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Country Profile 2005

Kuwait This Country Profile is a reference work, analysing the country’s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit’s Country Reports analyse current trends and provide a two-year forecast.

The full publishing schedule for Country Profiles is now available on our website at http://www.eiu.com/schedule The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

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ISSN 0269-7327

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

0 km 25 50 75 100

0 miles 25 50

© The Economist Intelligence Unit Limited 2005

October 2005

Main road

International boundary

Main airport

Capital

Major town

Other town

KUWAIT CITY

SalmiyaHawalliHawalliHawalliJahraJahraJahra

Fahaheel

Fintas

AhmadiAhmadiAhmadiSalmiSalmiSalmi Mina al-Ahmadi

Shuaiba

Mina Abdullah

KUWAIT

IRAN

IRAQ

SAUDI ARABIA

THE GULF

Bubiyan Is.

KhorKhorAbdullahAbdullah

KhorAbdullah

Warba Is.

Failaka I.

Maskan I.

Awhah I.

Kubbar I.

Doha

Subiya

Raudhatain

AbdaliAbdaliAbdali

Umm Qasr

Ras al-ZourRas al-ZourRas al-Zour

NuwaiseebNuwaiseebNuwaiseeb

Wafra Kheitan

Neutral ZoneNeutral ZoneNeutral Zone

Country Profile 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Comparative economic indicators, 2004

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

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Oman

Yemen

Egypt

Lebanon

Morocco

Israel

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Bahrain

Jordan

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Tunisia

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United Arab Emirates

Kuwait

Libya

Qatar

Iraq

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Lebanon

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-5 0 5 10 15

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Oman

Saudi Arabia

Lebanon

Morocco

Kuwait

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Bahrain

Qatar

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Sudan

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Iraq

Egypt

Syria

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Iran

Tunisia

Libya

Lebanon

Oman

Saudi Arabia

Bahrain

Israel

Kuwait


Qatar

Gross domestic product(% change, year on year)


Consumer prices(% change, year on year)


Gross domestic product per head(US$ ’000)


38.3

46.5 31.7

Kuwait 1

© The Economist Intelligence Unit Limited 2005 www.eiu.com Country Profile 2005

Contents

Kuwait

3 Basic data

4 Politics 4 Political background 5 Recent political developments 7 Constitution, institutions and administration 9 Political forces 14 International relations and defence

16 Resources and infrastructure 16 Population 19 Education 19 Health 20 Natural resources and the environment 21 Transport, communications and the Internet 24 Energy provision

25 The economy 25 Economic structure 26 Economic policy 30 Economic performance 32 Regional trends

32 Economic sectors 32 Agriculture 32 Mining and semi-processing 36 Manufacturing 37 Construction 38 Financial services 40 Other services

42 The external sector 42 Trade in goods 44 Invisibles and the current account 44 Capital flows and foreign debt 46 Foreign reserves and the exchange rate

47 Regional overview 47 Membership of organisations

50 Appendices 50 Sources of information 51 Reference tables 51 Population 52 Labour force 52 Transport statistics 52 National energy statistics

2 Kuwait


53 Government finances 53 Money supply and credit 53 Gross domestic product 54 Gross domestic product by expenditure 54 Gross domestic product by sector 55 Prices 56 Agricultural production 56 Oil production 56 Petrochemicals production 56 Building permitsa 57 Stockmarket index 57 Stockmarket indicators 57 Oil and oil products 57 Merchandise exports 58 Merchandise imports 58 Main trading partners 58 Balance of payments 59 External debt, OECD series 59 Foreign reserves 60 Exchange rates

Kuwait 3


Kuwait

Basic data

17,818 sq km, including 2,590 sq km in the Neutral Zone in which sovereignty is shared between Saudi Arabia and Kuwait

2.8m (March 2005)

The country is divided into five governorates. The Public Authority for Civil Information listed the following population breakdown as of end-2001:

Hawalli 496,294 Farwaniya 572,252 Jahra 282,353 Kuwait City (capital) 388,352 Ahmadi 364,484 Mubarak al Kabeer 144,981

Hot for most of the year and generally dry

Hottest months, June to September, 28-50°C (average daily minimum and maximum); coolest months, December to February, 8-18°C; rainfall erratic

Arabic; English is widely spoken and is the official second language

Metric system and regional measures

April 1st-March 31st

Kuwaiti dinar (KD)=1,000 fils. Average exchange rate in 2004: KD0.295:US$1.

3 hours ahead of GMT

Fridays; most commercial establishments also close on Thursday afternoons and government offices are shut all day Thursday and Friday; banks close on Friday and Saturday. All Muslim holidays are observed in accordance with the lunar calendar. This may mean the following dates are approximate

2005-06: (starting evening of) October 4th-November 3rd 2005, Ramadan; (starting evening of) November 3rd-6th 2005, Eid al-Fitr (end of Ramadan); January 10th 2006, Eid al-Adha (Feast of the Sacrifice); April 11th 2006, Mawlid al-Nabi (The Prophet’s Birthday). Secular holidays include New Year’s Day (January 1st), National Day (February 25th) and Liberation Day (February 26th)

Land area

Population

Main towns

Climate

Weather in Kuwait City

Languages

Weights and measures

Fiscal year

Currency

Time

Public holidays

4 Kuwait


Politics

Kuwait is ruled by an emir chosen, according to the constitution, from descendants of Sheikh Mubarak al-Sabah. Family members control key portfolios in the Council of Ministers (cabinet). There is a parliament, last elected in July 2003, which has limited legislative powers. Political parties are not permitted.

Political background

The principal families of Kuwait can trace their origins to the Anaiza tribal confederation of the Nejd in central Saudi Arabia. Members of the Utub division of the tribe emigrated during the 17th century to the fishing, trading and pearling settlement that became known as Kuwait City. The population grew as a result of migration from the Basra region to the north as well as from south-western Iran during the 19th century.

Political sovereignty over Kuwait was claimed by the Ottoman governorate of Basra, but the local ruler enjoyed considerable autonomy. Kuwait entered into a treaty of protection with Britain in 1899. Despite the territorial claims on Kuwait made on behalf of the province of Basra by the Ottoman Empire and then by Iraq, Kuwait was not considered a part of Basra under the 1919 Treaty of Versailles.

Kuwait lost around 30% of its claimed territory to the Al Saud rulers of Nejd in Arabia in a British agreement signed in 1921. Iraq has also intermittently asserted territorial claims since 1932. Iraq initially refused to recognise Kuwait after it secured independence from the UK in 1961, and its military threats resulted in the redeployment of British troops in the months following independence. In 1963 Iraq formally recognised Kuwait, which had gained admission to the Arab League and the UN in 1961 and 1962 respectively, However, there were border incursions in 1969-70, and clashes in 1972-73. Iraq invaded Kuwait in 1990 but was subsequently obliged to recognise Kuwaiti sovereignty under UN Security Council Resolution 833.

Kuwait projected an Arab nationalist foreign policy, which in a number of respects in the 1960s and 1970s echoed that of the leading radical Arab states, Egypt and Syria. Kuwait provided substantial support for poorer Arab states and for the Palestine Liberation Organisation (PLO) between 1961 and 1991, and welcomed many middle-class Palestinian exiles during this period. It was an enthusiastic enforcer of the 1967 and 1973 oil embargoes, and an active contributor to the rearmament of the “frontline” Arab states of Egypt, Syria and Jordan. In this respect Kuwait’s Arab nationalism was designed to appeal to a broad range of regional sentiment, reflecting the small, oil-rich state’s desire, for the most part, to avoid overt alliances with any regional power. Kuwait extended this principle on the international stage, where, during the cold war, it pursued an apparently non-aligned foreign policy and established diplomatic relations with the former Soviet Union long before other Arab monarchies. However, the maintenance of the strategic partnership with Britain until 1971,

The British protectorate

Kuwaiti independence

Kuwait 5


and the continuance of defence co-operation with the UK until the US took a more overt role in the security of the Gulf monarchies from the 1980s, reflected the difference between Kuwait’s pursuit of security in diplomatic and in military terms.

After the overthrow of the shah of Iran in 1979, relations with the country were strained. Kuwait’s support of Iraq during the 1980-88 Iran-Iraq war led to a deterioration in relations, and in late 1986 Iran announced a naval blockade on Kuwait-bound shipping. In retaliation, Kuwait reflagged most of its tanker fleet, putting it under the naval protection of the US and other Western powers. Iranian-backed Islamists engaged in a bombing campaign within Kuwait, causing considerable loss of civilian life, targeted Kuwaiti diplomats abroad and hijacked Kuwaiti commercial aircraft. Relations with Iran finally began to improve after the end of the Iran-Iraq war in August 1988 and the death of the Iranian leader, Ayatollah Ruhollah Khomeini, in 1989. During the 1990s high-level visits took place between the two countries’ leaderships and, taking the lead from improved Saudi-Iranian relations from the latter part of the decade, co-operation between Kuwait and Iran, who then faced a common Iraqi enemy, was enhanced.

Recent political developments

Relations between Kuwait and Iraq have been subject to tensions and periodic territorial claims by Baghdad since the 1930s. Under different regimes, Iraq has at various times maintained that Kuwait, or at least parts of its territory, should form part of Iraqi territory. It has argued, with varying degrees of force, but most especially during the crisis that followed Kuwait’s independence in 1961, and again following Iraq’s occupation of Kuwait in 1990, that the acceptance by the Kuwaitis and the British—with whom Kuwait had a treaty of protection from 1899 to 1961—of Turkish suzerainty over the sheikhdom indicates the limits to its legitimacy as an independent state. Although at different times Iraq has accepted the reality of Kuwait, and more definitively has signed up to the territorial delimitation between the two countries as per the 1932 and 1963 border agreements, Baghdad has also claimed that the specifics of territorial demarcation have not been entirely resolved. Iraq, seemingly for tactical reasons, in 1994 formally accepted the UN demarcation of both the land and the maritime boundaries between the two countries, having appeared to threaten directly the land border following the Kuwaitis’ physical delineation of their border with Iraq a year earlier. However, the fact that not only the regime of Saddam Hussein, but also a number of the then Iraqi opposition figures questioned the right of the UN to demarcate what had previously been agreed as more ambiguous land and maritime territorial delimitations raises questions about the long-term durability of the present border agreement. After the US-led occupation of Iraq in 2003, Kuwait began to build a metal barrier to demarcate the border, in place of the sand construction that had served the purpose for the previous decade. In mid-2005 this was torn down by an Iraqi mob after complaints that the barrier was encroaching on Iraq’s territory.

Tanker war involves Kuwait in Iran-Iraq conflict

Relations with Iraq

6 Kuwait


In the future Iraq may again argue that the constraints on its access to the headwaters of the Gulf require territorial accommodation. Discussions were held in the 1970s, without success, between Kuwait and Iraq over the latter’s desire to secure a leasehold over the islands of Warba and Bubiyan, which are situated in the waters off the Khor Abdullah leading to the Iraqi port of Umm Qasr. Iraqis of differing political hues have long felt that the specifics of the northern border settlement have been as much a product of political convenience, at Iraq’s strategic expense, as Kuwait’s western and southern boundaries with Saudi Arabia were at Kuwait’s.

On the other hand, the end of the regime of Saddam Hussein has created a more positive environment for Iraqi-Kuwaiti relations after the painful Kuwaiti experience of occupation in 1990-91 and the subsequent 12 years of tension. Some trading and familial links have been restored since 2003, and full diplomatic relations have been re-established for the first time since 1990. However, some redressing of what Iraqis—politicians and the public alike—generally consider to be an inequitable border settlement may be demanded by Iraq over the longer term. Furthermore, if Iraq eventually becomes a stable country, and exercises co-operative relations with the West, it may be able to gain broad international sympathy for a redressing of boundaries that have not had universal acceptance by Iraqis or even among all members of the UN border demarcation commission established after the 1991 Gulf war.

Important recent events

April 2003

The fall of the regime of Saddam Hussein in Iraq, after US-led military action launched from Kuwait, is warmly welcomed by Kuwait, but receives a much more muted response from other Arab states.

July 2003

The roles of crown prince and prime minister are separated for the first time, making it easier for the National Assembly to demand greater accountability from the prime minister, although the outcome of the National Assembly election strengthens the government’s position.

August 2004

Kuwait and Iraq agree to restore full diplomatic ties for the first time since the Iraqi occupation in 1990. However, Kuwait’s embassy in Baghdad is unlikely to open until the security situation improves, although there are plans to re-open the Iraqi embassy in Kuwait.

May 2005

Six years after it narrowly rejected an emiri decree authorising formal political participation for women, the National Assembly grants Kuwaiti women the right to vote and to stand in legislative elections. Two women are promptly appointed to the Municipal Council and the first female cabinet minister is appointed a month later.

Kuwait 7


August 2005

An Iraqi mob storms the steel barrier recently erected by the Kuwaitis to demarcate the land border as per the 1993 UN judgement. The Iraqis alleged that it had been positioned on Iraqi territory. UK intervention helped to end a crisis that reflected ongoing Iraqi resentments at the territorial dispensation between the two countries.

Constitution, institutions and administration

Kuwait is a hereditary emirate and the ruling emir comes from the descendants of Mubarak al-Sabah. The current emir is Sheikh Jabr al-Ahmed al-Jabr al-Sabah, who succeeded Sheikh Sabah al-Salem al-Sabah in December 1977. The emir appointed Sheikh Saad Abdullah al-Salem al-Sabah as his crown prince and prime minister. In July 2003, for the first time, the positions were separated when the emir’s half-brother and long-serving foreign minister, Sheikh Sabah al-Ahmed al-Jabr al-Sabah, became prime minister. Members of the ruling family hold key cabinet posts, including the defence, interior and energy portfolios. Laws passed by emiri decree must subsequently be ratified by the National Assembly (parliament), which can also initiate legislation.

The make-up of the cabinet is at the emir’s discretion, although members are appointed by the prime minister. At least one elected member of parliament must be included in the government. The 17-member cabinet formed in July 2003 included six members of the ruling family.

The first National Assembly was elected in 1963; it is supposed to sit for four-year terms. However, the emir has dissolved the Assembly on three occasions (1976-82, 1986-92 and 1999). In the 1999 case, this was done entirely constitutionally and elections were held shortly afterwards. In the former two instances, dissolution took place by emiri decree without consultation with the Assembly. Before the electoral law was amended in 2005 to allow women to vote and stand for office, voting rights were limited to male Kuwaiti nationals aged 21 or over, and only literate Kuwaiti males aged over 30 were permitted to stand as candidates for 50 elected seats in the National Assembly. Women can now stand for election on the same basis as Kuwaiti males. Cabinet members automatically become members of the Assembly, unless they have already been elected; 64 members are hence entitled to vote in the present parliament.

In recent years the Assembly has been pressing the government for greater transparency in financial matters. Members have demanded a greater role in oil policy and more oversight of defence contracts. Relations have been strained by MPs’ frequent insistence on asserting their right to question ministers, which in some cases has triggered ministerial resignations. There is a lack of serious commitment within the ruling family to deep-seated reform, while there is strong opposition within the Assembly to a number of economic reform proposals, including measures to attract foreign investment in the oil sector. The resistance within the ruling family and parliament to significant changes reflects an attachment to a status quo which has traditionally provided high levels of oil-funded welfare payments to the public and thereby contained pressure for extensive political accountability. Nevertheless, it is likely that political pressure

The ruling family

The Council of Ministers (cabinet)

The National Assembly

8 Kuwait


to extend the accountability of the ruling family will continue, encouraged by the apparent constitutional innovation of separating the offices of crown prince (and heir apparent) and prime minister, two roles that had been combined ever since the emir of newly independent Kuwait appointed an heir in 1963. However, demands for greater accountability, which are now focusing on calls for the legalisation of political parties, are unlikely to bring significant changes, given that this may raise questions about the role of the ruling family. Meanwhile, the government is unlikely actively to pursue radical economic reform, given the importance of the ruling family’s ability to meet the demands of vested social and economic interests in order to offset political pressures.

The constitution provides for judicial independence by stating that “judges shall not be subject to any authority”. It also states that sharia (Islamic law) is “a main source of legislation”. In practice, all judges are appointed by the emir and those who have Kuwaiti citizenship become judges for life. Some non-citizens are appointed on renewable contracts, with renewal subject to government approval. The highest court is the Court of Cassation, which can review decisions of the Court of Appeals. Ultimately, however, the emir is empowered by the constitution to pardon those convicted or commute sentences.

Security risk in Kuwait

The main security risk, albeit a comparatively limited one, is that domestic Islamic militants, partly motivated by Kuwait’s role in the overthrow of the regime of Saddam Hussein in Iraq, launch attacks in Kuwait. The emirate’s vulnerability on this score was illustrated by the attacks on US military-related targets from October 2002 to January 2003 during the build-up to the war in Iraq and by clashes between local security forces and armed extremists in January 2005. Individuals linked to the Islamist militant group al-Qaida are likely to remain in the emirate. However, clampdowns by the authorities have been successful, owing to the relative ease with which militants can be intercepted in such a small and well-policed country. Although the vast majority of Kuwaitis are opposed to terrorist attacks on US or other Western targets, the risk will persist, especially against the current backdrop of instability in Iraq, as long as coalition forces remain in Iraq and Kuwait. Although there is no formal connection between Islamic radicals in the National Assembly (parliament) and militant terror groups, the government and the US are concerned that an Islamic charitable foundation attached to a salafi bloc of Sunni Islamist MPs has financial connections to al-Qaida. The Kuwaiti government’s willingness to crack down on what may be a wider network of mosque-based support for extremist Islamists is constrained by the institutional strength of Islamist forces in Kuwaiti society and within the state apparatus, including the government. As Kuwaiti Islamists are deeply rooted within the parliamentary and wider political process, this creates political difficulties for the government in tackling grass-roots elements that may lend support to violence. In addition to the possible presence of al-Qaida cells, other Islamist extremist groups, seemingly with an entirely domestic agenda, such as the Movement to Cleanse Islamist Ranks and the Movement to Forbid the Forbidden, have operated in the country, although they appear to have been more or less eradicated. US and allied

The judiciary

Kuwait 9


military forces in Kuwait will continue to serve as targets for armed militants, but prominent foreign companies (especially US or British firms) could also be attacked. Furthermore, there have at times been angry political demonstrations by Islamist and more secular forces on the campus of Kuwait University. However, organised political violence between Kuwaitis is very rare. Violent and organised crime is also rare in Kuwait. Occasional instances of violent crime are reported in the Kuwaiti press. Nevertheless, it is extremely unusual for business disputes to turn violent, and those that do tend to be restricted to disputes between rival Kuwaiti families.

