By: M. Javedanfar

06/04/2005

The recent boom in oil prices has brought new fortunes to the economies of a number of oil exporting counties. However one country which stands out is Kuwait . The small Arab Kingdom with its population of 2.2 million has been making significant economic progress recently, both internally and at regional level. This analysis by meepas will chart the background of the Kuwaiti economy and regional relations, and will address the recent political and economic advancements made by the country. The analysis will be completed with a forecast analysis of the economic and political future of Kuwait .

Background

Oil is Kuwait 's main export and revenue generator. It provides 90% of Kuwait 's export income and 75% of government revenue. The large part played by oil in the Kuwaiti economy is best understood by looking at the country's geographical features. Kuwait has very small amount of arable land due to its hot desert conditions. This makes farming and agriculture very difficult. Meanwhile Kuwait's small population, small land size and absence of raw material make it economically unfeasible for its economy to become manufacturing based. As a result due to abundant availability of oil and the high demand for this commodity, its export has been central to the Kuwaiti economy

In the meantime in order to reduce the risks and impact of rising and falling oil prices on the Kuwaiti economy, more than 20 years ago the Kuwaiti government created the Kuwait Fund for Future Generations (KFFG). The KFFG is a state reserve fund managed by the state-run Kuwait Investment Authority (KIA). According to Kuwaiti law, 10% of Kuwait 's oil income goes directly to the fund for investment elsewhere. In 2004 KFFG's value was estimated at USD $70 billion, most of it in overseas investments such as ownership of companies, stocks and bonds in the US , Europe and the Far East. The benefits of this diversification strategy by Kuwait were noted in 1991 as the savings and revenues from KFFG investments were used to replace temporary loss of income from oil. This loss was caused by occupying Iraqi soldiers who set fore to Kuwait 's oil wells.

From 1991 onwards the Kuwaiti economy concentrated much of its efforts on the massive task of reconstructing its economy. This used up a sizeable part of its budget. Meanwhile Kuwait 's suspicions regarding the hostile intentions of Saddam Hussein made its relations tense with its northern neighbour until Saddam was deposed in 2003. The absence of relations with Iraq and Saddam's hostile postures towards Kuwait affected the level of foreign investment in Kuwait.

At the same time Kuwait 's relations in the Arab world were noted for its absence of contact with the most popular Arab and Muslim cause i.e. the Palestinian struggle. This was due to the fact that Kuwait cut off all relations with the PLO due to Yasser Arafat's support of Saddam Hussein during the invasion of Kuwait . Meanwhile as the Kuwaiti government itself was threatened by other radical Islamist movements, it did not have any contact with other popular Palestinian parties such as Hamas and Jihad Islami as they are both viewed as extremists.

At the same time the absence of women's right to vote, and the royal family's aging rulers who seemed out of touch with Kuwaitis had a negative impact on Kuwait 's political image at home and abroad.

During the 1990s Kuwait 's neighbours started to over take the Kingdom in their diversification plans which called for the development of local non oil industries. For example Bahrain made significant progress with its Finance and Tourism sector. Qatar saw improvements in its Telecommunication, Transport, Gas and Tourism sector. UAE's free trade ports and advancements in the Financial and Tourism sector were successful factors in its diversification strategy. Meanwhile Oman 's “vision 2020” economic plan saw the Omani government make progress with its privatisation plans, whilst expanding its Gas Tourism, Manufacturing and free trade sector. This factor created new impetus for the Kuwaiti economy to create new local industries, as up until then Kuwait had concentrated the bulk of its economic plans on its oil sector and investments abroad.

Change

A comparison of Kuwait in 2005 vs. Kuwait of 1995 is the most appropriate tool which enables us to measure progress made by the Persian Gulf state over the last 10 year.

In 2005 Kuwait 's relations with Iraq have improved significantly. In fact Kuwait is one of the largest Arab donors to the Iraqi reconstruction fund. Kuwait 's relations with the Palestinian Authority have also taken giant steps forward after the death of Yasser Arafat which was followed by Mahmud Abbas's successful visit to Kuwait in December 2004.

