Kuwait has made the fewest steps towards diversification.
Opec notes that the oil and gas sectors account for 60 per cent of its GDP, and 90 per cent of its exports. (The UAE has one of the lowest in the GCC, at 69 per cent.) This is a shame, because Kuwait pioneered the use of sovereign wealth funds in the GCC, as a way of using oil revenues to create additional income streams – Kuwait’s SWF started in 1953.
All of the GCC is grappling with the same questions as Kuwait. The UAE is fortunate to be preparing well, but no country in the region can afford to be complacent.