Political forces

There are no formal political parties in Kuwait. However, calls for the legalisation of parties have become more insistent and mainstream since 2004, and were further encouraged in May 2005 by the prime minister’s decision to push women’s suffrage through the National Assembly. The constitutional position is ambiguous; “associations” are legal. A number of political “groupings”, including various Islamist factions and two main liberal groups, exist without legal interference and campaign openly during elections.

Two branches of the Al Sabah monopolise political power within the ruling family—the bani Jabr (the descendants of the first son of Sheikh Mubarak al-Sabah, who ruled Kuwait from 1896 to 1915 and is considered to be the founder of an independent Kuwait), which includes the current emir and prime minister; and the bani Salem (descendants of the second son of Sheikh Mubarak), of whom the crown prince is the most senior member. The succession has tended to alternate between the two sides of the family, but under the constitution senior positions can be held by the descendants of any of the four sons of Sheikh Mubarak.

There is a degree of rivalry between the two branches, which occasionally surfaces over ministerial jobs and, less frequently, over policy. The emir, Sheikh Jabr, is closely related to the Al Salem side of the family through his mother and, like other Kuwaiti rulers, has no interest in allowing this competition to develop into a bitter power struggle. In recent years the Al Salem line has become the more junior partner in the division of power, with the foreign minister, Sheikh Mohammed Sabah al-Salem al-Sabah, the only Salem holding a top political post—aside from the currently figurehead position of the crown prince, Sheikh Saad Abdullah al-Salem al-Sabah. The latter appears unlikely to accede as emir, given objections within the ruling family and among the wider political elite on account of his health problems. However, family sensitivities and the difficulty caused by the succession issues this raises beyond the next in line, the prime minister, Sheikh Sabah al-Ahmed, has meant that Sheikh Saad Abdullah’s deposition as official heir apparent has been avoided. The unequal distribution of jobs between Al Jabr and Al Salem lines reflects the relative size and capabilities of the senior members of each family line. This also raises the possibility that the accession of the current prime minister (from the Al Jabr line) to emir (likely to occur as soon as the ailing emir, also an Al Jabr, dies) will not be “balanced” by an Al Salem in the position of crown prince (and heir

The ruling family

10 Kuwait


apparent). The prominence of the Al Jabr and Al Salem family lines does not exclude the holding of senior political posts by other descendants of the four sons of Sheikh Mubarak. For example, Sheikh Jabr al-Mubarak al-Hamad al-Sabah (an Al Hamad) is the defence minister, and Sheikh Mohammed al-Abdullah al-Mubarak al-Sabah, the son of a deputy ruler from the pre-independence period, holds ministerial rank as co-ordinator of cabinet business and parliamentary liaison, and is tipped for higher office. Claims continue to be pressed within the Al Sabah family council for more senior positions to be conceded. However, it remains unlikely that the dominance of the bani Jabr and the bani Salem will be fundamentally compromised.

A complex relationship also exists between the ruling family and the old established merchant families, who were the mainstay of the economy before the advent of oil wealth. The oil price explosion of the 1970s put additional power and patronage in the hands of the ruling family, while demographic change and reverberations of the regional rise of Islamism during the 1980s eroded some of the merchant families’ social influence, and reduced their (nonetheless still significant) role in parliamentary life. However, times of economic and political crisis, most notably in 1990-91, have seen their re-emergence as political players. Their influence has declined slightly from its peak in the mid-20th century, but they remain extremely significant actors in the economy and still hold important parliamentary posts. They control the bulk of private-sector activity, including important sectors such as construction and retail, and maintain close ties with the ruling family. In recent years many have used this indirect influence to oppose aspects of the economic reform programme, in particular where it promotes competition, which threatens the protected commercial environment on which their fortunes are often based.

The July 2003 elections resulted in a strengthening of the Islamist-affiliated opposition, while “liberals” who are pro-reform, both politically and to an extent economically, saw their numbers reduced. Deducing psephological trends can be difficult, however, not least because formal political parties are banned. Aside from making organised and constructive parliamentary opposition difficult, this also makes it hard to judge individual MPs’ adherence to parliamentary factions: some MPs have characterised themselves as pro-government and pro-Islamist, rather than siding with more organised Islamists who portray themselves as being in the opposition camp.

However, it is clear that the chief bloc within the 1999 parliament, the Islamists, saw a shift in support in 2003 for their different factional groupings. This saw the Islamic Constitutional Movement (ICM, which is Sunni Islamist and loosely linked to the pan-Islamic Muslim Brotherhood) reduced from six to two seats. However, the ICM’s decline was in part balanced by the rise in support for two salafi groupings—those Sunni Islamists who follow a more literal interpretation of Islam—whose number of MPs rose from three to five. In the context of the tensions caused among Islamist forces in Kuwait by the US military build-up and conduct of the war from Kuwaiti soil, the strength of the salafi vote would suggest that a more radical Sunni Islamist message has proven more popular among some of the comparatively poor, predominantly tribal areas where

Traditional merchant class

The National Assembly

Kuwait 11


Islamist voting strength lies. Shia Islamists saw a drop in their representation from six to five MPs, with the main grouping, the Islamic Popular Alliance, falling from three seats to one. However, a rise in support for independent Shia Islamists served to minimise the reduction in Shia Islamist parliamentary representation. The overall consequence is that the number of clearly affiliated Islamist MPs has declined from 15 to an estimated 12 in the current parliament.

Kuwait parliamentary representation, 2004 Islamist 12 Islamic Constitutional Movement 2 Islamic Popular Grouping 3 New Salafi bloc 2 Shia Islamists 5Liberals 4“Independents”a 34 Tribal representativesa 23

a Approximate figure.

Sources: Local news reports.

A handful of the MPs identified exclusively as tribal representatives (nuwab al-qaba’il) tend to ally themselves with Sunni Islamists (either salafi or ICM). In addition, support from other unaligned tribal MPs can provide the Islamists with an effective blocking majority on social and some economic reform issues. According to some local estimates, the total of tribal (and politically unaligned) MPs is 23, down from 25 in the previous parliament. Tribal representation is generally split between those who tend to support the government and those who generally side with the Islamists. Estimating precisely where this backing falls is difficult, not least because there are a total of 34 MPs (up from 27 in the previous parliament), both tribal and non-tribal, who have no clear ideological affinity. Half of the 50 MPs elected in 2003 were new to parliament .

The loss of representation in the National Assembly of one of the “liberal” factions, made up of formerly avowed Arab nationalists, Democratic Forum, reduced the liberal bloc’s total number of seats to four, all held by the more avowedly liberal and reformist National Democratic Rally. The liberals are usually supportive of government reform initiatives, especially changes of a political nature. The reduction in their representation, despite the fact that their apparent ally, Sheikh Sabah, is prime minister, indicates that senior government figures continue discreetly to nurture different political forces in order to build up their own support in parliament. The prime minister, for example, continues to maximise his own, as well as the government's, political autonomy. The reduction of Islamist and liberal representation in parliament, along with the maintenance of a large number of tribal MPs (some of whom have supported the government in the past) increased Sheikh Sabah’s room for manoeuvre, allowing him greater leeway to pursue his own priorities.

The government’s position in parliament is also aided by the additional votes that can be exercised by cabinet members (16 of the 17 members of the cabinet were not elected as MPs). This enables the government to prioritise issues such as Project Kuwait (see Economic sectors: Mining and semi-processing) and selected political reforms, such as the enfranchisement of women, which was

Tribes hold the key to power in Assembly

12 Kuwait


passed by 35 votes to 23 in May 2005, with government ministers accounting for 14 of the votes in favour. In contrast, the issue of restoring constituencies to their former size by decreasing their number from 25 to ten (to deter alleged vote-buying by members of the government) has been more contentious because of tribal MPs’ disquiet and the government’s concern about measures that would weaken its influence over the Assembly. On other questions, such as the status of the bidoon (stateless Arabs living in Kuwait), the government has kept concessions to a minimum for fear of boosting a section of the electorate expected overwhelmingly to support a conservative Islamist agenda.

Main political figures

Sheikh Jabr al-Ahmed al-Jabr al-Sabah

Born in 1926, and head of state since 1977, his increasing frailty means he rarely involves himself in the country’s day-to-day affairs.

Sheikh Saad Abdullah al-Salem al-Sabah

Crown prince since 1977 and prime minister from 1977 to July 2003, he is five years younger than Sheikh Jabr and is in increasingly poor health. As a consequence, he relinquished the position of prime minister in 2003 and, although he technically remains heir, there are increasing doubts over whether it would be appropriate for him to accede in the event of the emir’s demise.

Sheikh Sabah al-Ahmed al-Jabr al-Sabah

The emir’s half-brother was appointed prime minister in July 2003 and enjoys sufficient authority within the ruling family to pursue gradual economic reform, in which capacity his position as head of the Supreme Petroleum Council gives him particular weight His own ambitions to become emir could be confirmed as the current heir apparent, Sheikh Saad, seems likely to step aside in Sheikh Sabah’s favour, assuming that the current emir dies before the crown prince.

Sheikh Mohammed Sabah al-Salem al-Sabah

Foreign minister since the July 2003 cabinet appointments. From 2001 to 2003 he was minister of state in the Ministry of Foreign Affairs under the then foreign minister, Sheikh Sabah. Although Mohammed Sabah, who is in his mid-50s, is younger than some of the candidates to become heir after Sheikh Sabah al-Ahmed, as the younger son of the former emir, Sabah Salem, he is from the current generation of contenders. Given the ill-health of his elder half-brother, Sheikh Salem Sabah, coupled with the tradition of appointing suitable leaders among the present generation and alternating between the two favoured family lines, he is arguably in the strongest position to become heir (or, failing that, prime minister) to Sheikh Sabah, should the latter, as expected, become emir in the short to medium term.

Sheikh Ahmed al-Fahd al-Ahmed al-Sabah

Energy minister since July 2003 (see box: Key figures in economic policy). Relatively young, politically capable and genuinely popular among Kuwaitis. Sheikh Ahmed is also a strong contender for the position of crown prince or prime minister after the expected accession of his uncle, the current prime minister, Sheikh Sabah.

Kuwait 13


Sheikh Nasser Sabah al-Ahmad al-Sabah

Sheikh Sabah’s son, and a prominent candidate among the “next generation” of leading Al Sabah. Part of his credibility stems from having been an influential adviser to Sheikh Saad since 1999. The crown prince’s eclipse will not disadvantage Sheikh Nasser’s ambitions, which may be advanced under the expected eventual leadership of his father. However, his possible appointment as Sheikh Sabah’s heir is partly threatened by the preference to alternate appointments between family lines and the political discomfort among the Al Sabah that direct inheritance could create.

Sheikh Nawaf al-Ahmed al-Jabr al-Sabah

Brother of the present emir and prime minister. Sheikh Nawaf was brought out of virtual retirement in 2003 to become unofficial “first” among the three deputy prime ministers and interior minister, a post previously held by the ambitious Sheikh Mohammed al-Khaled al-Hamed al-Sabah, whose star appears to have waned.

Jassem al-Khorafi

A prominent businessman and associate of Sheikh Saad, from a leading Sunni Muslim merchant family traditionally close to the Al Sabah. He was first elected speaker of the National Assembly (parliament) after the July 1999 general election and takes a more conciliatory approach towards the government than his avowedly oppositionist predecessor, Ahmed al-Saadoun, whom he managed to defeat with the support of Islamist votes. Mr Khorafi was re-elected speaker of the 2003 Assembly, since when he has struck a balance between minimising opposition pressure on the government and calling for political reforms such as legalisation of political parties.

Ahmed al-Saadoun

Despite losing the speakership in 1999, he remains a powerful opposition voice in parliament, and a strong, non-aligned, populist critic of aspects of the government’s programme, including the northern oilfields investment programme, Project Kuwait.

Walid Musaid al-Tabtabaie

High-profile leader of the “New Salafi” group of two Islamist MPs. Possessing a PhD in Islamic law, he is quick to denounce any policy he considers “un-Islamic”.

The political scene is dominated by debate over much-needed economic restructuring and its implications for social welfare and distribution of national income. Some members of the government have been keen to implement reforms since the late 1990s, but ministers’ efforts have been blocked by MPs. In 1999 the emir dissolved parliament out of frustration with the lack of progress, but subsequent parliaments have continued to dilute and delay the reform process. In part, their opposition reflects the interests of the Kuwaiti electorate, who are overwhelmingly employed in the public sector. The reforms will begin to dismantle the welfare state that, while unsustainable in the long term, provides 93.6% of Kuwaiti nationals with government jobs and all Kuwaitis with a range of subsidies. After years of opposition, in the October 2005-July 2006 parliamentary session, MPs are due to consider draft legislation to approve Project Kuwait, the multi-billion-dollar foreign investment proposal for the Kuwaiti oil sector. The legislation was approved by a parliamentary committee in early 2005 in a form that appears to circumscribe the proposed project in an attempt to offset the suspicions of many MPs that generous

Splits over reform

14 Kuwait


concessions over a nationalised asset would be granted to foreign interests. A number of MPs believe that some well-placed Kuwaitis are promoting the project for personal gain, rather than for the benefit of Kuwait.

A large proportion, estimated at 30%, of Kuwaiti nationals are naturalised citizens who moved to Kuwait during the 1950s and 1960s. Until 1994 most naturalised Kuwaitis could not vote or run for office. However, in response to international pressure after the 1992 election campaign, parliament approved a law in 1994 stating that offspring born to Kuwaitis naturalised at the time of the child’s birth are eligible for the same political rights as Kuwaiti citizens. Despite this, by the end of the 1990s there were still between 110,000 and 150,000 stateless Arabs in Kuwait, known as bidoon because they are bidoon jinsiya (without nationality). Since mid-1999 the government has promised to resolve the issue, while insisting that the bidoon should provide proof of their “true” nationalities. In 2000 bidoon were instructed to register with the authorities so that they could be accepted or rejected for citizenship. Legislation passed in May that year revised the position that those bidoon who could prove they had Kuwaiti mothers or provide evidence of constant residence of their families prior to 1921 were entitled to citizenship. The law now requires proof of constant residence since 1965. Acceptance procedures under the new regulations have been slow. Those who are rejected are told they should register as nationals of a country other than Kuwait in order to be granted residence permits, although this is not strictly enforced and deportations are uncommon.

International relations and defence

Together with Saudi Arabia, Bahrain, Qatar, Oman and the UAE, Kuwait belongs to the Gulf Co-operation Council (GCC). Although intended primarily as a security alliance, the organisation’s six members frequently disagree on the pace at which security co-operation should proceed, while there is widespread suspicion among the smaller Gulf states of what are perceived to be attempts by Saudi Arabia to dominate the alliance. In this respect, Kuwait is no different to the other smaller Gulf states. However, it has maintained traditionally close relations with the Saudi kingdom, which has played a protective role toward Kuwait at moments of crisis since the latter’s independence in 1961.

The Kuwait-Iraq border was comprehensively demarcated for the first time by the UN following the 1991 Gulf war. The land allocated to Kuwait included some territory around the port of Umm Qasr. The regime of Saddam Hussein formally agreed to the territorial delimitation in 1994, but disputed the UN’s right to, in effect, legitimise previous British demarcation plans dating back to 1951. The comments of certain figures attached to prominent political trends in Iraq following the change of regime in 2003 suggest that some adjustments, including to the border, may be necessary in the future. At the least, this may mean a resumption of negotiations over Iraqi leasing of the islands of Warba and Bubiyan in order to enhance its access to northern Gulf headwaters, and possibly an adjustment of the current demarcation giving Kuwait maritime territory around Umm Qasr.

Naturalised Kuwaitis and the bidoon

Disputed borders

The GCC

Kuwait 15


Kuwait’s sea borders with Saudi Arabia and Iran remained undemarcated for many years. In February 2000 Kuwait objected when Iran started drilling in the Dorra gasfield, part of the undelineated offshore area. Iran stopped drilling in May that year, and, in a surprise move, Saudi Arabia and Kuwait signed a maritime border agreement in July, acknowledging Kuwaiti sovereignty over the two islands of Umm al-Maradim and Qurah. Talks on the offshore border with Iran began almost immediately, with Kuwait expressing interest in obtaining Iranian supplies of water and gas. By 2005 a gas supply contract had been provisionally scheduled to come into effect in 2007, even though the border issue remained unresolved. Meanwhile, Saudi Arabia blocked the passage of Qatari gas to Kuwait, intended to be supplied via a subsea pipeline, as this could have implications for the unresolved Saudi-Qatari border dispute.

The US is the ultimate guarantor of Kuwait’s security. The US provides a military umbrella under a ten-year defence pact, which was signed in September 1991 and renewed for a further ten years in February 2001. This is bolstered by defence treaties with the UK, France, and Russia. US military hardware and advisers are permanently stationed in Kuwait, where they undertake frequent military exercises. In 2004 Kuwait was awarded the status of “major non-NATO ally”, a title it shares with Qatar, Bahrain and the UAE among the GCC states. This association reflects Kuwait’s close defence and strategic partnership with the Western alliance and is liable to make arms sales less subject to US Congressional complications in the future.

Defence spending before the Iraqi invasion typically accounted for less than 5% of GDP. After the invasion the defence and security budget rose to 27-33% of current spending throughout the 1990s. Although the US-led invasion and occupation of Iraq in 2003 was judged in the emirate to have reduced external threats to Kuwaiti security, the country remains concerned about regional security challenges and is keen to keep up with its GCC neighbours. As a result, defence spending continues at high levels. The cost of military procurement was budgeted to rise from an estimated US$756m in 2004/05 to US$950m in 2005/06, pushing total outlays on defence to around US$3.4bn, or 14% of projected total spending. Kuwait is been the third-highest spender per head on defence in the Middle East and North Africa region. This has brought complaints of wastefulness from some MPs, who argue that Kuwait’s allies have encouraged it to buy expensive high-tech weaponry that will never be used, and accuse the government of corrupt dealings for substandard equipment.

