Kuwait risks paying a high price for cheap oil

Kuwait is about to pay a high price for cheap oil
6 min read
28 Sep, 2017
Comment: If Kuwait's government doesn't act now to restructure the economy, the country's over-reliance on a single source of wealth could prove disastrous, writes Fouad al-Obaid.
A trader at the Kuwait Stock Exchange in Kuwait City 2015 [Getty]
The dire reality of Kuwait's current economic conundrum dawned on me last week as I talked with a former Central Bank colleague.

In the modern era, Kuwait has greatly benefitted from the influx of wealth made possible by the exploration, exploitation, and commercialisation at a profit of its hydrocarbon resources.

And yet, we remain one of the few countries in the world to be dependent on one resource for the development and sustenance of our economy.

Were we to take the sage advice of any economist of not putting all our eggs in one basket, surely we would come to realise the foolishness of our dependence.

Faced with this reality, we must take action to develop alternative, competing revenue streams to - at the very least - mitigate inherent risks associated with our reliance on a single raw material.

Even when it came to developing industries based on hydrocarbons, we missed out on the opportunity to develop manufactured products ready for export with Dow Chemicals. 

When we glance at the macroeconomic picture, despite the dip in revenue generated by the export of hydrocarbons, we nevertheless maintained spending at a relatively high pace, without truly rationalising our expenditures.

The government is the sole income provider for the vast majority of citizens

The opacity surrounding our financial clout, and recent revelations about substantial amounts withdrawn from various government saving accounts to finance the current deficit, should only increase our concerns, and result in a call to action with greater clarity.

What is required, is nothing less than a national coherent dialogue of all key state and non-state actors from various industries to work together to set out a new vision. This vision must be backed by a solid political will to change the current course of action.

Today, government capital expenditure is the driver that keeps the economy afloat through the allocation of lucrative contracts to private sector companies.

At the same time, the government is the sole income provider for the vast majority of citizens, either through direct salaries paid to state employees and pensioners, or through indirect employment by paying social allowances* that for the most part make up two thirds of private sector salaries.

In essence without capital expenditure and social allowances of various natures, the local economy would come to grinding halt.

Ironically, the government is missing out on a massive potential boon. Were it to restructure the economy to allow for greater input from foreigners, it would reduce the billions of dinars annually siphoned abroad through remittance. Instead, new investment avenues should be found to encourage a substantial part to remain, and to be invested in the local economy.  

The recent slowdown, which has largely been the result of the government's expenditure slowdown, amounted to the first real wake-up call that prompted change, albeit limited and poorly directed, to punish non-nationals by increasing the price of electricity and water.

Another issue that should alarm those of sound fiscal mind, is the government's decision to follow a trend in the GCC region: the selling of bonds. Portrayed as a sound economic move, the contracting of debt that must be repaid with interest will never be beneficial, especially if it could be prevented by more sound management of the state budget.

The alternative to such a move would be tighter control of the budget with the scrapping of non-essential expenditures on projects that are not able to sustain themselves. Ideally, the focus would be on means of wealth generation, which in the short term could mean we rely on the financial largess amassed in prior years.

Kuwaiti oil workers protest pay cuts and plans to privatise parts of the oil sector.  [Getty]

Kuwaiti oil workers protest pay cuts and plans
to privatise parts of the oil sector. [Getty]

Today, we must all realise that the economic growth of the last decade was largely due to circumstances out of our control - namely the price of oil.

We must understand that for all the good that hydrocarbons have had on the development of the national economy, they are - according to most experts - a finite resource, and in the long run, their viability will decrease.

More challenging still, is that discovery of new wells and/or techniques to extend the production of existing wells, will maintain pressure on the global oil price to remain at the current range.

With little perspective for a marked increase in oil prices to something akin to their 100$/barrel heyday, the current deficit will only worsen unless structurally addressed, as the margin for manoeuver to correct the economic imbalance becomes narrower.

Unless serious efforts are made to address the situation, the future of the country will become bleak.

But with all the challenges of climate change, opportunities for new industries to develop are numerous. The government should take note, and encourage new industries that could prove lucrative in exports to grow.

In their early development, these industries should be cocooned to allow them to eventually compete on the global market place.

Read more: Hunger games: The geopolitics of the GCC's food insecurity

Industries in areas that require new technologies to sustain life on a hotter planet could very well alter the future of country, and turn our climatic disadvantage into something positive.

The current trend in the rise of renewable energy technology should prompt the government to set up with private sector partners new free-trade-zones dedicated to the development and manufacturing of such new technologies.

The realm of water desalination through the use of non-fossil technologies is another avenue worth exploring, as are means of making long plains of arid lands viable using new agricultural techniques, and the development of seeds that can grow in hotter, drier climates.

But with all the challenges of climate change, opportunities for new industries to develop are numerous

Finally, at the micro-level, the government needs to look at the creation of national poles of industry through the setting up of specialised companies that could develop manufactured products ready for export.

After 60 years of hydrocarbon wealth, it is essential we branch out to other industries. To be successful in such an endeavour, a new generation of thinkers and talent will need to emerge, with the technical know-how to sustain its development.

The cost of failure to act today will place us on a course that could very well in the next 50 years wipe out the greatest wealth generation experiment in the history of mankind, by taking the desolate, climate-intolerant patch of land we inhabit today, back to a time when we were subsisting in harsh conditions with no perspective for meaningful development. 

*Kuwaitis working in the private sector recieve a 'complimentary' salary from the government based on educational achievement. They also recieve extra allowances for spouses, children and 'rent'. For most people early in their career this can be as high as 70 percent of their take home pay.

Fouad al-Obaid is a Kuwaiti Communication Professional currently working in Financial Services, he holds an MA in Global Communication and Civil Society from the American University of Paris. 

Follow him on Twitter: @Fouadalobaid 

Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff.