Kuwait emir calls for spending cuts over low oil prices

With state revenues down 60 per cent, Sheikh Sabah stresses importance of reforms in address to parliament.

Kuwaiti emir Sheikh Sabah Al Ahmad Al Jaber Al Sabah greets members of Kuwait National Assembly during the opening ceremony of the new legislative year in Kuwait City on October 27, 2015. Yasser Al ZaShow more

ABU DHABI // Kuwaitis should be ready for government cuts in social spending, emir Sheikh Sabah Al Ahmad Al Jaber Al Sabah said on Tuesday.

Addressing parliament at the beginning of the new term, Sheikh Sabah said state revenues were down 60 per cent due to the fall in global oil prices.

He called for “urgent measures” to adopt economic reforms, reduce public spending and corruption.

“The decline in global oil prices has caused state revenues to drop by around 60 per cent while spending remained without any reduction, leading to a huge deficit,” Sheikh Sabah said.

“I also call on every citizen to realise the importance and usefulness of these reforms.”

Kuwait’s citizens, who make up about a quarter of its nearly four million-strong population, benefit from extensive government support including subsidised health care, education and well-paid state jobs. Public sector wages rose in response to Arab Spring protests in 2011-2012.

Oil accounts for more than 90 per cent of Kuwaiti government revenues.

The drop of more than 50 per cent in oil prices since June has called into question the sustainability of government spending, prompting calls for fiscal reforms.

The International Monetary Fund (IMF) said last week that it expected Arabian Gulf states including Kuwait to move faster on spending cuts rather than introducing taxes in the face of massive budget deficits.

The IMF revised its economic growth projection for the Arabian Gulf region for 2015 downwards to about 3 per cent after the fall in oil prices.

Kuwait is considered the most oil-dependent of the six Gulf Cooperation Council states, with the least diversified economy.

Cuts in social spending are publicly sensitive in Kuwait and carry the risk of protests – which have been frequent in recent years. About half of Kuwaitis are under the age of 20 and many grew up expecting the government to help them purchase a house after marriage.

“In the current unstable environment where sectarian conflicts are on the rise, budget cuts indeed can create instabilities domestically,” said Dr Jean-Marc Rickli, an assistant professor at King’s College London who works in Doha.

“In order to overcome this, the rulers have to explain that there is no alternative solution, and that adopting a responsible policy now will guarantee future prosperity of the country. This requires that citizens will have to adapt their spending habits.”

Kuwaiti political analyst Shamlan Al Essa cast doubt on the government moving quickly to make cuts.

“I don’t think they are going to cut seriously,” he said.

Like other Gulf states, Kuwait has substantial fiscal reserves – about US$600 billion (Dh2.2 trillion) – that can help prop up the economy during times of low oil prices.

But with oil prices expected to remain low, Kuwait and its GCC partners need to take additional steps, which prompted the emir’s call to parliament.

“The emir’s comments reflect concern across the GCC about the dramatic oil price drop and what it’s meant for revenues,” said Lori Plotkin Boghardt, an expert on Arabian Gulf states at the Washington Institute think tank.

Abu Dhabi raised electricity and water prices earlier this year. The cost of petrol was also raised across the UAE in a bid to reduce government subsidies.

In Kuwait, subsidies on diesel, kerosene and aviation fuel were lifted earlier this year, and further cuts in spending could include reductions in electricity, water and petrol subsidies. However, such moves have faced a backlash.

“Earlier this year, the government’s efforts to cut diesel subsidies resulted in a public outcry,” said Ms Boghardt.

Members of parliament also criticised the government after the rise in fuel prices, and have at times sought to impede government policies.

“Kuwaiti MPs have shown in the past their reflexive hostility to any reforms that endanger the welfare of their constituents,” said Kristian Coates Ulrichsen, a Middle East expert at Rice University’s Baker Institute for Public Policy in Houston and an associate fellow at Chatham House in London.

“The populist streak that runs through Kuwaiti politics as well as the lack of trust between the government and the parliament means that it is likely that future reforms also will be controversial. It remains to be seen whether the sense of urgency occasioned by the dramatic fall in government revenue is sufficient to change this equation.”

Saudi Arabia and Oman are also believed to be on the verge of cutting government subsidies.

Due to low oil prices Oman posted a budget deficit of $6.97bn in the first eight months of this year. Despite this, the country’s central bank governor, Hamood Sangour Al Zadjali, said the country would proceed with costly projects aimed at expanding industry and creating jobs. But cuts in government spending are also expected.

“The government is working hard to reduce expenditure and increase revenues through various means. They have directed the ministries to cap their expenditure at a certain level, or to cut the expenditures by a certain percentage,” Mr Al Zadjali said.

“On the revenues side, the government is considering taking some of the load off by cutting subsidies, and increasing some of the fees.”

According to a Dow Jones report, when asked if the country was considering cutting energy subsidies, Saudi Arabia’s oil minister Ali Al Naimi responded: “What you are asking is: is it under study? And the answer is yes.”

Kuwait’s emir also used his speech to parliament to observe how Kuwait has remained largely peaceful despite regional unrest, and to remember the 27 people killed in the bombing of a Shiite mosque by ISIL in June.