Military forces, 2004 Regular forces Army 11,000 Navy 2,000 Air force 2,500Paramilitary National Guard 6,600

Source: International Institute for Strategic Studies, The Military Balance 2004/05.

Kuwait’s active defence forces numbered 15,500 in 2004. Its small air force has been re-equipped since the 1991 Gulf war with F-18 ground attack fighters. The

Defence issues

Relations with the West

16 Kuwait


army uses US-made M84 and M1A2 tanks and UK Desert Warrior armoured fighting vehicles. Kuwait’s navy was largely destroyed by the Iraqis. It has since bought French fast patrol boats, while air defence is provided by Hawk and Patriot missiles from the US. A US$1bn purchase of AH-64 Apache Longbow helicopters from the US, deferred in 1997, began in 2001. National Assembly pressure has constrained defence expenditure since the end of the war to overthrow the Iraqi regime in April 2003, with planned communications infrastructure and armoured vehicle purchases seemingly put back. However, replacement or upgrading of the F-18s remains possible in the medium term.

Manpower remains a logistical problem for Kuwait. Before the 1991 Gulf war it relied on bidoon regulars, but they are no longer permitted to serve. All Kuwaiti men are supposed to complete two years of military service, but exemptions are easily obtained. After the Iraqi regime was overthrown in 2003, US-led foreign troops continued to be stationed in Kuwait in addition to those “on rotation” from Iraq. It is expected that, together with pre-positioned equipment, a residual US troop presence will remain in Kuwait in the longer term.

Resources and infrastructure

Population

Kuwaiti nationals have been a minority of the population since the influx of foreign labour for oil-based development began in the 1960s. Many immigrants left after the Iraqi invasion in 1990. The Palestinian community, which at around 450,000, was by far the largest foreign population, departed in large numbers after the ruling Al Sabah family was restored to power in Kuwait. This reflected considerable tension over the role of a minority of community members during the occupation, and of the Palestine Liberation Organisation (PLO) leadership’s attitude toward the Iraqi leadership after the invasion.

Unlike their predecessors, most new immigrants are not accompanied by their families and dependants; 44% of the non-Kuwaiti population lived in one-person or non-family households in June 2004. According to the Public Authority for Civil Information (PACI), the rate of increase in Kuwait’s expatriate population slowed markedly in 1998, and in 1999 and 2000 the total declined by 2.8% and 4.7% respectively. The fall in 1999 was the first time there had been a net expatriate withdrawal since liberation in 1991. This largely reflected the decline in oil revenue in 1998, which hit private-sector demand and domestic investment levels in 1999, leading to a decrease in demand for foreign labour that was also felt in the following two years. However, in 2001-03 the foreign population resumed rates of growth in keeping with the post–war period, rising by 4.6%, 5.8% and 6.4% respectively in these three years. A further rise of 10.5% was recorded in the first half of 2004, reflecting strong growth in the private sector, where the demand for low-income expatriate labour increased in construction and the retail economy as Kuwait enjoyed the trade and investment benefits of regime change in neighbouring Iraq.

Figures from PACI for mid-2004 show Kuwaitis accounting for 36% of the population, down from 38.1% in 2000. (By comparison, expatriates constitute an

Nationals form the minority

Kuwait 17


estimated 70% and 80% of the populations of Qatar and the UAE respectively, and in relatively resource-poor Oman expatriate workers represent around 30% of the overall population.) This demographic shift towards non-Kuwaitis occurred despite continuing high rates of growth in the indigenous population during the second half of the 1990s, with the population rising by 3.8% in 1995, 3% in 1996-99 and 3.3% in 2003-04.

PACI has not produced a breakdown of respective national populations among non-Kuwaitis for some years. However, according to a Kuwaiti newspaper, Al Watan, as of end-1999 the non-Kuwaiti Arab population was 38.5% of the total non-Kuwaiti population, making Arabs the second-largest ethnic group among non-Kuwaitis, after south Asians. Among the Arab group, Egyptians, at 19% of the overall non-Kuwaiti total, were by far the biggest. However, the largest non-Kuwaiti national group was Indians, at 19.8% of the total; Bangladeshis, Pakistanis and Sri Lankans comprised 10.9%, 7% and 6.9% of the total non-Kuwaiti population respectively. South Asian workers made up 44.7% of the total non-Kuwaiti population. Local sources suggest that these proportions have stayed at around the same level since end-1999, with south Asians and Arabs representing about 45% and 40% of the non-Kuwaiti population respectively.

High rates of growth in the indigenous population are reflected in the fact that, according to latest PACI data, 40.9% of Kuwaiti nationals were aged under 15 at end-2003. Some 69.8% of the Kuwaiti population were under 30 and hence strong growth in the indigenous population is likely in at least the medium term. PACI put the country’s total population at end-March 2005 at 2.8m.

Cheap land and subsidised housing mean that Kuwaitis move frequently. New neighbourhoods are developed, while established ones become less popular. This results in large swings in population between the various governorates. However, the country is small and over 90% of the population lives within a 500-sq km area bounded by Jahra, Kuwait City, Ahmadi and Fahahil.

Regional population (’000)

1999 2000 2001 Kuwaiti Non-Kuwaiti Kuwaiti Non-Kuwaiti Kuwaiti Non-KuwaitiKuwait City 170.0 218.1 177.4 205.0 184.9 203.6

Hawalli 228.0 170.0 141.3 347.2 145.4 342.9Ahmadi 163.0 209.9 167.3 195.8 171.7 192.8Jahra 82.3 204.1 85.0 195.8 88.7 193.7

Farwaniya 154.7 439.6 158.9 413.4 164.4 407.9Mubarak al-Kabeera n/a n/a 96.1 43.4 100.2 44.8

a This region was created in November 1999.

Source: Public Authority for Civil Information.

Kuwait’s total labour force rose from 607,608 in 1992 to 1.25m by the end of 1998. It declined in each of the following two years, but recovered to 1.26m at end-December 2001 before rising steadily to reach 1.55m by end-June 2004. There is a sharp imbalance between the number of Kuwaitis and non-Kuwaitis in the labour force, and in the employment of each group in the public and private sectors. The number of non-Kuwaitis in employment decreased by 3.5% in 1999

Labour force

Population distribution

18 Kuwait


and 4.1% in 2000, as private consumption rose only marginally and investment declined. In addition, the introduction of healthcare fees and mandatory health insurance made employing foreign workers less attractive. However, a subsequent growth in private consumption boosted private-sector expatriate employment, resulting in this section of the employed workforce rising by 5.9% in 2001, 7.1% in 2002, 7.6% in 2003 and 10.9% in the first six months of 2004. As of end-June 2004, non-Kuwaitis comprised 81.3% of the total workforce and around 98% of employees in the private sector.

Kuwaitis dominate the public sector, which expands each year to accommodate nationals entering the labour market. In mid-2004 92% of all Kuwaiti employees were working in the public sector, with Kuwaitis comprising 75% of all public-sector workers. The number of Kuwaitis employed in the public sector rose by 11,875 in 2001, 11,345 in 2002, 9,955 in 2003 and 4,492 in the first half of 2004.

Labour force, 2004a (’000)

Kuwaitis 290.7Non-Kuwaitis 1,260.6

Total 1,551.3

a End-June.

Sources: Public Authority for Civil Information, IMF.

The public-sector domination of employment of Kuwaiti nationals means that, without a significant expansion of private-sector jobs of the kind that Kuwaitis are willing to take up, the government will need to create 9,000-10,000 new jobs each year during the next five years to absorb the growing Kuwaiti labour force. Although some 94% of new jobs created in the Kuwaiti economy in the first half of 2004 were in the private sector, these were largely of the unskilled variety, with tougher terms and conditions, including lower pay, than nationals are willing to accept. Despite this, the Kuwaiti government has accelerated plans to “Kuwaitise” the private sector, by setting a target of replacing 10% of expatriate workers with Kuwaitis each year and establishing quotas for different sectors of the economy, with incentives for private firms which comply.

Labour force distribution by activity, Dec 2003 (% of total)

Kuwaiti Non-Kuwaiti TotalAgriculture & fisheries 0.0 2.1 1.7

Mining & quarrying 1.6 0.2 0.5Manufacturing 2.8 6.8 6.0

Electricity, water & gas 2.4 0.2 0.6Construction 0.6 9.1 7.5Wholesale, retail trade & restaurants 1.5 19.1 15.8

Transportation & communications 2.4 3.2 3.1Finance & business services 3.3 4.6 4.4

Community, social & personal services 81.0 45.7 51.5Unclassified 4.4 8.9 8.0

Note. Total does not sum in source.


Kuwait 19


Compounding the difficulty in “nationalising” the workforce is the fact that 51% of adult Kuwaitis have not completed a high-school education, and only 27% have a diploma or university degree. A law came into effect in 2001 to ensure that Kuwaiti employees in the private sector would receive the same attractive benefits package as those in the public sector. On average these benefits are equivalent to half the average take-home pay of a Kuwaiti public-sector employee. However, it will take time for this change to alter the imbalance in the number of jobs for Kuwaitis in the public and private sectors, as many Kuwaitis remain unwilling to take up more demanding private-sector posts. This is despite the fact that the gap between the total number in employment and the total size of the labour force has widened in recent years, with the derived number of unemployed Kuwaiti nationals rising steeply to 14,300 by mid-2004, from 9,600 at end-2003, according to the latest IMF Country Report.

Education

Education is compulsory and free for all residents of Kuwait. Education is the third-highest budget category (after defence and security, and social security). Spending on educational services rose from KD645m in fiscal year 2001/02 to KD705m (US$2,343) in fiscal year 2002/03, or from 13.6% to 14.3% of total spending. In the following fiscal years (now adjusted to April 1st-March 31st) budget allocations to just the ministries of education and higher education rose from KD520.3m in 2002/03 to KD627.6m in 2005/06. Official Kuwaiti figures for June 2004 show 8% of the total adult population to be illiterate, representing 9% of Kuwaitis (3% of men and 15% of women) and 8% of non-Kuwaitis (8% of men and 9% of women). Although the 2005 Human Development Report, published by the UN Development Programme (UNDP), put the overall adult illiteracy figure far higher, at 17.1%, it also suggested that Kuwait compares well with most of its neighbours in terms of percentage of literacy and children receiving schooling. Saudi Arabia has an illiteracy rate of 20.6%, for example, although Qatar has a rate of only 10.8%. The net secondary school enrolment ratio is 77%, compared with 53% in Saudi Arabia, 71% in the UAE and 82% in Qatar.

Two institutions provide higher education—Kuwait University and the Public Authority for Applied Education and Training (PAAET). Kuwait University has developed gradually since the 1960s. Its Sharia and Islamic Studies department has more students (nearly 1,500) than the departments of law (1,150) or medicine (500). More women than men graduate from Kuwait University and PAAET, partly because men are more likely to study abroad; in 1999 67% of all Kuwaiti graduates from these institutions were women.

Health

The government disbursed 6.9% of its 2002/03 actual fiscal expenditure on health services and allocated KD431.5m to the Ministry of Public Health in its 2005/06 budget, representing 6% of total expenditure and an increase of 32.6% on the budget allocation for 2001/02. Concerns about spiralling healthcare costs have been addressed through the introduction of a law requiring expatriates to pay for the use of public hospitals and clinics. The introduction of healthcare

Literacy rates lag

Healthcare expenditure is high

20 Kuwait


charges started to make a noticeable impact on revenue received in 2001/02 fiscal year, when income from health services almost trebled to KD26.5m (US$86.3m). Revenue levels from this source steadied before being projected to decline to KD14.1m in 2004/05. The health ministry is the third-largest public-sector employer, after the ministries of education and interior, but only half of its 28,000 staff are Kuwaiti. The ratio of doctors and nurses per head of the population is higher in Kuwait than in other Gulf countries, according to data provided in the latest Statistical Abstract published by the Ministry of Planning.

Health indicators Infant mortality rate (per 1,000 births) 8Life expectancy at birth (years) 76.8Health expenditure per head (US$; PPP rates) 552

Public health expenditure (% of GDP) 2.9Private health expenditure (% of GDP) 0.9

Physicians (per 100,000 persons) 15.3

Source: UN Development Programme, Human Development Report 2005.

Natural resources and the environment

Kuwait is very largely a desert, with no fresh groundwater other than some brackish oases. Natural vegetation is extremely sparse, which leaves the desert soil very fragile. Wildlife is largely limited to insects and small reptiles. The coastline of Kuwait Bay and to the north is composed of mudflats and shoals. Other than huge hydrocarbons deposits and modest supplies of limestone, the country possesses negligible natural resources. Most of Kuwait’s oil is in the “super-giant” Burgan field, south of Kuwait City. Smaller fields in the west and north of the country are due for further development and there are offshore deposits in the Neutral Zone. Kuwaiti export blend crude is relatively sour (high in sulphur) and, at 31° API, is medium-heavy (that is, with low calorific value).

Iraq’s invasion of Kuwait in 1990 and its aftermath had severe environmental consequences. In 1997 Kuwait filed a US$16.3bn claim against Iraq for environmental damage (although only a small proportion of this has been accepted by the UN Compensation Commission). Iraq’s mass destruction of oil wells, the huge oil spills caused by allied air strikes against the Sea Island loading terminal and the use of heavy armoured vehicles triggered an environmental catastrophe. Marine wildlife, including fish, invertebrates and the endangered dugong, was devastated. The shallowness of the water and intensity of solar radiation have helped the marine environment to recover. However, concerns emerged that Iraq’s “third river” project, involving drainage of the southern marshlands, adversely affected the discharge of fresh water (and hence the concentration of pollutants) from the Shatt al-Arab into the Gulf around Bubiyan island. The destruction of desert soils is also hazardous. Desert sandstorms now contain a higher concentration of by-products of the 1991 oil fires. Statistics are hard to obtain, but there are fears that this contamination has brought an increase in respiratory complications and allergies.

Environmental issues

Kuwait 21


Transport, communications and the Internet

Kuwait has good transport facilities and plans to upgrade these further to enhance its capacity as an international transport hub and gateway for the eventual reconstruction of Iraq. There are two commercial ports, one at Shuwaikh and one at Shuaiba. A major three-phase project to develop a commercial seaport on Bubiyan island received cabinet approval in November 2004. Work was scheduled to begin in 2005—although at the time of going to press it had not done so—and to continue to 2016. In the early 1980s Kuwaiti planners developed an ambitious scheme to turn Shuwaikh into a free-trade zone (FTZ), acting on an idea first approved in legislation introduced in 1955. The FTZ was officially established in May 1998 and inaugurated, after some delays, in November 1999. Incentives to attract commercial, industrial and service companies include 100% foreign ownership, no company taxes, and no currency restrictions. The first phase of the planned four-phase development saw virtually 100% take-up. Although this represents 300 or more small firms, made up mostly of traders, including from other Gulf Co-operation (GCC) states and Iran, the number of visits by container ships has been relatively low.

The National Real Estate Company (NREC) runs the FTZ as essentially a private-sector operation. However the NREC is more than 50%-owned by the Kuwait Investment Authority, and complaints have been made about the amount of government regulation affecting the zone’s operation. The main focus has been on the 60m-strong Iranian market, and on Iran as a conduit for trade with Central Asia. However, the original conception of the zone, and its development in the 1980s, had Iraq more in mind. Kuwaiti planners believed that the FTZ could strengthen Kuwait as a trading hub, linking it more extensively with its northern neighbour, as well as Iran, Syria and Jordan. Following the change in regime in Iraq in 2003 the FTZ is seen as more able to capitalise on Kuwait’s advantageous location, having been dwarfed by the volume of goods passing through the Jebel Ali free zone in the southern Gulf emirate of Dubai. However, Kuwait also envisages setting up a special FTZ area around Abdali on the Kuwaiti side of the Iraq border. In a reflection of the frustration at the bureaucracy affecting the Shuwaikh FTZ, the Abdali FTZ is intended to be passed to 100% private management on completion. However, Iraq’s unstable political and economic development looks set to limit the pace of this project.

Kuwait operates its own tanker fleet: four crude carriers with a total capacity of 1,139,299 dead-weight tonnes (dwt), 15 product carriers of 705,421 dwt, two carriers for crude or products of 589,478 dwt, and six liquid petroleum gas (LPG) carriers of 289,632 dwt. The state-owned Kuwait Oil Tanker Company (KOTC) operates the tanker fleet, but it ran into controversy in the early 1990s after embezzlement charges were brought against senior officials. In August 1998 the Supreme Petroleum Council approved proposals to privatise KOTC. These failed to get beyond the drawing-board, but in 2005 the plans were revived, with the aim of transferring 75% of shares in KOTC to the private sector over three years.

Kuwait has an excellent road network, covering 4,967 km. However, routes into Kuwait City and around schools become clogged with traffic at peak hours.

Good port facilities

A large tanker fleet

Roads

22 Kuwait


Traffic problems have been aggravated by unplanned suburban development and heavy reliance on the use of private cars. Petrol was heavily subsidised until 1999, when prices were raised by 30-50%, but with market prices for petrol having soared recently, those within the emirate remain cheap. Public transport use is mainly restricted to unskilled foreign workers. The government plans to build a causeway to link Kuwait City, Subiya and Bubiyan island.

Capacity at Kuwait International Airport is currently strained, with around 30 passenger airlines flying in and out. The Civil Aviation Authority (CAA) reported a rise of almost 10% in passenger departures in June 2005, which numbered 491,000, compared to June 2004, when they numbered 449,000. The CAA reports that the number of arrivals in June 2005 was 217,500, up 8.4% on June 2004, when they numbered 200,700. The total capacity is put by the CAA at 6m passengers a year, though there are plans to raise it to 20m by building a new terminal. Plans to resume direct flights to Iraq remain on the back-burner. Over time, however, Kuwait hopes that the planned expanded airport capacity will exploit its location at the head of the Gulf to enable the country to become an air transport hub. Nevertheless, doubts remain as to even the long-term likelihood of this aspiration being realised, given the competing appeal of Dubai, in particular, as a transport and communications centre in the Gulf.

