Kuwait Economy

Kuwait Economy

Subchapters:

  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax system

Basic data

The Kuwaiti economy is dominantly based on the extraction and export of oil and related products, Kuwaiti economic growth is therefore linked to the development of world oil prices. The paralysis of the global economy and fuel consumption as a result of the COVID-19 pandemic has thus hit Kuwait in a sensitive spot. Kuwait Export Crude (KEC) fell well below $20/bbl in late April 2020, but has recently crossed the $100/bbl mark. Since March 2021, mainly due to rising oil prices, there has been a revival of the Kuwaiti economy, growth in export earnings and a reduction in the budget deficit. The growth of the gross domestic product of Kuwait in 2021 reached 2.7%, in 2022 it is expected to grow up to 6.4%. In addition to rising oil prices, the main driving forces are investments in the implementation of delayed development projects, especially in the northern economic zone, which is supposed to include the construction of, for example, the so-called “Silk City” or the port of Mubarak Al Kabeer worth billion USD. According to the EIU, the inflation rate was 3.4% in 2021, and is expected to grow to approximately 3.6% in 2022. According to local sources, inflation is expected to be higher, in May 2022 it already reached 4.6%. The adoption of excise duties and VAT has again been delayed and can be expected in late 2022 or mid-2023 at the earliest.┬áCheck ebizdir for economical facts of Kuwait.

The structure of the Kuwaiti economy is quite homogeneous. The economy is oriented towards the oil industry, which generates most of the product. Kuwait’s goal is to increase daily production by 2025 from million barrels to million barrels. Another important sector is the construction industry and the related production of steel and building materials used for domestic consumption. Recently, Kuwait has been trying to produce some agricultural crops and is introducing livestock production to enhance food security. Kuwait therefore has only very limited production capacity, importing most of the goods. The service sector in Kuwait is dominated by a highly developed banking sector.

Table from MOP + additionally balance of payments, indebtedness/GDP.

Pointer 2019 2020 2021 2022 2023
GDP growth (%) 0.4 -5 2.7 6.4 5
GDP/population (USD/PPP) 72,729.10 66,298.00 69,500.00 73,540.00 77,740.0
Inflation rate (%) 1.1 2 3.4 3.6 2.8
Unemployment rate (%) 3 3.1 3 2.7 2.5
Export of goods (billion USD) 64.8 40 63.6 76 78.8
Import of goods (billion USD) 33.6 26.7 31 34.8 37.9
Trade Balance (Billion USD) 35.4 15.4 36 45.1 45.1
Industrial production (% change) ON ON ON ON ON
Population (millions) 4.2 4.3 4.3 4.5 4.6
Competitiveness ON ON ON ON ON
OECD export risk 2/7 2/7 2/7 ON ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance 2021
State budget balance (% of GDP) -6.5
Public debt (% of GDP) 20.4
Current account balance (billion USD) 47.6
Taxes 2022
AFTER ON
F.O ON
VAT ON

Kuwaiti revenues from the sale of oil and its derivatives abroad constitute almost 90% of all state budget revenues and are thus the dominant source of the Kuwaiti budget. The fiscal year in Kuwait always runs from 1 April to 31 March of the following year. Revenues to the state budget in 2021/22 should amount to USD 61.23 billion (+ 72.2%), expenditures USD 71.32 billion (- 4.8%). Budget revenues consist of 89% oil and 11% non-oil revenues. 75% of budget expenditure goes to salaries and subsidies, 13% to capital expenditure and 12% to other expenditure. Due to rising oil prices, the Kuwaiti budget is in surplus after several years of deficit management, which according to the EIU should reach less than 15% of GDP in 2021/22. At the same time, in the pandemic years 2020/21, the deficit amounted to 6.5% of GDP, and in 2019/2020, it was even almost 30%. The trend of surplus budgets should continue in Kuwait for the next few years. The amount of surpluses will depend on oil prices on world markets.

Deficit budgets in recent years were mainly covered by drawing financial reserves accumulated in the Kuwaiti sovereign fund Kuwait Investment Authority (KIA), which with more than USD 738 billion is the first largest sovereign fund in the GCC countries and the third largest in the world. Through its sovereign wealth funds and massive investments abroad, Kuwait holds significant stakes in a number of large international corporations (e.g. Daimler-Benz), investment funds, stock markets and foreign real estate. KIA invests the entrusted financial reserves mainly abroad and for this purpose uses the so-called Future Generations Fund (FGF), into which 10% of state income from the sale of oil is compulsorily transferred. Another fund managed by the KIA, the so-called General Reserve Fund (GRF), whose portfolio is more liquid, is used for the ongoing rehabilitation of potential state budget deficits, which has been happening in recent years and there was talk of its complete exhaustion. This method of correcting deficits is therefore to be strengthened by the adoption of the debt law, also due to the reduction of risks due to the volatility of world oil prices. The approval of this instrument, which has been postponed several times, still fails to get through the parliament.