Thanks to responsible economic planning the Kuwaiti economy has weathered a number of downturns in oil prices. This is supplemented by the $4.8 billion budget surplus for 2003-4, and the anticipated $10 billion budget surplus for the year 2004-05. Such surpluses were created thanks to rising oil prices and prudent estimation of per barrel income from oil in Kuwait 's revenue projection plans. The surplus means that the Kuwaiti budget has approximately $4500 extra to spend per person living in Kuwait . It must be noted that this one of the highest budget surpluses scored between all oil producing countries.

Furthermore the Kuwaiti stock exchange has recently been breaking records thanks to sturdy performances by its Finance, Services, and Real estate shares. This is notwithstanding the entrance and growth of new Kuwaiti companies such as the Telecomm company MTC which has been making giant strides in Kuwait , the Middle East and Sub Saharan markets. At the same time the Kuwaiti Construction, Finance and Tourism sector have also seen significant growth at home and abroad.

Progress has also been made on the political front. It is forecasted by meepas that in 2005 Kuwait will make voting legal for Kuwaiti women. This forecast is based on the observation of recent progress made by the Kuwaiti royal family and Kuwaiti moderates in the Kuwaiti National Assembly towards the attainment of this goal against the wishes of Islamist MPs. Furthermore Kuwait 's rulers have taken note of calls from Kuwait 's population regarding the need to replace ageing and conservative members of the royal family. This is confirmed by the appointment of younger and more liberal minded members such as Ahmed Fahd al-Sabah as Energy Minister and Sheikh Dr Mohammed al-Sabah as Foreign Minister.

Meanwhile Kuwait has done much to improve its political image abroad through liberal media laws which have turned the country's press into one of the most outspoken in the Arab world. At the same time the Kuwaiti parliament today is known as being one of the liveliest political debating forums in the region.

The future

The recent economic gains will serve as fuel for the continued strong performance of the Kuwaiti economy. According to calculations by meepas it is forecasted that the Kuwaiti economy will grow 4% per year (minimum) from 2005 until 2008. This forecast is based on the following premises:

The recent windfall from high oil prices, which is supplemented by the strong financial performance of Kuwait 's non oil industries (especially Banking, Real Estate and Telecommunication sectors) will translate into further investments. The investments will be made mainly in Kuwait 's stock exchange and in expansion projects for Kuwait 's non oil and oil industry. Such investment and their returns will subsequently fuel the sustainability of the high revenues generated by the various sectors of the Kuwaiti economy. Furthermore due to the growing demand in India and China it is expected that the price of oil will stay high for the rest of 2005, thus enabling the Kuwaiti economy to continue its high earnings from this resource.

It is also expected that Kuwait 's low inflation rate and its relatively low interest rates will further fuel the growth of the private sector thus adding to economic growth. Meanwhile anticipated economic and political improvements in Iraq will produce more confidence and investment in the Kuwaiti economy, whilst creating a new market for Kuwaiti exports. Development of the Iraqi market will also act as new source of cheap imports. The savings made from this channel of importation will allow to Kuwaiti economy to use its financial resources elsewhere for other investments. The Kuwaiti economy also stands to gain further investments and exports from the planned Free Trade Agreements with the EU and the US .

On the political front, meepas forecasts that the biggest shake up in the Kuwaiti political landscape for the next three years will be the new law allowing the country's female population to vote. Other than that the National Assembly is expected to continue in its current form with perhaps less influence from Islamist political parties due to the liberal attitude of Kuwait 's growing younger generation. It is also forecasted that the Amir's powers will remain unchanged. The forecasted absence of more radical change in Kuwait 's political system is based on the premise that when Kuwait allows women to vote, its political system will be at the same level as most of its regional neighbours (except Iraq ) whilst being more advanced than others ( Saudi Arabia and Iran ). Therefore there is no great regional pressure on Kuwaiti politics to reform further. Meanwhile the country's close relations with the US and America 's dependency on Kuwait as a gateway to Iraq will mean that Washington will not be placing any significant pressure on the Kuwaiti government for more reforms.

Islamic militancy is the most serious perceived threat against Kuwait 's political stability. This threat is expected to recede over the next three years. This will be due to expected improvement in the political and security situation in Iraq and the government's success in its operations against the militants.

The last verse of the Kuwaiti national anthem contains the words ”may you always enjoy good Fortune”. It seems that this will be the case for the next three years.

End of report

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