Fixed telephone lines had reached 95.3% of the Kuwaiti population by 2003, according to an independent Amman-based telecoms company, Arab Advisors Group. The National Assembly (parliament) rejected plans to privatise basic telephone services in 1997, although it ended the monopoly of the semi-private mobile-phone operator, the Mobile Telecommunications Company (MTC), which led to a big reduction in MTC’s access charges. A competitor to MTC, the National Mobile Telecommunications Company (Wataniya), also part government-owned, launched its service in 1999. Behind Wataniya Telecom is Kuwait Investment Projects Company (KIPCO), a holding company owned by Sheikh Hamad al-Sabah al-Ahmad al-Sabah, one of the prime minister’s sons. In 2004 the National Assembly’s Financial Affairs Committee approved draft legislation allowing a third mobile-phone operator. At that point, MTC and Wataniya had an estimated 1.8m customers from a total population of 2.5m—one of the highest cellphone penetration rates in the world. Arab Advisors Group has projected that the rate could rise from around 72% to 86% by 2008.

Kuwait’s Internet penetration rate is similar to that in most other GCC states. According to latest data from the International Telecommunication Union (ITU), Internet penetration in Kuwait in 2003 had reached 23% of the population, against 27.5% in the UAE and 15% in Saudi Arabia. A strong increase in Internet use throughout the GCC is expected during the next five years, as broadband assumes an increasing part of service provision in households and in the business environment. The high penetration of the Internet in Kuwait, compared with that in Saudi Arabia, partly reflects the former’s more liberal attitude to its use. However, there are some restrictions. The communications ministry has withdrawn licences from some Internet cafés, alleging infringements of codes of decency, and regulations have been introduced to

Airports

Telecommunications

Kuwait 23


tighten controls on Internet access. Kuwait has around 300 licensed Internet cafés and entertainment centres offering Internet services.

Although Internet service provision is semi-competitive in Kuwait and the mobile-phone network is operated by a duopoly, the fixed network remains under a state-run monopoly. In theory, the latter system permits cross-subsidisation, with revenue from heavy business use helping to reduce charges to residential users. In practice, however, this arrangement is weakening. The National Bank of Kuwait (NBK) has set a trend by moving all its branch communication services from lines leased from the public network of the communications ministry to its own independent broadband network.

An allied development of the existing Shuwaikh FTZ is the so-called Future Zone Project, a private-sector venture that enjoys strong political backing. The project is designed to cater to the e-commerce and media and communications requirements of companies operating in the FTZ. Located adjacent to the customs-free zone and Kuwait University, “Future Zone” enjoys tax exemption and long-term leasing arrangements. However, as with the FTZ itself, it has not been as successful as the government expected, not least because of competition from Dubai as a regional trade and communications hub.

The Kuwaiti press is relatively free by regional standards, partly because of a relatively pluralistic political tradition and partly because the government came under international pressure after the 1991 war to revoke pre-publication censorship. Criticism of the emir is not tolerated, although informed speculation on succession issues does occur. In common with neighbouring states, the licensing of new titles remains in the government's hands and is not

The media

24 Kuwait


subject to legal appeal. This situation is periodically challenged by more liberally minded MPs, but to no avail. A new draft press law has been in circulation for several years but has not secured significant parliamentary support. Although the bill contains liberalising elements, the government’s revived enthusiasm for the legislation in the wake of security problems in January 2005 seemed to stem from aspects of it that could be used to restrict media activity; it was therefore rebuffed by liberals in the National Assembly. There are five Arabic-language daily newspapers, Al Qabas, Al Siyassa, Al Watan, Al Anbaa and Al Rai al-Aam, and two English-language dailies, Arab Times and Kuwait Times. The Kuwaiti parliament has been televised (although not live) since 1999. Satellite television is popular, although some Islamists have called for it to be banned for transmitting allegedly immoral material.

Energy provision

Kuwait relies on desalination plants for its water supplies, and as in most Gulf states, power generation and water desalination are combined for greater efficiency. Electricity demand growth of around 7% per year is encouraged by government subsidies and driven by rapid population growth. The government earmarked KD312m (US$1bn), or 43% of its development spending, for electricity and water development in 2003/04, although this decreased to KD260m in each of the following years. Kuwait budgeted to raise KD85m in electricity and water charges in 2003/04, and this was due to increase to KD88.7m in 2004/05 and KD107.1m in 2005/06. Actual revenue from these sources was KD75m in 2003/04 and KD79.5m in 2004/05. In 2003/04 this represented 20% of total government revenue from services. According to Ministry of Electricity and Water forecasts, demand for desalinated water was expected to rise from 284m gallons/day (gal/d) in 2001 to 358m gal/d in 2005. Peak demand for electricity was expected to rise from 6,902 mw in 2001 to 9,046 mw by end-2005. According to 2005 data from the UN Development Programme (UNDP), Kuwait’s electricity consumption per head, at 16,544 kwh, is the world’s seventh highest, exceeded by only Qatar among the Gulf states.

Petrol prices have traditionally been heavily subsidised. As most of Kuwait’s oil, including that from the Burgan field, costs less than US$1/barrel to produce, subsidising domestic prices does not directly cost the government a great deal—although it does deny it a potentially high source of revenue. In 1999, however, prices were raised by 30-50%. Aviation and bunker fuel is already priced at international levels and other product prices are approaching these levels.

Consumption grows rapidly

Petroleum product prices are rising

Kuwait 25


The economy

Economic structure Main economic indicators, 2004 Real GDP growth (%) 7.2

Consumer price inflation (av; %) 1.8Current-account balance (US$ bn) 18.9

Total external debt (US$ bn)a 13.1Population (m) 2.64Exchange rate (KD:US$; av) 0.295

a 2002.

Sources: Central Bank of Kuwait, Quarterly Statistical Bulletin; Public Authority for Civil Information; IMF,, International Financial

Statistics; Economist Intelligence Unit.

The Kuwaiti economy is dominated by petroleum, which accounts for 90-95% of merchandise export earnings, over 80% of budget revenue and around 45% of nominal GDP. The manufacturing sector is dominated by downstream petroleum industries such as oil refining and petrochemicals. Manufacturing excluding oil refining contributed just 2.5% of real GDP in 2003. Kuwait’s largest oilfield is the Burgan field, situated south-west of Kuwait City. The principal refineries and industrial centres are located along the coast south of Kuwait City in Ahmadi and Shuaiba.

Kuwait’s economy is small and open. The trade/GDP ratio, a typical measure of the openness of an economy, is usually around 90%, similar to economies of other Gulf Co-operation Council (GCC) members. Gross fixed capital formation has accounted for around 9% of GDP in recent years. Public and private consumption comprised 75.5% of nominal GDP in 2003, up from 65.5% in 2000, although the increase was linked to the presence of coalition troops related to the US-led invasion of Iraq in March 2003.

Comparative economic indicators, 2004 Kuwaita Qatara UAEb Saudi Arabiab Omanb

GDP (US$ bn) 53.0 28.5 103.1 250.6 24.8

GDP per head (US$) 19,258 38,293 23,870 10,462 9,175a

GDP per head (US$ at PPP) 25,785 41,348 19,075 11,804 12,217a

Consumer price inflation (av; %) 2.0b 6.8b 4.4 0.5 0.3

Current-account balance (US$ bn) 18.9b 7.4 12.7 51.5 0.6

Current-account balance (% of GDP) 35.6 26.1 12.3 20.5 2.4

Exports of goods fob (US$ bn) 30.2b 17.9 82.7 126.1 13.3

Imports of goods fob (US$ bn) -10.9b -4.8 -54.2 -40.8 -7.9

External debt (US$ bn) 14.2 18.2 27.7a 33.6a 4.3a

Debt-service ratio, paid (%) 2.7 10.2 1.6a 2.0a 8.1a

a Economist Intelligence Unit estimates. b Actual.

Source: Economist Intelligence Unit, CountryData.

An open economy

The economy depends on oil

26 Kuwait


Economic policy

The comparatively early development of Kuwait’s oil reserves allowed the country to build its basic infrastructure by the early 1980s and to establish a strong “cradle-to-grave” welfare state. However, the burden of financing the 1991 Gulf war and rebuilding after the Iraqi occupation forced the government to liquidate a substantial portion of its huge overseas assets and to borrow from international markets. The burden of reconstruction expenditure after the 1991 Gulf war, combined with periodic dips in oil revenue, forced the government to draw down periodically on its Reserve Fund for Future Generations (RFFG). Kuwait’s oil production recovered steadily, reaching pre-war levels of output by 1993, easing the burden of reconstruction costs. However, oil earnings fell significantly in 1998/99 as oil prices plunged. This emphasised the limited extent of revenue from the private sector. Fiscal pressure in 1998 was eased by high levels of state investment income as well as by profits of public entities not officially counted in the budget. These earnings continue to represent a substantial supplement to oil revenue, being estimated at US$5bn in 2004 and officially projected at US$6.5bn in 2005. A run of six consecutive fiscal surpluses to end-March 2005 has enabled money withdrawn from the RFFG to be repaid.

The government continues to emphasise its commitment to a structural reform programme drawn up after the 1991 war, which was designed to reduce its involvement in the economy and increase the role of the private sector. However, much of the limited private-sector activity is driven by public-sector spending. High levels of government revenue and longer-term fears that privatisation would jeopardise the authority conferred by stewardship of the oil-funded welfare state, have acted as major disincentives for any significant moves toward selling off publicly owned assets. There is also considerable suspicion of economic reform proposals in the National Assembly (parliament), partly reflecting the potential employment issues involved. Fears that the benefits of privatisation would go to members or allies of the government has also hindered large-scale sell-offs of state assets.

Key figures in economic policy

Sheikh Sabah al-Ahmed al-Jabr al-Sabah

Sheikh Sabah chairs both the Supreme Petroleum Council and the Higher Committee for Development and Economic Reforms, which were formed in 2001. His commitment to the reform programme, his enhanced authority after being made prime minister in July 2003 and the government’s strengthened position in the National Assembly (parliament) elected in July 2003, have increased the focus on long-standing economic proposals.

Sheikh Ahmed al-Fahd al-Ahmed al-Sabah

This popular member of the ruling family is tipped as a possible crown prince (and therefore heir apparent), or at least prime minister, in the future. He took over exclusive responsibility for the oil portfolio, which has been combined with electricity in a new Ministry of Energy, when the new cabinet was formed in July 2003. Sheikh Ahmed had previously been acting information minister, a factor that

State-led growth

Kuwait 27


had prevented him giving his full attention to the oil portfolio. The previous oil minister, Adel al-Sbaih, resigned in early 2002, calling for a major shake-up in the oil industry after a series of accidents.

Bader Mishari al-Humaidhi

Appointed finance minister in April 2005, Mr Humaidhi is a former director-general of the Kuwait Fund for Arab Economic Development, who held that post for nearly 20 years. In his mid-fifties, he took over the finance portfolio when his predecessor, Mahmoud Abdel-Khaliq al-Nouri, resigned after only narrowly surviving a no-confidence vote in the National Assembly. In recent years the job of finance minister has not been monopolised by the ruling family. However, the prime minister remains ultimately responsible for authorising key decisions affecting finance or oil policy and Mr Humaidhi is not expected to initiate any significant changes.

Bader al-Saad

Appointed managing director of the Kuwait Investment Authority with effect from December 2003, having previously been managing director of the Kuwait Financial Centre, an investment company.

Hani Husain

Chief executive officer and deputy chairman of the Kuwait Petroleum Corporation (KPC), Mr Husain was nominated in August 2004 to replace Nader Sultan, who had held the post of deputy chairman since 1994 and had asked not to be reappointed. KPC, which is chaired by the energy minister, is the state-owned co-ordinating company for the exploration, distribution, marketing and sale of Kuwaiti oil and oil-related products, as well as for the Kuwaiti oil sector’s overseas activity and investment.

Jamal al-Umar

Chairman of the National Assembly’s Budget Committee. He raised fresh questions in April 2004 about the contentious Project Kuwait, which envisages foreign companies developing Kuwait's northern oilfields.

Nevertheless, the government has privatised some smaller state assets and is seeking to encourage private-sector investment, including non-Kuwaiti investment, in new industries. In March 2001 the National Assembly passed a foreign investment law that allows foreign investors to establish companies in Kuwait without a local sponsor or partner. The aim of the law is as much to attract foreign management expertise as additional capital. The banking sector has also been opened to foreign participation, following the National Assembly’s approval of an amendment to the banking law in January 2004. However, the National Assembly has delayed approving a comprehensive privatisation law, and privatisation of state enterprises in the fields of utilities and communications will require legislative approval on a case-by- case basis.

Some divestment of state assets has taken place through the partial sale of stakes owned by the Kuwait Investment Authority (KIA) in companies listed on the Kuwait Stock Exchange. The divestment programme began in 1994 but was interrupted in 1997-2000 because of the stockmarket’s weakness. It resumed in 2001 with the sale of KIA shares in the Mobile Telecommunications Company, and, by early 2002, total proceeds from KIA’s divestiture programme had

Privatisation and foreign investment

28 Kuwait


reached KD1bn (US$3.4bn) from the sale of holdings in 31 companies. In mid-2002 state shares in the Bank of Kuwait and the Middle East were offered for public subscription. Privatisation of existing state utilities is not seen as a pressing option, but capacity expansion—for example, in the power and water sectors—is being tendered to the private sector. In 2001 Kuwait became the first country in the region to offer a 30-year concession for wastewater treatment to a private consortium on a build-operate-transfer basis. Plans to privatise 75% of the Kuwait Oil Tanker Company (KOTC) resurfaced in 2005, having remained dormant since the late 1990s.

The small scale of Kuwait’s privatisation activity is demonstrated by the fact that one of the most significant moves in this direction was the Supreme Petroleum Council’s decision in June 2005 to allow a newly formed firm called the First Company for Local Fuel Marketing, 40% owned by Kuwait Petroleum Corporation (KPC), to take over 40 of the country’s 110 petrol stations and to open ten new ones. In theory, the government has plans for the eventual part-privatisation of KPC, along with the Kuwait Public Transport Company and port and public transport facilities. Privatisation of the national airline, Kuwait Airways Corporation (KAC), is obstructed by its persistent lack of profitability and accumulated debt. Parliamentary concern for protecting national interests can be expected to delay the sale of other state assets. When the government first tried to privatise the telecommunications holdings of the Ministry of Communications in 1992, the National Assembly spent five years deliberating the proposal before finally rejecting it. MPs feared that privatisation without adequate regulation would create private monopolies, benefiting a small number of wealthy people, while leading to job losses among Kuwaitis.

Kuwait’s monetary policy options are extremely limited. The government has pegged the dinar to the US dollar since January 1st 2003. However, the dinar had previously been pegged to a US dollar-dominated basket of currencies, so the impact on the stability of the local currency was limited. The decision to peg the dinar exclusively to the US dollar reflected plans to create a single currency for the six member states of the Gulf Co-operation Council (GCC) by 2010. However, the extent to which the GCC will maintain this objective against significant economic and political obstacles remains in doubt.

There are no capital controls. Domestic interest rates (set by the Central Bank of Kuwait) move in line with US interest rates, although some adjustments are made in accordance with liquidity levels, which have fluctuated in recent years, mainly owing to changes in UN compensation payments to Kuwait for damage arising from the Iraqi invasion in 1990. From 2001 to 2002 the positive differential between average Kuwaiti dinar and US dollar three-month interest rates increased from 37 to 90 basis points, falling back to an average of 75 basis points in 2003 and 54 basis points in 2004 before switching to a negative differential of 20 basis points during the first quarter of 2005. The gradual erosion of the positive differential occurred as rises in Kuwaiti interest rates failed to keep pace with those of the US Federal Reserve. However, by the end of the second quarter of 2005 the positive differential had begun to re-emerge as high liquidity levels continued to encourage rises in Kuwaiti rates.

Monetary policy

Kuwait 29


The government’s fiscal policy options are limited in terms of both expenditure and revenue. Budget revenue is dominated by oil, and thus determined by world crude prices. OPEC, of which Kuwait is a member, seeks to stabilise prices through production quotas, which have at times kept output below capacity. Non-oil revenue is mainly made up of taxes on foreign companies and some user fees for government services. There is strong opposition within the National Assembly and the ruling family to new revenue-raising measures such as a consumption tax or personal income tax. Soaring oil revenue since 2000 has undermined calls for the introduction of additional taxation.

There is limited flexibility on budgeted expenditure, mainly because of the high level of public-sector employment. Wages and salaries accounted for 31.6% and 29% of actual fiscal spending in 2003/04 and 2004/05 respectively. In absolute terms, allocations under this heading were due to rise from KD1.74bn in the 2004/05 budget to KD1.86bn in the budget for 2005/06, in line with a National Assembly decision to award increases in pay and pensions to Kuwaiti nationals. The decision followed payment of a one-off bonus to all Kuwaitis on the emir’s instructions in 2004 and coincided with a decision to exempt each Kuwaiti household from KD2,000-worth of electricity bills. Handouts like these, seen as a means of distributing oil revenue windfalls to all citizens, are not conducive to promoting the workforce mobility or energy conservation that Kuwait ultimately needs. Most austerity measures in recent years have targeted items such as equipment procurement and development projects.

The official budget presents only a partial picture of Kuwait’s fiscal position, as it excludes government investment income. The government is legally obliged to place 10% of its revenue (excluding investment income) into a special account set up in 1976, the RFFG, and to record that saving as an expenditure. The rationale for this provision lay in the finite nature of oil reserves and the country’s limited scope for economic diversification. Ministers admitted in June 2000 that KD25.5bn had been withdrawn from the fund since the 1991 Gulf war to meet budget deficits and costs arising from the Iraqi invasion. The chairman of the National Assembly’s Budget and Closed Accounts Committee revealed at the end of 2002 that a further withdrawal had occurred of some KD1.5bn, of which only a nominal KD5m (US$16.7m) had been repaid. However, a closed session of the National Assembly was told that the RFFG stood at KD21.9bn at end-March 2004, up from around KD15bn in 2000.

Government budget, 2005/06 (KD m; fiscal year, Apr 1st-Mar 31st)

Total revenue 4,607 Oil 3,914 Non-oil 693

Total expenditure 6,950Balancea -2,343

a Before RFFG allocation.

Source: Ministry of Finance.