Kuwait’s public debt is relatively low, in relation to GDP it was 20.4% in 2020/21, it is expected to fall to 17.4% in 2021/22. In the following years, it should stay around 20% of GDP. Debt service costs are set to rise from $8.31 billion to $9.09 billion in 2021/22. Kuwait’s total foreign reserves exceed $4billion. The Kuwaiti dinar is a relatively strong currency and is pegged to a basket of several currencies, but mostly to the US dollar. The exchange rate is to be kept at 0.303 KWD: 1 USD in the coming years. The current account balance is set to increase from +$32.6m to +$71.6m in 2021/22. Kuwait has pledged to introduce taxes to strengthen the sustainability of public finances. It is one of the last GCC countries yet to introduce value added tax. The five percent VAT was supposed to be introduced already in 2021, which was postponed again.

Banking system

The banking sector is very developed and relatively open. Kuwait is one of the centers of finance and investment banking in the Gulf region. Monetary policy and supervision of the banking sector in the country is carried out by the Central Bank of Kuwait, which is the main market regulator. It is headed by Governor Basil Al-Haroun. The central bank closely monitors the US policy of the FED, as the Kuwaiti dinar is, among other currencies, dominantly tied to the US dollar. Based on the development of key global and domestic indicators, it autonomously carries out the necessary interventions. In the past, the Central Bank of Kuwait intervened very successfully to maintain the stability of the currency. Due to current developments, the central bank is increasing interest rates. At the beginning of May 2022, it raised the discount rate by 0.25 pp to 2.00%. It is expected to raise the base rate to 3% by the end of 2023. The average rate at which commercial banks lend has a slight upward trend. Currently, it is around 4%, in 2023 it should be 4.4%.

The largest and most prominent banks include National Bank of Kuwait (NBK), Kuwait Finance House (KFH), Burgan Bank, Gulf Bank and Commercial Bank of Kuwait. All these banks offer a wide portfolio of services in the segment of retail and private banking, corporate banking, investment banking and asset management, as well as Islamic banking services. All of them also provide a wide range of different types of letters of credit and bank guarantees that can be used for international trade purposes. E.g. NBK offers all common types of letters of credit (irrevocable, confirmed, transferable, revolving, stand-by letters of credit) to foreign exporters. The letter of credit is issued within 1-2 working days by the bank in cooperation with the Kuwaiti buyer of goods/services. The fee charged by the bank for providing a letter of credit depends on the riskiness of the transaction, it also includes correspondent bank fees, courier fees, etc. The bank also offers the so-called “documentary collection” service, which consists in the fact that the bank, acting as an agent of the supplier, hands over to the Kuwaiti customer, or his bank, the relevant documents, after which he takes over the amount owed to his client – the exporter. Last but not least, NBK offers a wide portfolio of various bank guarantees that can be used, for example, for the purposes of submitting bid bonds or performance bonds when participating in public tenders.

The peculiarity of the Kuwaiti banking system is the fact that a number of local banks follow the principles of Islamic banking, which works without fixed interest rates for depositors. The reason is the prohibition of lending money for interest embedded in the Islamic faith. That is why loans are taken as co-participation in business plans (profit from business is permissible in Islam). A non-Muslim entity can also be a client of Islamic banks.

Tax system

The Kuwaiti tax system is specific in that most taxes do not exist in the country. For example, there is no value-added tax, personal income tax, road tax, excise tax, etc. Kuwait applies a 15% profit tax to foreign legal entities that hold shares in Kuwaiti trading companies (a foreign partner can have in a Kuwaiti company maximum share of 49%). Kuwaiti companies that are wholly owned by Kuwaitis (or nationals from other GCC states) are not subject to profit tax. In practice, this tax is thus applied only to a foreign legal entity with a stake in a Kuwaiti trading company. All profits of foreign corporations arising from dividends, franchises, license patent fees, or fees associated with the use of trademarks in Kuwait are taxed at the same rate. Closer to https://dits.deloitte.com/#TaxGuides

Exemptions from foreign corporation tax apply to the business of foreign legal entities under Act No. 116 of 2013 on foreign direct investment (allows up to 100% ownership), the Public-Private Partnership Act (PPP) and business under the so-called free trade zones. Foreign entities trading on the Kuwait Stock Exchange are also exempt from profit tax. Foreign corporations registered in Kuwait under the Foreign Direct Investment Law and the PPP Law are exempt from corporate income tax for up to 10 years.

A 5% value-added tax was due to come into force in Kuwait in 2021, but the move has been postponed again. The introduction of a unified VAT was decided within the GCC in 2018. Unlike most other GCC member countries, which have already implemented VAT in practice, Kuwait repeatedly postpones this unpopular, but necessary for the sustainability of public finances step, and it is not clear when to introduce will actually happen. They are currently talking about 2023. However, it is clear that as long as oil prices remain high, there will not be such pressure on the state budget and the government to introduce taxes.

Kuwait Economy