When Kuwait’s prime minister returns to office in the coming weeks, he faces an apparent paradox: the Gulf state with a $550bn sovereign wealth fund is running short on cash to pay ballooning public sector salaries.
Oil accounts for 90 per cent of its revenue, but slumping prices have hit the western ally’s income hard, putting its forecast deficit close to 40 per cent of GDP, higher than it was in the 1990s, during the financially perilous aftermath of the first Gulf war when Iraq invaded Kuwait.
While other Gulf states have turned to global debt markets to fund themselves through the pandemic, Kuwait is hamstrung by parliament’s refusal to renew a debt law that elapsed in 2017. Any attempt to tap into the country’s large sovereign wealth fund is also opposed by lawmakers as it would undermine its function as a nest egg for future generations.
Long criticised for failing to prepare for a post-oil future even as it built one of the world’s largest wealth funds, the crisis in Kuwait illustrates how even wealthy Gulf states have been rocked by coronavirus and plunging oil prices.
The economic crisis has forced a political reckoning — early December elections have delivered a strong showing for opposition and younger candidates, with 31 new lawmakers in the 50-member parliament. Emir Sheikh Nawaf al-Ahmad al-Sabah, who took the reins in September following the death of his brother, a revered global diplomat, this week reappointed the prime minister, Sheikh Sabah al-Khaled al-Sabah, to form a new cabinet.
But analysts doubt the new parliamentary intake will agree with the unelected cabinet and the ruling family on the hard choices needed to tackle the fiscal crisis.
“The outcome of the elections will only reinforce the contentious relationship between the government and the legislature,” said Ahmed Helal, an independent analyst. “The reform drive will remain muted following the election as opposition candidates will blame the government for the economic mismanagement that has led to Kuwait’s fiscal crisis.”
Kuwait’s lively legislature has more powers than other more authoritarian systems in the oil-rich Gulf, though the emir appoints cabinet and can dissolve parliament. While political parties remain banned, individuals form coalition blocs, including one linked to the pan-Arab Muslim Brotherhood Islamist group.
Many lawmakers have made clear their opposition to reforms needed to ease fiscal pressures, such as curbing public sector wages, benefits and subsidies that make up the cradle-to-grave welfare state.
Moody’s rating agency downgraded Kuwait in September for the first time because of increasing “liquidity risks”. The status quo could over time lead to chronic deficits, a hollowed out private sector in an economy dominated by a government reliant on a commodity that faces an inexorable decline in the decades ahead, analysts say.
“All hard decisions have been put to the side,” said Ali Al Salim, a Kuwaiti investor who has called for a radical restructuring of the economy including the introduction of a universal basic income linked to oil prices for all nationals.
“No one is willing to say we have two choices: a painful path and a very painful path,” he said. “So we need to take the painful path.”
About 80 per cent of Kuwaitis are in government jobs and their salaries account for 52 per cent of state spending.
About another quarter of government spending goes on subsidies, including utilities. “We need to take the medicine,” said Mr Salim. “The government has created too much of an incentive for unproductive public sector work — it needs to send a signal by lowering or freezing salaries.”
As pressure builds on public services, many Kuwaitis — including candidates for parliament — have ratcheted up rhetoric against expatriates, calling for a reduction in their numbers and a tax on their remittances. Foreigners, who make up about 70 per cent of the 4.5m population, are largely drawn from south Asia and Egypt.
The high election turnout indicates a popular yearning for change. Various corruption scandals, including the alleged involvement of a member of the ruling family in the Malaysian 1MDB fraud, has emboldened parliamentarians to push for more accountability.
“The feeling in Kuwait today is that things can’t change. But who says things can’t change,” said Ghadeer Aseeri, a former social affairs and labour minister who lost her seat, in a campaign video. The elite have guaranteed jobs and can bypass hospital queues, she said. “Their future is known, whereas the future of the normal Kuwaiti is unknown,” she said.