Given the lack of agreement about the urgency of economic restructuring, consensus is unsurprisingly lacking on the priorities and modalities of a reform

Fiscal policy

Budget peculiarities

Reform priorities

30 Kuwait


programme. In its Article IV consultations with Kuwait in recent years, the IMF has advised Kuwait to strengthen its ability to raise non-oil revenue in order to minimise dependence on the volatile oil market. IMF Country Reports on Kuwait released in June 2004 and July 2005 urged accelerated implementation of the official reform programme. They noted that benefits would accrue from market pricing of publicly supplied goods and services; a reduction in and targeting of subsidies; and flexible wages with a cautious “Kuwaitisation” policy. The policy of Kuwaitisation entails replacing non-nationals with Kuwaitis according to a quota system, as set out in the labour market law of May 2000 and Decision No 904 of 2002, both of which are resented by the private sector. The IMF has encouraged the government to place more emphasis on integrating the foreign and national labour markets, and to link wages to competitiveness and productivity with the aim of encouraging private investment. The government, however, has used the 2000 labour market law to provide financial incentives to the private sector to hire Kuwaitis.

Although privatisation is likely to remain a problem for the National Assembly, whose members generally do not want to be seen to jeopardise comfortable and secure jobs for Kuwaiti nationals, there is an understanding of the need for some structural reforms among MPs and within the ruling family. The difficulty is in implementing measures that would radically shift the central role played by the state in the management of the economy and the provision of social welfare. The challenge of creating private-sector jobs requires a significant culture change, given that overstaffing in the public sector has kept unemployment historically low. Significantly, the number of registered unemployed Kuwaitis rose by 44% in the year to June 2004, apparently because people who had not previously indicated any intention of working reported their availability for work to the Civil Service Commission in the hope of collecting unemployment benefit. The unemployment rate among Kuwaitis was 5.2%, according to IMF figures. Meanwhile, government interest in proposals to raise some taxation in order to increase fiscal revenue is undermined by high revenue streams and objections in the National Assembly. The cabinet assented to the drafting of a personal income tax law in early 2004. However, the legislation was a hangover from tighter fiscal years. Furthermore, it appeared to target mainly small traders. Despite tabling it, the government is unlikely to pursue parliamentary approval for such a politically controversial measure. In contrast, the draft law on corporate taxation, designed to reduce the tax ceiling from 55% to 25% of company profits, was approved by the National Assembly’s Finance and Economic Affairs Committee in March 2004. It is an essential complement to the law on foreign direct investment passed in 2001.

Economic performance

Gross domestic product (% real change)

Annual average 2003 1999-2003GDP 9.7 2.0

Source: Central Bank of Kuwait, Quarterly Statistical Bulletin.

Kuwait 31


Kuwait’s economy is dominated by oil. Nominal and real GDP growth rates have fluctuated significantly since 1990 as a result of the Iraqi invasion, which severely curtailed oil output for nearly three years, and the volatility of international oil prices. The substantial shrinking of the economy in 1990 and 1991 was largely reversed in 1992 and 1993, with GDP growing by 33.3% in real terms in 1993 alone, according to official figures. By end-1994, after further real GDP growth of 8.4%, the broad structure and performance of the economy had returned to pre-invasion levels. Since then, oil prices have risen, plunged, and risen again, causing pronounced fluctuations in the value of economic activity. In 1996, after post-war reconstruction of oil and other facilities had led to fiscal deficits, the government cut spending, which contributed to a 2.7% contraction in the real economy. More recently, contractions in real GDP have followed oil output reductions resulting from OPEC quota cuts and accidents at oil facilities. In 2003, however, higher oil output in the wake of the US-led invasion of Iraq and fewer interruptions to Kuwaiti production returned the economy to positive real growth of 9.7%, with further growth of 7.8% estimated by the Economist Intelligence Unit for 2004. Real growth will have slowed in 2005, reflecting relatively flat oil output, owing to Kuwaiti oil capacity constraints.

The public sector’s important role in the economy is reflected in the expenditure measure of GDP, with much private expenditure resulting from state employment and welfare spending, and oil-dominated exports. State spending has been the mainstay of the domestic economy since the production of oil, although the government is formally committed to reducing the scale of its reliance on this revenue stream.

Gross domestic product by expenditure, 2003 (current market prices)

KD m % of totalFinal consumption 9,392 75.5 Private 6,169 49.6 Government 3,224 25.9Gross fixed capital formation 1,076 8.6Exports 6,817 54.8

Imports 4,844 38.9GDP 12,441 100.0

Source: Ministry of Planning.

Since the end of the 1991 Gulf war, the government has removed subsidies on many commodities and services. However, the basket of goods from which the inflation index is compiled has not reflected these upward pressures. Residents claim that the prices of many goods and services rise faster than official inflation rates. The government would thus appear to have squeezed real wages, and, in many cases, nominal wages have also declined.

Inflation (% real change)

Annual average 2004 2000-03Consumer prices 2.03 1.25

Source: Ministry of Planning.

Oil dominates the economy

Inflation

32 Kuwait


Regional trends

Kuwait is a small country and does not have a well-established regional structure. Much business activity is concentrated in the capital, Kuwait City, while the country’s oil industry is centred on the purpose-built “oil town” of Ahmadi, where both downstream operations and gathering and loading for Kuwait’s upstream activities take place.

Economic sectors

Agriculture

Agriculture and fishing account for only 0.6% of Kuwaiti GDP, and do not provide a substantial source of employment. Only 0.3% of the total land area is used for crops. Some 99% of the land area is officially designated as “pasture land”, although it can support only limited numbers of sheep, goats and camels. There are some farms, mainly in the south and south-west, that cultivate vegetables.

Mining and semi-processing

Oil was discovered in Kuwait in 1938 and production began in 1946. Output peaked at 3.3m barrels/day (b/d) in 1972 but was then reduced substantially to conserve oil reserves. The Greater Burgan structure has reserves of some 70bn barrels and produced an estimated average of 1.2m b/d in 2000, making it the world’s third-largest oilfield in terms of production, after the Ghawar field in Saudi Arabia and Cantarell in Mexico. The Raudhatain and Sabriya fields are also classed as giant oilfields, and produced around 200,000 b/d and 150,000 b/d respectively in 2000. Production at Raudhatain was disrupted following an explosion at an oilfield installation in January 2002, which prompted the Kuwait Oil Company (KOC), responsible for upstream development and production, to plan the upgrading and modernisation of facilities. Although restricted to 1.85m b/d in 2002 under the OPEC quota system, Kuwaiti output increased to 2.2m b/d in 2003 as quotas and production problems eased. At an average of 2.45m b/d in 2004, Kuwaiti output was markedly above quotas, as was that of other OPEC producers. A tight international oil market and ongoing concerns about security of supply in the Gulf region combined to create strong upward pressure on prices, enabling Kuwait, in common with other producers, comfortably to expand output. Plans for expansion of oil export facilities at Mina al-Ahmadi are projected to raise Kuwait’s overall crude export capacity to 3mn b/d by 2007, from a projected 2.8m b/d following the restarting of a new oil gathering centre at Raudhatain this year. At current production rates, Kuwait has sufficient reserves for more than 100 years of output.

Oil is predominant

Kuwait 33


Oil production (‘000 b/d)

2004 2005 2001 2002 2003 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Total production 1,870 2,175 2,280 2,250 2,308 2,390 2,413 2,400 2,405

Source: International Energy Agency, Oil Market Report.

Kuwait Petroleum Corporation (KPC) has overall responsibility for investments in the country’s domestic and foreign oil industry, and its management has taken steps to improve integration among the various KPC subsidiaries, to make them accountable to a single board of directors. While KOC is responsible for running the upstream sector at home, KPC has been active in upstream activities abroad through another subsidiary, Kuwait Foreign Petroleum Exploration Company. It has interests in a number of countries, including the UK, which altogether gives it access to some 75,000 b/d of equity crude. Other subsidiaries are responsible for such downstream functions as refining, marketing and retail sales. A KPC subsidiary, Kuwait Petroleum International, owns equity in refining ventures in Sweden, Denmark, Italy and Singapore, and has been involved in negotiations to acquire shares in ventures in India, Pakistan and Thailand.

The upstream oil sector in Kuwait has remained closed to foreign interests since nationalisation in the 1970s, with the exception of the 40-year concession held by the Japanese-owned Arabian Oil Company (AOC) in the Kuwaiti part of the Neutral Zone. On expiry at the start of 2003, this was handed over to a new

34 Kuwait


state firm, the Kuwait Gulf Oil Company, and AOC now provides technical services under contract. The Supreme Petroleum Council (SPC) is proposing to involve other international oil companies in a development scheme known as Project Kuwait, involving the expansion of four oilfields in the north of the country and two in the west. KPC is focusing first on the Raudhatain, Sabriya, Ratga and Abdali fields in the north, which have proven reserves of nearly 10bn barrels, aiming to double their combined production capacity to 900,000 b/d within two to three years of the start of the expansion project. Production capacity at the western fields of Minagish and Umm al-Ghudair is due to be raised from 190,000 b/d to 460,000 b/d over a similar period. This will reduce reliance on the Burgan field without reducing overall output. The government seeks to raise total sustainable production capacity from what in 2005 was projected at 2.8m b/d, to 3.5m b/d by 2010 and 4m b/d by 2020.

Foreign companies involved in Project Kuwait are expected to invest more than US$8bn, recouping their costs through fees paid on the basis of KPC’s oil revenue from the fields, as Kuwait’s constitution forbids foreign ownership of natural resources. A draft law regulating this proposed arrangement was approved by the SPC and the cabinet in March and April 2000. It stated that, in all but the most exceptional circumstances, Kuwaiti nationals should make up at least 70% of the Project Kuwait workforce and that local firms should have priority for subcontracts. In return, foreign oil companies would have 20-year operating licences, extendable to a maximum of 30 years.

It is a reflection of the domestic political sensitivity surrounding Project Kuwait that the National Assembly (parliament) passed a resolution in March 2001 declaring that the steps that had already been taken on the scheme were null and void. The resolution stated that every future contract signed with a foreign oil company should be submitted separately for parliamentary approval, and included a clause designed to deter foreign oil companies from hiring local agents. The draft law remained with the National Assembly, unapproved, even though KPC went ahead with qualifying interested bidders. KPC did this on the basis that the constitutional prohibition on conceding ownership over mineral resources does not relate to service agreements, which do not give international oil companies (IOCs) ownership over any part of the oil resource, oil revenue or the strategic direction of any aspect of oil production. Instead, the service contracts reward, at fixed rates, an IOC’s investment in the designated oilfields. MPs who argue that approval should be the responsibility of the National Assembly assert that these are technical attempts to get round the fact that the rewarding of large foreign investments will come from future Kuwaiti oil revenue, and therefore the principle of exclusive national control is being compromised. Although KPC has operated technical agreements with IOCs since 1992, if the government were to back such a switch in tactics regarding Project Kuwait, it would be fiercely resisted in the National Assembly.

In August 2003 the SPC approved the composition of three international consortia bidding for the work, and in August 2004 it approved the operating services agreement (OSA) relating to their bids. However, the government has sought to ensure that it has the approval of the National Assembly for what is essentially a service contract, and, following approval by the finance and

Kuwait 35


economy committee, is seeking to get legislation that, after an amendment to tighten the focus of Project Kuwait, will approve the deal by mid-2006. Nonetheless, a number of MPs have persisted with their objections, arguing that foreign companies should not be given production responsibility even on a service basis. With some MPs demanding that the whole of the draft contract that would be signed with a foreign consortium be appended to the proposed legislation, approval could continue to be a slow process. However, if it wishes, the government possesses sufficient support in parliament to curtail some of the debate and push the legislation through.

Kuwait has three refineries, at Mina al-Ahmadi, at Mina al-Abdullah and at Shuaiba. A fourth, Shuaiba II, was approved by the SPC in 2004; its planned capacity was increased in 2005 from 430,000 b/d to 615,000 b/d, making it the biggest in the Middle East. The refinery, likely to cost US$6bn, is due to start production in 2010 and will replace the existing 200,000 b/d refinery at Shuaiba. It will boost Kuwait’s refining capacity from 917,000 b/d in 2005 to more than 1.5m b/d by 2010. The largest existing refinery, Mina al-Ahmadi, which has a rated capacity of 440,000 b/d, was badly damaged by an explosion, which killed six people and injured 50, in June 2000. Capacity returned to 285,000 b/d by mid-2001, but repair work was not completed until January 2004. A gas leak at Shuaiba, also in June 2000, killed two people and injured four and was said to have been the sixth incident of its kind at the refinery since 1991. Another small fire occurred in April 2001, and in April 2002 workers at the refinery had to be evacuated when a fire broke out at the nearby petrochemicals complex. Domestic consumption of petroleum products rose from 126,000 b/d in 1996 to 230,800 b/d in 2004.

Kuwait has built up an extensive overseas network of refineries and product distribution outlets to provide guaranteed markets for its crude output. Some 250,000 b/d (40%) of product exports are marketed via this network, which is concentrated in Europe, mainly under the Q8 brand. A further KPC purchase of a petrol retailing network in Belgium in 1999 increased KPC’s market share in Belgium to 17%, second only to Shell.

Kuwait has natural gas reserves of around 52.4trn cu ft, about 1% of the world’s total. Virtually all gas in Kuwait is associated with oil, with the great majority of current production either flared or reinjected to maintain pressure. Local consumption has been limited, but development of the petrochemicals industry, including the major Equate projects that are part-owned by KPC’s petrochemicals subsidiary (see Manufacturing), should boost domestic consumption. Gas is also bottled locally for domestic and commercial users. According to a Memorandum of Intent signed in May 2000, Qatar was to supply Kuwait with around 1bn cu ft/day of gas from its offshore North Field via a 590-km undersea pipeline for power generation and desalination plants. A Memorandum of Understanding (MoU) was signed with Iran in January 2002 for 300m cu ft/d, with a potential to reach 800m-1bn cu ft/d in the longer term. Both tentative agreements ran into delays, however, as negotiations stalled on gas prices and methods of transportation. A diplomatic row between Qatar and Saudi Arabia put the former project in limbo, as Saudi agreement is

Gas

Refineries

Overseas refineries and distribution outlets

36 Kuwait


required for a pipeline under Saudi waters from Qatar to Kuwait. After the US-led invasion and occupation of Iraq, Kuwait signalled that it was considering obtaining gas from the Rumaila field in southern Iraq, reviving a pipeline built for that purpose in the 1980s. Kuwait is also interested in exploiting reserves in the Kuwaiti portion of the disputed offshore Dorra field, over which Kuwait has reached a maritime demarcation agreement with Saudi Arabia, but which still needs final agreement with Iran on dividing the revenue. Work could progress without such an accord, and this course of action was threatened by Kuwait. However, in the light of the tensions this generated, progress is now likely only on a consensual basis. Kuwait and Iran have also agreed in principle for Tehran to supply liquefied natural gas (LNG) to the emirate.

Manufacturing

Kuwait first developed a petrochemicals industry in the late 1960s, although it was constrained by a lack of associated gas and the absence of profitable domestic and export markets for its products. After the 1991 Gulf war, the government revived the industry, partly for strategic reasons, as it was anxious that foreign firms should commit themselves to major commercial projects in Kuwait in the hope that their involvement would stiffen the resolve of industrialised countries to defend it again in the event of a future conflict.

Petrochemicals development also gave the government an opportunity to bring in more private-sector investment. The state-owned Petrochemical Industries Company (PIC) joined Union Carbide of the US and Kuwaiti private-sector investors to set up the Equate I complex. This began production in late 1997 using ethane-enriched gas as feedstock, with the capacity to produce 650,000 tonnes/year (t/y) of ethylene, 350,000 t/y of ethylene glycol and 450,000 t/y of polypropylene. Most of its output is exported to Europe and Asia. PIC’s salt and chlorine units in Shuaiba were sold to the private Al Ahlia Investment Company in April 2000.

PIC gave the go-ahead to the Equate II project in 2001. In May 2003 PIC and Dow Chemical Company (owner of Union Carbide) announced that new ethylene and ethylene derivative capacity would be added to Equate I, following an MoU signed in February. This will integrate new olefins capacity (“Olefins II”) with the Equate I plant at Shuaiba and the ethyl benzene/styrene facility nearby. It is expected that an ethane cracker producing 850,000 t/y will be built alongside a new 600,000-t/y ethylene glycol/ethylene oxide (EO/EG) unit, while a 450,000 t/y styrene monomer unit is also planned. It is also expected that at least 400,000 t/y of polyethylene capacity will be added under Equate II. The award of the engineering, procurement and construction contract for the styrene project and for the EO/EG unit was expected by end-October 2005. In addition to these projects, a new aromatics plant has been tendered as a joint venture between PIC and Dow (the “Kuwait Aromatics Company”), for which ethylene will be supplied from Equate I. International firms have since submitted bids for the engineering, procurement and construction contract, and work is expected to begin shortly.

Oil-related industry dominates

Kuwait 37


The Equate II project’s shareholding structure is to be similar to that of Equate I—but in this case will be a 42.5% for each of PIC and Dow, with a local firm, Bubiyan Petrochemical Company, holding 9-10%, and other local investors making up the remaining 5-6%. The aromatics plant will be owned by PIC and private local investors. Commissioning of the new capacity from the above petrochemical plants is scheduled to begin in early 2007.

After the Iraqi invasion, Kuwait adopted an offset programme similar to that in Saudi Arabia. The programme required foreign companies winning military or civilian contracts valued at more than KD1m (US$3.3m) to offset 30% of the value of the contract with an investment in a productive sector in Kuwait. However, red tape and the effective exclusion of the oil sector from investment limited the range of projects, and the permissibility of offset requirements has been questioned under the terms of Kuwait’s membership of the World Trade Organisation (WTO). Kuwait has signed approximately 21 offset agreements with foreign companies for amounts between US$1.65m and US$276.3m. Despite doubts about the acceptability of offset arrangements under WTO rules, interest has continued in Kuwait in ensuring an offset component to defence contracts. In 2005 US defence company Boeing agreed to provide aviation training and engineering equipment as part of an offset agreement linked to a contract for the supply of 16 Apache Longbow helicopters, the first of which was ordered by the Kuwaiti government in August.

Non-oil industry is concentrated on small-scale activities such as food-processing and production of building materials. Little of the output is export-oriented and the protective tariffs that underpin it were negatively affected by Kuwait’s membership of the customs union among Gulf Co-operation Council (GCC) countries, to which the National Assembly agreed in April 2003. There are around 4,000 privately owned manufacturing units in Kuwait, most of which employ fewer than 15 people. The main products are wooden goods, including furniture, metal products and machinery. According to the Public Authority for Industry, the number of industrial establishments, excluding chemicals, oil derivatives and non-metallic minerals manufacturers, was 629 as of end-2002. Since 1999 the most significant increase in the number of registered industrial companies was in the areas of basic metals and textiles, clothing and leather products, which increased to 16 and 21 respectively. The largest numbers of companies were in the fabricated metal products and the wood products sectors.

Construction

The construction sector is dominated by public-sector contracts, which means that activity largely reflects government spending trends. When oil revenue plunged in 1998, a moratorium was announced on major new public-sector projects and the government turned its attention to options such as the build-operate-transfer formula, as with the Sulaibiya wastewater treatment plant. A subsequent recovery in oil prices prompted the Ministry of Housing and Public Works to resurrect plans to develop the Subiya peninsula and build a causeway linking it to Kuwait City, in a project designed to have various spin-offs, such as

Offset investment

Non-oil manufacturing

38 Kuwait


tourism developments on the islands of Failaka and Bubiyan. At the same time, proposals were announced for the construction of roads, prestige office blocks and a KD30m (US$100m) sports stadium built to Olympic standards. The planned state-of-the-art tourist development project at Failaka island, situated only 20 km east of Kuwait City, has been given added emphasis since the change of regime in neighbouring Iraq. Although US troops on the island came under attack from Kuwaiti militants in the run-up to the Iraq war, this project could attract private investment owing to a reduction in regional tensions, Kuwait’s anticipated improved relations with its northern neighbour and the increased tendency for Arab tourists to holiday within the region. Overall, however, despite the impact of fluctuating government spending levels, the construction sector represents a relatively small proportion of the economy, at around 2.5% of both real and nominal GDP since 1998. In 2004 the construction sector represented a nominal value of US$1.23bn.

Residential construction is partly the domain of the Public Authority for Housing Care (PAHC) and therefore directly related to budget spending. In 1999 the PAHC started to award housebuilding contracts to private firms. The Savings and Credit Bank put a freeze on new housing loans during the second half of 2000, owing to lack of funds. To solve the problem, the government authorised the bank to issue long-term bonds to the Kuwait Fund for Arab Economic Development, which had previously funded development only outside Kuwait. From 2001 increased domestic liquidity—owing to low interest rates and a strong influx of UN compensation monies—together with a significant rise in bank credit to the real-estate sector, contributed to a sustained rise in the value of residential and commercial real estate. Since 2003 construction growth has additionally benefited from the return of Kuwaiti investment following the fall of the regime of Saddam Hussein in Iraq. The total average monthly value of residential and commercial property sales reached KD125.5m during 2004, up from just under KD100m in 2002, and this rose further to an average of KD132.6m during the first half of 2005. However, the average number of units sold each month declined from 611 in 2002 to 593 in 2004 and 567 in the first half of 2005. The corresponding rise in the average price of units was steeper in the commercial than the residential sector, although rises have generally been firm as domestic demand continues to rise on the back of high oil revenue and continued Kuwaiti investment.

Financial services

Kuwait has seven, largely privately owned, commercial banks, including one operating on Islamic banking principles, which together have around 140 branches. The Kuwait Investment Authority (KIA) acquired stakes in a number of banks after the 1982 stockmarket crash. Divestment of these assets remains an aim of government economic policy. The banking sector in Kuwait is fundamentally sound, having been rescued by the government in the early 1990s following the Iraqi occupation. The pre-eminent bank is the National Bank of Kuwait (NBK), which has 39 branches at home, as well as an international network.

Commercial banks

Kuwait 39


In 2002 NBK became the first bank in the Gulf to launch a Eurobond. The US$450m issue was rated “A-2” by Moody’s, two notches above Kuwait’s sovereign ceiling. In 2002 Moody’s, Standard & Poor’s and Fitch Ratings improved their ratings of most Kuwaiti banks, including NBK, which became the highest-rated bank in all emerging markets.

Under an amendment to the 1968 banking law, approved by the National Assembly in January 2004, foreign banks were permitted to set up operations in Kuwait. The change in banking regulations was a logical follow-up to the foreign direct investment law, which went into effect in October 2003 and allowed foreign banks to operate in Kuwait provided they received approval from the Central Bank of Kuwait (CBK). It took a change in the 1968 legislation for the CBK to be able to give its consent. A French bank, BNP Paribas, was the first to gain approval, in August 2004. It was followed in January and February 2005 by Abu Dhabi National Bank and HSBC respectively. The implications of the new legislation should not be overstated, as it restricts foreign banks to one branch and requires them to ensure that Kuwaiti nationals account for half their local workforce within a period of three years. However, this stipulation is not honoured by Kuwaiti banks and may not be as rigorously enforced as implied in the legislation. Foreign banks are already active in Kuwait in the most lucrative fields of wealth management and investment banking, through “briefcase bankers” operating quite openly out of Kuwaiti hotels. Foreign banks are unlikely to want to compete in the domestic retail banking market, which is small and already subject to intense competition.

The CBK took on a serious regulatory role only in 1984, after a debt crisis engulfed commercial banks following exposure to the collapsed informal stockmarket, the Souq al-Manakh. In line with changes to banking regulations in 2004, the CBK’s supervisory powers were strengthened to allow it to fine banks that violate laws and to intervene in the appointment of banks’ boards of directors.

Kuwait has two specialised banks, Industrial Bank of Kuwait and Kuwait Real Estate Bank, created to provide long-term credit. The three dominant local insurance companies are Al Ahlia, Warba and Kuwait Insurance Company.

After a marked decline in the late 1990s, the Kuwait Stock Exchange (KSE) saw a strong and sustained increase in the value and volume of trading from 2001, as rising oil revenue boosted trading and a downturn in global equity markets encouraged local investors to turn their attentions closer to home. The upward trend became especially marked in 2003, when it was compounded by expectations of greater business opportunities in Iraq.

The KSE was launched in 1977. After a series of boom-bust cycles, a speculative bubble on the informal Souq al-Manakh burst in 1982. Investor liquidity dried up and, despite government and KSE efforts to revive investor sentiment, it remained low throughout the 1980s. By the time of the Iraqi invasion, the government and its agencies owned more than half of the market’s shares.

The market was reopened in September 1992 but began to grow strongly only after the KSE adopted an automated trading system in 1995. Trading volumes

Other financial institutions

The stockmarket

40 Kuwait


soared until the CBK slowed the market’s growth by introducing restrictions on the purposes for which consumer credit could be made available. The KSE index (KSEI) peaked at 2,836.9 points on November 2nd 1997, but fell in each of the next three years, ending 2000 at 1,348.1. This trend was reversed in 2001, when the index rose by nearly 27%. Further boosts came with news of additional KIA share sales, and in May 2002 the index topped 2,000 for the first time since 1998, not only because of the faltering performance of stockmarkets in other parts of the world but also because, from 2000 onwards, foreigners were permitted to trade in Kuwaiti stocks.

Despite intermittent market corrections, the KSEI continued to reflect buoyant trading conditions in 2003-05. Liquidity was not adversely affected by the US-led war in Iraq, and instead was stimulated by continued UN Compensation Commission (UNCC) awards (albeit smaller in 2003) and by the expectation of improved business opportunities in Iraq. The index rose by 101.7% during 2003, 32.9% in 2004 and continued to climb steeply, albeit intermittently, in 2005, breaching the 9,000-point mark in August for the first time in its history. By September 2005 it exceeded 10,000 points, having risen by 38.6% since the start of the year. Market capitalisation exceeded US$115bn in September 2005, with 150 Kuwaiti and foreign firms listed. Concerns are voiced periodically about the possibility of a fairly sharp downward adjustment, reflecting an awareness that a high volume of stockmarket transactions are financed by bank lending at historically low rates of interest that are expected to rise more firmly over the next two years.

Kuwait Stock Exchange (1993=1,000; end-period)

2001 2002 2003 2004 2005a

Share price index 1,709 2,375 4,790 6,367 10,233

a End-September.

Source: Kuwait Stock Exchange.

Other services

Kuwait has an active retail sector for a small country, ranging from the crowded market streets in the centre of Kuwait City to the increasing number of smart air-conditioned shopping centres, both in upmarket suburbs such as Salmiya and in the city centre, most notably the Sharq mall, which is part of a waterfront development project. The large malls have contributed to recent rapid growth in retail franchising, particularly for clothing. Cars, household goods, electrical appliances, fast food, and food and drink services are other key retail areas.

The retail trade is mainly operated by foreigners, even though only Kuwaitis have traditionally been allowed to “own” businesses. This fiction has been maintained through the “sponsorship” system, whereby a Kuwaiti partner is the titular owner, and the beneficial owner of the business is given a work permit as an employee. Kuwaiti banks are prepared to lend to those who actually run businesses, so the system does not necessarily cut off the supply of credit to the retail sector. However, Kuwaiti citizens are able to extract a form of economic rent, which raises the cost of doing business.

The retail sector

Agents and middlemen

Kuwait 41


The business culture created by this arrangement openly flouts the spirit, and often the letter, of the law. Enforcement of other regulations, including employee rights, becomes very difficult under such circumstances. Despite legislation allowing foreigners to own up to 100% of projects without the need for a local partner, in practice the latter arrangement remains the norm. Although the Ministry of Social Affairs and Labour periodically discusses with the International Labour Organisation measures to bring employment practices in line with international standards, progress has been slow.

Kuwait attracts few foreign tourists because of its relatively complicated visa regime, a lack of major attractions, a ban on the sale or consumption of alcohol and restrictions on the holding of events involving music. The authorities have decided, however, to try to boost local and regional tourism by focusing on amenities for families. The country has five deluxe hotels and a further six first-class hotels. These are normally used by official delegations and business visitors. Furthermore, it has begun to ease visa applications for both regional and Western visitors from neighbouring countries, and for businesspeople making applications at Kuwaiti embassies. Visitors from a number of Western countries, including the US and the UK, can now collect visas on arrival.

The Kuwaiti authorities see the reconstruction work being attempted in Iraq as a chance for Kuwait to establish itself as a regional financial and commercial centre. However, although there is a US$100m fund in Kuwait to invest in 20 local companies participating in Iraqi reconstruction, and one Kuwaiti businessman is setting up a fund for US$250m-worth of investments in Iraq, prospects for business with its northern neighbour are not proving as significant as initially hoped. One reason is the security problem that has set back the economic rebuilding of the country. Another factor is the difficulty in encouraging the US agencies through which aid money has been distributed to subcontract to local firms.

In the early post-regime change period, three of the companies in the Kuwaiti fund were awarded subcontracts on the Umm Qasr water pipeline, in addition to more minor transportation work. One, Khorafi, has also been awarded the main contract commissioned by the Kuwaiti Ministry of Construction for the “friendship pipeline” supplying water to Iraq. Additional subcontracts have been won by Kuwaiti firms to assist in the reconstruction process, and trade will in the future be boosted as credit is extended to Iraqi companies. However, Kuwait’s geographical location and improved relationship with the Iraqi government will not necessarily ensure a significant number of larger-scale contracts to Kuwaiti companies. In 1989, the last normal year of business activity prior to the 1990 occupation, the value of Kuwait’s exports of goods and services to Iraq was around US$300m—about 28% of the total value of its non-oil exports that year, but only 2.5% of its total exports. This market should increase in the future, but Kuwait lacks an industrial base and hence the technological development of some of its neighbours. Nevertheless, Kuwaiti re-exports to Iraq should benefit from family connections between some leading merchant families in Kuwait and Iraq, and the former’s links with Western companies should further benefit indirect business opportunities. However, the

Tourism

Iraq presents businessopportunities

42 Kuwait


resentment felt by some Iraqis against the Kuwaiti role in the containment and then the occupation of their country may undermine such prospects.

The external sector

Trade in goods

Export receipts depend almost entirely on the price of Kuwait’s oil exports on world markets. Kuwait officially projects an oil production capacity of 2.8m barrels/day (b/d), although it also consumes more than 200,000 b/d of refined products. According to the OPEC Annual Statistical Bulletin, in 2004 Kuwait exported 1.4m b/d of crude oil and 604,000 b/d of refined products. Around two-thirds of crude exports and four-fifths of product exports go to customers in Asia. Oil market volatility caused the value of oil exports to plunge to US$8.47bn in 1998, recovering to US$11.04bn in 1999 and to US$18.18bn in 2000 before sliding back to US$14.98bn in 2001 and to US$14.1bn in 2002 following refinery disruption. In 2003 oil exports recovered firmly, to US$19bn, as international demand boosted the price of oil and encouraged output at a level approaching capacity. These trends continued in 2004, yielding oil exports worth US$27.8bn, which in 2005 is expected by the Economist Intelligence Unit to reach US$42.1bn, representing a fivefold increase on 1998.

External trade, 2004 (US$ m; fob)

Merchandise exports 30,221 Oil & oil products 27,783 Non-oil 2,438

Merchandise imports 10,920Trade balance 19,301

Source: Central Bank of Kuwait.

The Central Bank of Kuwait (CBK) estimates that, in 2003, consumer goods comprised 45% of total imports, intermediate goods 34.5% and capital goods 20%. The value of capital goods increased markedly in 2003, both in absolute value—to KD657m (US$2.2bn) from KD420m in 2002—and in relative terms, as they accounted for only 15% of total imports in 2002. This increase reflects higher public and private investment in infrastructure, as well as expectations that Kuwait would benefit in a more sustained way from Iraqi reconstruction. Domestic demand is largely the result of public-sector activity, which in turn is driven by oil revenue. Nevertheless, the country’s allowances and transfers system helps to cushion Kuwaiti citizens from falls in government income, thus keeping consumption levels relatively steady.

Imports are dominated by finished goods and driven by domestic demand. There is only limited manufacturing activity in Kuwait, and re-export trade with Iraq and Iran was hit by UN and US sanctions on these countries during the 1990s. The Kuwaiti government continues to hope that the Shuwaikh free-trade zone (FTZ) will come into its own with an eventual return to reconstruction in post-war Iraq, allowing the northern Gulf port to rival the success of Jebel Ali in Dubai (see Resources and infrastructure: Transport, communications and the

Oil prices are the key

Kuwait 43


Internet). Plans for an FTZ at Abdali on the Iraqi border assume that this would be a secure zone in which Iraqi and Kuwait businesspeople could meet more easily than is currently possible in either country—an ambition that illustrates the practical problems inherent in the idea that Iraq will provide a sustained trade and manufacturing boost to the non-oil economy in Kuwait.

Normally, the value of oil exports overwhelms the absorptive capacity of Kuwait’s domestic economy, generating a trade surplus. Even in the aftermath of the 1991 Gulf war, the trade balance quickly moved back into surplus. Despite substantial imports for reconstruction in 1992, Kuwait recorded only a small deficit and by 1994 the merchandise trade surplus had reached US$4.7bn. Since then the balance has trended upwards (with the exception of 1998, when oil prices collapsed, but even that year saw a trade surplus of US$1.9bn).

The Gulf Co-operation Council (GCC) customs union was founded on January 1st 2003 and ratification by the National Assembly (parliament) allowed Kuwait to join in May that year. This has meant that across the GCC area a flat-rate import tariff of 5% applies on most goods; however, there are various national exceptions, affecting a number of luxury goods and some industries. Given that most items were subject to a 4% Kuwaiti customs charge, this represents a small disincentive to GCC trade. However, Kuwait’s trading partners continue to be chiefly Western countries. Saudi Arabia and the UAE remain its primary Gulf trading partners, representing 6.8% and 3.7% of the value of Kuwait’s imports respectively in 2003. Kuwait continues to exempt essential goods such as food and raw materials from customs charges.

Main trading partners, 2004 (% of total)

Exports fob to: Japan 17.3South Korea 12.7US 10.4Singapore 9.5Imports cif from: US 13.9Germany 13.3Japan 8.6China 6.5

Source: IMF, Direction of Trade Statistics.

Kuwait’s exports are concentrated on its top five trading partners, of which Japan, South Korea and the US are the most important, accounting for over 40% of the total in 2004. Kuwait has sought to diversify its oil export revenue in recent years, mainly by increasing the share of its exports to the Asian economies, a policy that was re-emphasised in July 2004 when the prime minister, Sheikh Sabah al-Ahmed al-Jabr al-Sabah, led a trade delegation on an Asian tour. Trade with the US came under a Trade and Investment Framework Agreement signed by the two sides in February 2004 as part of US plans to create a Middle East Free-Trade Area. Kuwait’s exports to the US declined from US$2.7bn in 2000 to US$2bn in 2001 and to US$1.9bn in 2002, before rising again by 21% and 42% in 2003 and 2004 respectively, to reach US$3.2bn in the

Customs union

Trade is dominated by a few countries

44 Kuwait


latter year. In contrast, the value of imports from the US rose by less than 1% in 2004, to US$1.7bn. The US, Germany and Japan are Kuwait’s leading import suppliers. Their combined share of total imports stood at 25% in 1999, before reaching 45% in 2001, and falling to 35.8% in 2004.

Invisibles and the current account

Surpluses on the merchandise trade and investment accounts underpin Kuwait’s large current-account surpluses. These can fluctuate as oil volumes or prices fall, and overseas investments are likewise affected by the global economic environment. However, with the exception of the first two years after the 1991 Gulf war, they have continued to show healthy surpluses since the 1970s. After the Iraqi invasion, the government liquidated huge amounts of its reserves to pay for the war and reconstruction efforts. Government investment income therefore plummeted, and debt-servicing costs introduced net income outflows into the current account.

The current account, 2004 (US$ m)

Merchandise exports 30,221Merchandise imports -10,920Merchandise trade balance 19,301Services balance -4,269Income balance 6,399Transfers balance -2,549Current-account balance 18,882

Source: Central Bank of Kuwait.

However, the current account has regained its pre-war structure. Kuwait’s foreign debt stock declined and the resumption of current-account surpluses helped to rebuild reserves, despite subsequent periodic reductions (as seen in 2002-03 in the run-up to the US-led war against Iraq). Strong performance on world stockmarkets in the late 1990s boosted Kuwait’s foreign investments, but these felt the impact of the subsequent downturn, as income credits declined from US$7.3bn in 2000 to US$5.5bn in 2001 and US$3.7bn in both 2002 and 2003. The rebound to US$6.8bn in 2004 contributed to that year’s very large current-account surplus. A further significant item is the outflow of remittances from overseas workers in Kuwait, which has risen sharply since 2002 as recruitment of foreign workers has increased. Their value rose from US$1.8bn in 2002 to US$2bn in 2003 and US$2.1bn in 2004.

Capital flows and foreign debt

There are some indirect restrictions on foreign capital inflows, although these are slowly being eroded by economic reforms. Kuwaiti banks find it difficult to offer attractive deposit rates to foreign banks because of reserve requirements on interbank deposits from abroad. Legislation to allow foreigners to buy government securities or shares in Kuwaiti companies suffered parliamentary delays before being passed in 2000. The CBK also limits the amount of Kuwaiti dinar-denominated corporate securities that foreign investors can buy. The

Old patterns are re-established

Capital inflows are restricted

Kuwait 45


authorities historically discouraged foreign direct investment, although this stance was reversed by the foreign direct investment law, passed in 2001, which allowed foreigners to own up to 100% of Kuwaiti companies—instead of 49% as before—subject to certain conditions. Efforts to bring foreign firms into the upstream oil sector have also signalled the government’s interest in attracting foreign investment.

The strength of Kuwait’s revenue stream is reflected in the health of its capital account. Net financial outflows more than doubled in 2003 and rose by a further 66% in 2004, to US$19.8bn. These outflows are dominated by central government portfolio investments abroad. Before the Iraqi occupation, Kuwait was a major foreign aid donor. In the early 1980s its official assistance rarely dropped below US$1bn a year. Aid flows are channelled through the Kuwait Fund for Arab Economic Development (KFAED), a self-financing body that has received no injection of government funds since the late 1980s. However, the KFAED still provides significant levels of loan support on highly concessionary terms to mostly, but not exclusively, Arab and Asian countries. In the 2003/04 fiscal year (April-March) loan disbursements totalled US$366m, down from US$424m in 2002/03.

The cost of financing the war and subsequent reconstruction led Kuwait to announce plans to borrow up to KD10bn (US$33bn) from the international markets in 1991. In the end, only KD5.5bn was borrowed, which was repaid by the end of the decade. Rising export revenue and liquidation of some global assets were used to meet the rest of the financing needs. Kuwait’s ability to draw on its ample foreign investments made a far greater contribution to meeting these emergency funding needs than foreign loans.

In addition to other claimants, the UN Compensation Commission (UNCC) awards payments to Kuwaiti individuals, corporations and the government for damage caused by Iraq’s invasion and occupation in 1990-91. These payments fell from KD519m in 2002 to KD436m in 2003, in line with UN Security Council Resolution (UNSCR) 1483 of 2003, passed after the US-led invasion of Iraq, which reduced the share of Iraqi oil income diverted to the UNCC from 25% to 5%. Government receipts from the UNCC are recorded in the fiscal accounts under the heading of miscellaneous non-oil revenue and fees, which declined from KD212m in 2002/03 to KD169m in 2003/04 and KD73m in 2004/05.

In mid-2005 the UNCC announced that it had completed its work of handling claims, having awarded total compensation of US$52.5bn. Of this, US$19.4bn had been paid by September 15th 2005 and a further US$33.1bn remained to be disbursed. The total sum awarded represented just under 15% of the total US$352.5bn sought, of which approximately one-third was submitted by the Kuwaiti government on behalf of the public sector and private citizens. Having regularised payments to a rate of US$200m per quarter after UNSCR 1483 was passed, the UNCC said it would continue to facilitate payments with a view to winding up its work by end-2007, although payments drawn from 5% of income from Iraqi oil exports are supposed to continue until outstanding sums have been cleared. After 2007 the UNCC expects that unresolved reparation claims will be pursued by Kuwait bilaterally.

Aid flows, war claims and foreign debt

46 Kuwait


Kuwait’s external debt amounted to an estimated US$14bn at the end of 2003, up from US$13bn at end-2002, which was markedly higher than the US$10.2bn recorded in 2001. Private debt accounted for 58% of the end-2002 debt stock, which was equivalent to 37.1% of GDP, with an estimated debt service/exports ratio of 4.3%.

Foreign reserves and the exchange rate

The CBK’s holdings of gold and foreign currency represent only a small part of Kuwait’s foreign assets. There are two other reserves: the Reserve Fund for Future Generations (RFFG) and the State General Reserve (SGR). Although there are wide discrepancies between published estimates of Kuwait’s foreign assets, its liquid assets at the time of the Iraqi invasion in 1990 were estimated at US$70bn-100bn.

These assets were heavily depleted by the costs of both the Gulf war and reconstruction, but were boosted by the strong performance of many world equity markets in the late 1990s and then by Kuwait’s soaring oil income. The Kuwait Investment Authority (KIA), which manages the RFFG and the bulk of Kuwait’s overseas investments, adopts a relatively conservative investment strategy and appeared to escape the worst of the 1997-98 emerging markets crisis. It had assets of US$56bn in 2000. Kuwait’s assets with banks reporting to the Bank for International Settlements (BIS) in Basle rose from US$15.6bn at the end of 1999 to US$22bn by end-2002, and its net assets with these banks rose over the same period from US$7.9bn to US$12.8bn. By end March 2005 these figures had risen to US$28.7bn and US$15bn respectively. Total foreign reserves excluding gold rose from US$4bn at end-1998 to US$9.9bn at end-2001, decreasing slightly to US$8.2bn at end-2003 as foreign reserves were drawn down, seemingly in expectation of costs associated with the US-led war in Iraq, and possibly also to repay funds borrowed from the RFFG. Foreign reserves stood at US$8.7bn at end-August 2005, equivalent to nearly six months of import cover.

Since the start of 2003 the Kuwaiti dinar has been pegged to the US dollar within the range KD0.289:US$1 to KD0.310:US$1, as part of a plan to create a single GCC currency by 2010. As the CBK had previously maintained a peg between the dinar and a trade-weighted basket of currencies that was heavily weighted in favour of the US dollar, the “new” peg did not make much immediate difference to the Central Bank’s monetary policy. However, a combination of the close peg and the weakening dollar caused the Kuwaiti dinar to depreciate against all other major currencies during 2003, declining by 18% against the euro, 10% against the Swiss franc and 9% against both the Japanese yen and the pound sterling. The dinar declined further against foreign currencies in 2004—by 9.2% against the euro, 7.2% against the yen and 10.4% against the Swiss franc Kuwait’s strong foreign-currency reserves and, despite fluctuations, its high level of foreign-currency earnings from oil exports ensured that the dinar was not subject to serious upward or downward pressure. In the first half of 2005 the dinar’s exchange rate with the major international currencies recovered as the US dollar’s strengthening was aided by a rise in domestic interest rates.

Official reserves are understated

Currency regime

Kuwait 47


Regional overview

Membership of organisations

More commonly known as the Arab League, the organisation was formed in 1945 to strengthen relations between Arab states and co-ordinate policies for the good of the whole Arab nation. Its membership has stood at 22 since Comoros was admitted in 1993. Palestine is treated as a full member of the organisation. The League, which has observer status at the UN General Assembly, is based in Cairo. It has attempted to mediate in a number of regional conflicts, and was the overseer of the Arab boycott of Israel. It has been criticised as an ineffective talking-shop; one of its handicaps is a system whereby unanimous decisions of the Arab League Council are deemed binding on all members, but majority decisions are binding only on those states that voted for them.

The Arab world has become increasingly divided in recent years, further negating the effectiveness of the League. US and UK policy toward Iraq was a major cause of tension within the Arab world from the second half of the 1990s, with even some countries strategically allied with the West taking a signally different position from Kuwait’s staunch support for Iraq’s comprehensive containment. However, when, from 2002, the prospect of a US/UK ground invasion to overthrow the regime of the Iraqi president, Saddam Hussein, became increasingly likely, a common Arab stance opposing any military action against the Iraqi regime and in support of the lifting of UN sanctions was agreed at the April 2002 Arab League summit in Beirut. This was strongly criticised by Kuwait, given the implied criticism that was made of it in the resolution. The success of the US-led military campaign to overthrow the Iraqi regime helped to minimise the tensions that had been expected within the League. However, while this led to League recognition of the interim Iraqi administration, and subsequently of the Iraq government formed after the January 2005 elections, tensions have been caused by the apparent diminution of Sunni Arab interests in Iraq and the rise of Iranian influence there.

Israel’s dispute with the Palestinians remains a central issue, which at times of relative progress can cause division between League members. The (originally Saudi-authored) 2002 Arab peace initiative has been placed on the back-burner, with Egypt and Jordan keen to work with the Israeli and Palestinian leaderships to use Israeli territorial withdrawals from the Gaza Strip and a small planned withdrawal from the West Bank as a springboard to resurrect the US-backed Roadmap for Middle East Peace. In contrast, the US’s commitment to democratisation in the Middle East is showing signs of having prompted a more concerted Arab League position, balancing criticism with attempts to publicise efforts within the region to achieve internal change. The dominant role of Egypt within the League caused friction between Cairo and Algiers in the run-up to Algeria’s hosting of an Arab League summit in March 2005.

The Arab Monetary Fund (AMF), based in Abu Dhabi, was established in 1977 by 20 Arab states. It was hoped that this would presage greater integration of Arab economies, while AMF financing promoted the goal of greater inter-Arab

League of Arab States

Arab Monetary Fund (AMF)

48 Kuwait


trade flows. Its success has been limited, but the AMF serves as a provider of loans to members, especially for balance-of-payments support. Its original articles define other goals, such as promoting the use of the Arab accounting dinar (AAD) as a unit of account akin to the IMF’s special drawing rights (SDRs), and working towards the establishment of a single Arab currency. Another aim is to promote development of Arab financial markets. AMF officials have floated the idea of establishing a debt ratings agency. Iraq, Somalia and Sudan have been suspended from the AMF for defaulting on debt repayments.

The Gulf Co-operation Council (GCC) was formed in 1981 by six Arab Gulf states: Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and the UAE. The primary aim was to promote security and stability in the region, particularly through the integration of foreign and security policies. Secondary goals included the co-ordination of economic, financial and monetary policies. The main motivation behind the creation of the GCC was the threat posed to regional security by the Iran-Iraq war. Since the end of the conflict in 1988, the GCC has lost much of its sense of direction. Members’ foreign ministers meet in a ministerial council every three months, and heads of state hold an annual summit. Summits are mostly concerned with putting on a show of unity to the outside world and reaching a compromise over the squabbles that divide the organisation. Over the years the GCC has become increasingly divided over issues such as UN sanctions against Iraq. Qatar, Oman and the UAE often stand apart from the Saudi-led policy of the other three members. At the summit in December 1995 it was thought that the organisation was close to breaking up, because of a serious disagreement between Saudi Arabia and Qatar.

An integrated regional defence force, initially proposed by Sultan Qaboos bin Said al-Said of Oman, has been under discussion for some time, but progress has been limited, mainly because of Saudi Arabia’s lack of enthusiasm. In economic affairs, integration has, until recently, been limited. Moves towards tariff unification were agreed in principle in 1993 but, as with many other GCC agreements, follow-up talks were slow, and marred by disputes over compensation arrangements. In September 1999 the six members finally accepted a draft set of customs laws and set the deadline for their implementation at March 2001. After further delay, the customs union went into effect at the start of 2003. A customs union is a prerequisite for a free-trade agreement with the EU, which has now been debated for over a decade. Doubts about the pace of progress on movement towards inter-GCC free trade and wider economic cooperation were increased in January 2005 when Saudi Arabia bitterly attacked Bahrain’s conclusion, pending US Congressional approval, of a bilateral free-trade agreement with the US, and movement by Kuwait and the UAE toward such agreements.

The Organisation of Petroleum Exporting Countries (OPEC) was formed in 1960. It aims to promote the interests of the main oil-exporting countries by co-ordinating their petroleum policies, thus exercising control over world oil prices. The current members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE and Venezuela; Ecuador left in 1992 and Gabon in 1995. In the 1970s OPEC succeeded in altering the structure of oil

Organisation of Petroleum Exporting Countries (OPEC)

Gulf Co-operation Council (GCC)

Kuwait 49


prices in favour of producing countries, at the expense of major oil companies. Prices quadrupled in 1973-74 and rose by over 25% in 1979-80. OPEC continues to hold some 75% of the world’s proven oil reserves, of which two-thirds lie in the Middle East. However, by driving up prices, it has made alternative fuels more attractive, and turned previously unprofitable, marginal oil reserves into commercially viable concerns. These factors have reduced OPEC’s share of world oil supply from 55% in 1974 to some 40% today.

In the mid-1980s falling demand, oversupply of crude and disagreements within OPEC as to the correct response brought the pricing system close to collapse. Prices, which had risen from US$2.50/barrel in 1973 to a peak of over US$36/b in 1980, crashed to less than US$8/b in 1986, when Saudi Arabia, which had been acting as the swing producer by cutting its output to support prices, refused to continue playing this role. Throughout the late 1980s and most of the 1990s, OPEC’s ability to control prices was severely curtailed by persistent quota-busting by its members and a consistent inability to reach agreement on adjustments to its self-imposed production ceiling. A series of attempts to co-operate with non-OPEC producers over production cuts failed, and OPEC’s market share was eroded by higher output from non-member countries. The return of Iraq to the oil market in December 1996 compounded these problems and oil prices fluctuated heavily. In November 1997 OPEC finally agreed to raise its production ceiling by 10%, to 27.5m barrels/day (b/d). This, combined with the economic crisis in Asia, precipitated a 30% slide in oil prices, which slumped to a low of US$9/b in 1998.

Over the next three years OPEC succeeded in restoring its internal discipline, and this, combined with a recovery in the global economy, brought the oil price securely into its target band of US$22-28/b. Prices rose above the OPEC band in 2003 in response to tensions over the US-led invasion of Iraq and, more fundamentally, to a surge in global demand. It emerged during that year that the International Energy Agency had underestimated the actual level of world oil demand by 3m b/d, with the result that spare production capacity was reduced to a slender margin. As demand increased, particularly in China, limitations on spare capacity, especially with regard to lighter crudes, added to upward price pressure. The oil price rose steadily in 2004 and 2005, and reached a record high of US$70/b in September 2005 after the catastrophic hurricane Katrina in the Gulf of Mexico. OPEC has been producing at close to its capacity for the past two years, and is likely to continue to do so until major new oilfield developments in Saudi Arabia and other member states start to come on stream towards the end of 2006.

The Organisation of Arab Petroleum Exporting Countries (OAPEC) groups ten Arab oil producers and includes three countries that are not members of OPEC: Bahrain, Egypt and Syria. It was established in 1968 with the aim of co-ordinating members’ oil policies. OAPEC also conducts technical training, feasibility studies and market reviews, and provides information on member countries. A number of joint Arab projects are sponsored by OAPEC, including the Arab Petroleum Investments Corporation (Apicorp) and the Arab Maritime Petroleum Transport Company (AMPTC).

Organisation of Arab Petroleum Exporting Countries

(OAPEC)

50 Kuwait


Appendices

Sources of information

The Ministry of Planning provides a range of statistical series in Arabic and English, including a Statistical Abstract section containing data on the worldwide web. The Central Bank of Kuwait publishes in hard copy and electronic formats reliable financial information covering output and balance of payments, monetary aggregates, capital markets and public finance in its Quarterly Statistical Bulletin. The Central Bank’s annual Economic Report provides a broad overview of developments.

Among unofficial sources, the National Bank of Kuwait’s Economic and Financial Review is consistent, thorough and analytical, as are its monthly Economic Briefs. Al Shall Economic Consultants publishes a weekly report. The Arabic-language daily Al Qabas has developed a reputation for its economic coverage and holds editorial views that are closely allied to those of the Kuwait Chamber of Commerce and Industry.

Al Qabas (Arabic daily newspaper), Kuwait

Al Watan (Arabic daily newspaper), Kuwait

Kuwait Times (English-language daily newspaper), Kuwait

Arab Times (English-language daily newspaper), Kuwait

Central Bank of Kuwait, Annual Report, Kuwait

Central Bank of Kuwait, Economic Report (annual), Kuwait

Central Bank of Kuwait, Monthly Monetary Statistics, Kuwait

Central Bank of Kuwait, Quarterly Statistical Bulletin, Kuwait

Ministry of Planning, Central Statistical Office, Monthly Digest of Statistics, Kuwait

National Bank of Kuwait, Economic and Financial Quarterly, Kuwait

International Energy Agency, Middle East Oil and Gas, Paris

International Energy Agency, Monthly Oil Market Report, Paris

International Institute for Strategic Studies, The Military Balance (annual), London

IMF, Direction of Trade Statistics (quarterly), Washington DC

IMF, International Financial Statistics, Washington DC

MEES, Middle East Economic Survey (weekly), Cyprus

OPEC, OPEC Statistical Bulletin (annual), Vienna

National statistical sources

International statistical sources

Kuwait 51


ac & C om p a ny , L o nd o n, 1 9) , L uza

Abdul-Reda Al-Assiri, Kuwait’s Foreign Policy—A City State in World Politics, Westview Press, 1990

Anthony H Cordesman, Kuwait: Recovery and Security after the Gulf war, Westview Press, Boulder, Colorado, 1997

Jill Crystal, Kuwait: The Transformation of an Oil State, Westview Press, Boulder, Colorado, 1992

Jacqueline Ismael, Kuwait: Dependency and Class in a Rentier State, University Press of Florida, Gainsville, Florida, 1993

Richard Schofield, Kuwait and Iraq, Royal Institute of International Affairs, London, 1991

Ben J Slot (editor), Kuwait—The Growth of a Historic Identity, Arabian Publishing, London, 2003

Mary Ann Tétreault, Stories of Democracy: Politics and Society in Contemporary Kuwait, Columbia University Press, New York, 2000

Rosemarie Said Zahlan, The Making of the Modern Gulf States (revised 2nd edition), Ithaca, Reading, 1999

Central Bank of Kuwait: http://www.cbk.gov.kw

Kuwait Stock Exchange: http://www.kse.com.kw

Arab Times: http://www.arabtimesonline.com

Kuwait Times: http://www.kuwaittimes.net

Al-Shall Economic Consultants: http://www.alnadeem.com.bh/shall

Kuwait Investment Authority: http://www.kia.gov.kw

National Bank of Kuwait: http://www.nbk.com

Reference tables Population (‘000; year-end)

2000 2001 2002 2003 2004a

Kuwaiti 842 871 898 914 943

Non-Kuwaiti 1,375 1,438 1,521 1,571 1,702

Total 2,217 2,309 2,420 2,484 2,645

a End-June.


Select bibliography and websites

52 Kuwait


Labour force (‘000)

2000 2001 2002 2003 2004a

Kuwaiti public sector 217 228 240 250 254

Kuwaiti private sector 14 15 16 20 22

Total 231 243 256 270 276

Non-Kuwaiti public sector 84 83 85 86 84

Non-Kuwaiti private sector 872 931 1,006 1,093 1,164

Total 956 1,014 1,091 1,179 1,248

Total public sector 301 305 325 336 338

Total private sector 886 900 1,021 1,113 1,186

Total employed 1,187 1,257 1,346 1,448 1,525

Men 903 940 1,004 1,085 1,147

Women 284 317 342 363 378

Total labour force 1,196 1,271 1,364 1,466 1,551

Kuwaiti unemployedb 2.5 6.2 9.7 9.6 14.3

a End-June. b Derived from IMF data for total employed and total labour force.

Sources: Public Authority for Civil Information; IMF, Staff Report.

Transport statistics 1996 1997 1998 1999 2000Arrivals ('000) 2,537 2,705 2,986 3,075 3,353 Air 1,244 1,288 1,319 1,395 1,392 Sea 36 30 43 60 60 Land 1,257 1,385 1,624 1,620 1,901Departures ('000) 2,593 2,739 3,027 3,087 3,058 Air 1,225 1,284 1,312 1,375 1,420 Sea 40 38 45 61 47 Land 1,328 1,418 1,670 1,650 1,591

Source: Ministry of Planning, Statistical Abstract.

National energy statistics (m kwh unless otherwise indicated)

1996 1997 1998 1999 2000Total electricity generated 25,475 26,724 29,984 31,576 32,323Domestic consumption 21,735 22,862 25,753 26,962 27,558

Maximum load (mw) 5,200 5,360 5,800 6,160 6,450


Kuwait 53


Government finances (KD m)

2000/01 2001/02 2002/03 2003/04 2004/05Revenue 5,111 5,337 6,219 6,925 8,854Oil revenue 4,528 4,525 5,498 6,150 8,105Non-oil revenue 583 812 721 775 749

Expenditure 4,252 4,746 4,927 4,698 4,951Wages & salaries 1,414 1,472 1,542 1,484 1,439Goods & services 489 545 582 541 605Transport & equipment 32 24 24 19 17Development projects & land purchase 286 406 461 326 373Miscellaneous expenditures & transfer payments 2,031 2,299 2,319 2,327 2,518Balancea 859 591 1,292 2,228 3,903

Note. The approved budget for 2000/01 covered a nine-month period from July to March. In this table, the nine-month figures are annualised to facilitate comparison with other years. a Before the Reserve Fund for Future Generations allocation.

Sources: Central Bank of Kuwait, Quarterly Statistical Bulletin; Ministry of Finance.

Money supply and credit (KD m unless otherwise indicated; end-period)

2001 2002 2003 2004 2005a

M1 1,641 2,067 2,612 2,988 3,287

% change, year on year 11.8 26.0 26.4 14.2 10.1

M2 9,209 9,646 10,401 11,655 12,392

% change, year on year 12.8 4.7 7.8 12.0 6.3

Net foreign assets 3,306 2,930 2,467 3,603 3,658

Domestic credit 9,420 10,390 11,673 12,305 12,586

Claims on private sector 6,753 7,723 9,379 10,815 11,037

Claims on government 3,402 3,248 3,050 2,750 2,773

a End-March. Percentage change, year on year.

Sources: Central Bank of Kuwait; IMF, International Financial Statistics.

Gross domestic product (market prices)

2000 2001 2002 2003 2004

Total (KD m) At current prices 11,711 10,851 11,983 14,184 16,961

At constant (1984) prices 9,946 9,844 8,697 9,541 n/a

% change, year on year 3.9 -1.0 -11.7 9.7 n/a

Per head (KD) At current prices 5,096 4,524 4,420 4,886 5,675

At constant (1984) prices 4,221 4,163 3,595 3,748 n/a

% change, year on year 3.4 -1.4 -13.6 4.3 n/a


54 Kuwait


Gross domestic product by expenditure (KD m; current market prices)

2000 2001 2002 2003 2004Final consumption 7,399 7,849 8,677 9,241 9,659 Private 4,915 5,320 5,747 5,960 6,204 Government 2,485 2,528 2,929 3,281 3,455

Gross fixed capital formationa 846 910 1978 2,012 2,331Exports 6,534 5,490 5,171 7,432 9,885

Imports 3,488 3,803 4,243 4,917 5,455GDPb 11,312 10,446 11,584 13,768 16,420

a Includes change in stocks. b Total for 2000 does not sum in source.


Gross domestic product by sector 2000 2001 2002 2003 2004(KD m; current market prices) Oil sector 5,543.9 4,586.5 4,409.2 5,794 7,817.8Mining & quarrying 0.5 0.5 13.8 17.3 19.7Agriculture & fisheries 42 47.7 59.9 64.7 70Manufacturing 800.2 678.8 907.3 1,076.4 1,314.6Electricity, gas & water 245.5 253.1 275.3 299.4 311.9Construction 255.2 262.6 312.0 333 361Wholesale & retail trade 603.7 636.2 822.5 918 999.2Restaurants & hotels 92.4 97.0 123.7 142.4 149.8Transport, storage & communications 552.1 597.5 594.1 684.2 712.5Financial institutions 604.1 676.9 760.4 942.2 1,065.6Insurance 12.8 15.8 22.7 27.2 32.7Real estate 613.9 615.5 982.4 1,003.7 1,055.7Business services 52.2 54.7 159.0 163.4 166.7Community, social & personal services 2,293.2 2,328.3 2,540.8 2,736.4 2,883.4Net adjustments of imputed bank

services & import duties -475.6 -489.3 -495.5 -551.3 -661.1Import duties 77 83.9 96.9 135.1 120.8Totala 11,312.3 10,445.7 11,584.5 13,768.1 16,420.3

Kuwait 55


Gross domestic product by sector 2000 2001 2002 2003 2004% change, year on year Oil sector 66.6 -17.3 -3.9 31.4 34.9Mining & quarrying -44.4 0.0 2,660.0 2.7 13.9Agriculture & fisheries 7.1 13.6 25.6 8.0 8.2Manufacturing -21.1 -15.2 33.7 18.6 22.1Electricity, gas & water -20.1 3.1 8.8 8.8 4.2Construction 3.7 2.9 18.8 6.7 8.4Wholesale & retail trade -2.7 21.5 12.2 11.6 8.8Restaurants & hotels 0.7 5.0 27.5 15.1 5.2Transport, storage & communications 12.2 8.2 -0.6 15.2 4.1Financial institutions 8.7 12.1 12.3 23.9 13.1Insurance -24.7 23.4 43.7 19.8 20.2Real estate -1.5 0.3 59.6 2.2 5.2Business services 7.6 4.8 190.7 2.8 2.0Community, social & personal services 3.7 1.5 9.1 7.7 5.4Net adjustment of imputed bank services -10.2 2.9 1.3 11.3 19.9Import duties -4.3 9.0 15.5 39.4 -10.6Total 23.4 -7.7 10.9 19.0 19.1

a Total for 2001 does not sum at source.


Prices 2000 2001 2002 2003 2004Consumer price index (2000=100) 100.0 101.3 102.2 103.2 104.5 Food 99.8 103.1 104.5 106.6 110.0 Beverages & tobacco 100.1 101.5 105.8 107.5 111.2 Clothing & footwear 100.0 103.2 105.9 108.0 111.0 Housing 100.0 101.1 102.1 103.8 104.6 Household goods & services 99.6 96.9 99.1 100.3 96.0 Transport & communications 99.9 99.1 95.0 93.8 99.8 Education & medical care 100.1 103.9 106.6 112.4 116.6 Other goods & services 100.1 106.2 108.5 105.7 102.0Consumer price index (% change) n/a 1.3 0.9 1.0 1.3 Food n/a 3.3 1.4 2.0 3.3 Beverages & tobacco n/a 1.4 4.2 1.6 3.4 Clothing & footwear n/a 3.2 2.6 2.0 2.8 Housing n/a 1.1 1.0 1.7 0.8 Household goods & services n/a -2.7 2.3 1.2 -4.3 Transport & communications n/a -0.8 -4.1 -1.3 6.4 Education & medical care n/a 3.8 2.6 5.4 3.7 Other goods & services n/a 6.1 2.2 -2.6 -3.5Wholesale price index (1980=100) 163.1 166.3 171.8 175.1 175.8 Manufacturing 124.8 120.0 127.0 132.8 144.9 Mining & quarrying 110.4 155.0 155.0 161.8 177.1 Agriculture, livestock & fishing 165.7 169 174.5 177.7 177.5


56 Kuwait


Agricultural production (tonnes)

2000 2001 2002 2003 2004Vegetables & melons 174,075 179,797 180,492 180,392 185,620 Cucumbers & gherkins 33,004 33,004 33,004 33,500 32,300 Tomatoes 36,713 41,140 35,127 35,127 36,000 Watermelons 251 441 924 1,000 1,000Fruits excl melons 11,250 11,570 11,488 11,511 11,695 Dates 10,155 10,376 10,376 10,400 10,500Cereals 2,835 3,513 4,412 3,300 7,800 Maize 391 436 800 800 800

Source: UN Food and Agriculture Organisation.

Oil production (‘000 b/d)

2001 2002 2003 2004 2005a

Kuwaiti production 1,720 1,600 1,870 2,050 2,120Kuwaiti share of Neutral Zone 285 270 305 300 285

Total production 2,005 1,870 2,175 2,350 2,405

a January-June.

Source: International Energy Agency, Monthly Oil Market Report.

Petrochemicals production 1996 1997 1998 1999 2000Urea (tonnes) 749.6 749.6 773.1 751.6 618.0Chlorine (tonnes) 0.0 0.0 2.6 1.6 2.4Caustic soda ('000 tonnes) 1.0 2.0 13.0 12.9 12.2

Hydrochloric acid (m gallons) 1.0 1.6 1.0 1.0 1.1


Building permitsa 1999 2000 2001 2002 2003New construction 4,267 3,016b 3,234 5,560 5,629 Commercial 67 15 25 46 154 Investment 118 71 220 524 868 Industrial 77 45 63 103 162 Residential 4,005 2,882 2,926 4,887 4,445Additions 6,913 5,580 6,346 6,949 6,432

Renovations 2,406 1,942 2,297 1,584 2320Total 13,586 10,535 11,877 14,093 14,381

a Issued within Kuwait Municipality area. b Total does not sum in source.

Source: Kuwait Municipality.

Kuwait 57


Stockmarket index (1993=1,000)

2001 2002 2003 2004 2005a

Banks 2,513.2 3,271.2 4,662.9 5,199.2 6,496.0Investment 1,967.9 2,653.9 5,355.2 6,880.9 11,055.0

Insurance 1,050.6 1,424.0 2104.2 2,194.3 2,436.0Real estate 1,236.3 1,910.1 3,586.4 4,159.7 5,152.0Industrial 1,761.2 2,275.6 3,573.3 4,740.6 5,460.0

Services 1,967.6 3,237.5 9,016.8 12,867.6 17,038.0Food 1,316.2 1,794.7 3,128.0 3,246.6 4,287.0

Gulf companies 1,143.1 1,254.3 2,601.8 4,432.9 n/aInvestment funds 1,398.8 1,858.1 2,260.4 2,547.0 n/aGeneral index 1,709.2 2,375.3 4,790.2 6,367.0 8,811.3

a January-July.

Sources: Central Bank of Kuwait, Quarterly Statistical Bulletin; Kuwait Stock Exchange.

Stockmarket indicators 2000 2001 2002 2003 2004Market capitalisation (US$ m) 20,772 26,681 36,194 60,702 73,250

No. of listed companies 86 88 95 103 125Value traded (US$ m) 4,203 11,665 21,980 54,530 51,780

Volume traded (m shares) 6,758 16,300 27,837 49,563 33,536No. of transactions 156,521 354,321 520,946 1,081,000 1,056,869


Oil and oil products (‘000 b/d)

2000 2001 2002 2003 2004Exports of crude oil 1,231 1,214 1,138 1,243 1,415Exports of refined products 675 642 572 623 604

Source: OPEC, Annual Statistical Bulletin.

Merchandise exports (KD m; fob)

2000 2001 2002 2003 2004Oil exports 5,578 4,591 4,273 5,664 7,861Non-oil exports 384 358 394 499 605

Manufactured fertilisers 20 17 16 32 35Ethylene products 196 182 191 188 213Other 105 105 121 153 172

Re-exports 64 62 66 125 186Total exports 5,963 4,948 4,667 6,162 8,467


58 Kuwait


Merchandise imports (KD m; cif)

1999 2000 2001 2002 2003Capital goods 416 335 364 420 580Intermediate goods 797 805 873 1,035 1,184

Consumer goods 1,070 1,026 1,149 1,258 1,441Unclassified goods 35 29 27 23 12Total imports 2,318 2,195 2,413 2,736 3,217


Main trading partners (US$ m)

2000 2001 2002 2003 2004Exports to: Japan 4,525 4,027 3,825 4,148 5,228South Korea 2,469 2,046 2,028 2,901 3,839US 2,698 2,010 1,866 2,253 3,157Singapore 1,379 1,237 1,587 1,921 2,872Netherlands 1,157 954 701 624 719Pakistan 1,175 721 675 756 1,001Total incl others 19,478 16,238 15,366 21,795 30,221Imports (cif) from: US 7,365 7,732 8,753 11,409 13,084Japan 893 996 1,116 1,660 1,671Germany 567 1,076 1,076 1,076 1,597UK 743 212 289 743 1,029Italy 574 566 515 683 784France 341 426 462 564 718Total incl others 7,157 7,869 9,002 10,987 13,084

Source: IMF, Direction of Trade Statistics.

Balance of payments (US$ m)

2000 2001 2002 2003 2004Merchandise exports fob 19,478 16,238 15,366 21,795 30,221Merchandise imports fob -6,451 -7,046 -8,124 -9,882 -10,920

Trade balance 13,027 9,192 7,242 11,913 19,301Services: credit 1,822 1,787 1,648 3,144 3,322Services: debit -4,920 -5,354 -5,837 -6,617 -7,591

Income: credit 7,315 5,481 3,708 3,725 6,844Income: debit -616 -525 -365 -369 -445

Current transfers: credit 85 52 49 67 88Current transfers: debit -2,041 -2,133 -2,195 -2,446 -2,637Current-account balance 14,670 8,324 4,250 9,417 18,882

Kuwait 59


Balance of payments (US$ m)

2000 2001 2002 2003 2004Direct investment abroad 303 -323 155 4,983 -1,873Direct investment in Kuwait 16 -39 7 -67 -20

Portfolio investment assets -12,923 -7,375 -3,425 -13,580 -14,001Portfolio investment liabilities 254 -78 161 336 288Other investment assets -1,108 505 -3,754 -3,329 -3,936

Other investment liabilities -316 1,138 1,695 -285 -278Financial-account balance -13,773 -6,313 -5,163 -11,942 -19,820

Capital-account balance 2,217 2,931 1,672 1,429 434Net errors & omissions -847 -2,038 -1,733 -723 1,128Overall balance 2,267 2,904 -974 -1,819 624Memorandum item Total change in reserve assetsa -2,268 -2,905 973 1,824 -626

a Minus indicates an increase.

Sources: IMF, International Financial Statistics; Central Bank of Kuwait, Quarterly Statistical Bulletin.

External debt, OECD series (US$ m unless otherwise indicated; debt stocks as at year-end)

1998 1999 2000 2001 2002Public medium- & long-term 3,134.0 2,778.0 2,563.0 3,153.0 5,490.0

Private medium- & long-term 0.0 0.0 0.0 0.0 0.0Total medium- & long-term debt 3,134.0 2,778.0 2,563.0 3,153.0 5,490.0 Official creditors 1,539.0 1,250.1 1,076.5 1,261.2 2,196.0 Private creditors 1,595.0 1,527.9 1,486.5 1,891.8 3,294.0Short-term debt 7,858.0 7,092.0 6,301.0 7,051.0 7,562.0 Interest arrears 0.0 0.0 0.0 0.0 0.0Use of IMF credit 0.0 0.0 0.0 0.0 0.0Total external debt 10,992.0 9,870.0 8,864.0 10,204.0 13,052.0Principal repayments 1,117.0 406.0 573.0 500.0 545.0Interest payments 499.0 592.9 638.6 391.6 343.0 Short-term debt 374.0 424.9 456.5 274.2 215.5Total debt service 1,616.0 998.9 1,211.6 891.6 888.0Ratios (%) Total external debt/GDP 43.8 33.8 23.9 30.0 37.1Debt-service ratio, paida 8.7 5.0 4.2 3.8 4.3

Note. Long-term debt is defined as having original maturity of more than one year. a Debt service as a percentage of earnings from exports of goods and services.

Source: OECD, External Debt Statistics.

Foreign reserves (US$ m)

2000 2001 2002 2003 2004Total reserves excl gold 7,082.4 9,897.3 9,208.1 7,577.0 8,241.9Gold (national valuation) 103.9 103.2 105.9 107.7 107.6

Total reserves incl gold 7,186.3 10,000.5 9,314.0 7,684.7 8,349.5

Source: IMF, International Financial Statistics.

60 Kuwait


Exchange rates (KD per unit of currency; annual averages)

2000 2001 2002 2003 2004US$ 0.307 0.307 0.304 0.299 0.295£ 0.465 0.441 0.456 0.487 0.540

Qatari riyal 0.084 0.084 0.083 0.082 0.081Saudi riyal 0.082 0.082 0.081 0.080 0.079Bahraini dinar 0.816 0.815 0.808 0.795 0.784

UAE dirham 0.084 0.084 0.083 0.081 0.080


Editors: Neil Partrick (editor); Ben Faulks (consulting editor) Editorial closing date: October 14th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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