Kuwait’s ambitious economic reforms face big challenges

Summary: Kuwait’s efforts to move away from a rentier economy are encountering stiff headwinds.
Kuwait’s Vision 2035, a plan first released in 2010, then shelved before being revised and re-introduced in 2017, aims to achieve a diversified economy, one that no longer relies primarily on hydrocarbons, and that empowers the private sector while reducing the public sector’s role in the employment of nationals.
The first version of the plan became mired in controversy after it was revealed that Tony Blair Associates was reportedly given £27 million in consultancy payments. Kuwaiti parliamentarians were outraged at the exorbitant fees paid to the former British prime minister’s firm. At roughly the same time, the price of oil spiked to over $100 a barrel, a figure that held for nearly four years before plunging dramatically. As with other Gulf states Kuwait, buoyant with hydrocarbon wealth, lost its sense of urgency in carrying out economic reforms. The plan quickly disappeared. It was only when the price of oil crashed, at one point falling below $30, that the urgency re-emerged and Vision 2035 was pulled off the shelf, polished up and presented to a bemused public and still sceptical MPs in 2017.
Three years on with oil prices stubbornly hovering around $60 (with the coronavirus driving them down even further to around $55) pressure is growing finally to move forward on diversification. Typical of the mood is a recent article in Gulf Business titled “Why Kuwait has to adapt and change now.” The writer argues the country is suffering from its fixation on oil: “This means,” he notes “that Kuwait’s economy continues to be subject to the volatility of energy prices. To make matters worse, the majority of citizens are employed in the public sector with low rates of economic productivity.”
Indeed, the extent to which oil revenues are used to fund public sector jobs (more than 75% of Kuwaiti nationals work in the public sector) and support heavy state subsidies in a rentier economy is but one of several challenges that Vision 2035 faces. A study just published by the London School of Economics Middle East Centre’s Kuwait Programme notes that Kuwait is not alone among Gulf states in grappling with expectations from what it calls “rentier citizens”  who expect “exceptional welfare provisions, economic subsidies and, critically, guaranteed lifelong jobs.” In Kuwait, the majority of nationals who are without jobs would prefer to remain unemployed while waiting for a public sector job rather than to seek work in the private sector with its lower wages and far less attractive benefits.
Compounding the problem, the government’s efforts to encourage private business to hire Kuwaitis has backfired rather spectacularly.  An enforced quota system with punishing fines for firms that fail to meet the “localisation” criteria has produced ghost employment. This involves companies hiring nationals, putting them on the payroll and not requiring them to work. Fake salary payrolls have been created and office desk space reserved for these non-workers. As the study notes “this behaviour has become so pervasive that there are now tens of thousands of ghost workers in Kuwait.”
But it doesn’t stop there.  Enterprising opportunists are creating fake companies that claim to meet the quota while informally hiring migrants to work in their businesses. They then conduct a brisk and lucrative trade in migrant visas. As one informant quoted in the LSE report put it “as they are employed by a fake company, their visa is traded with other companies seeking unofficial migrant labour, who then become part of the informal labour market.”
More scrupulous business people point to other difficulties in realising Vision 2035. In order to help fire up the private sector, Kuwait needs Foreign Direct Investment (FDI) and yet despite its vast hydrocarbon wealth and its avowed intention to welcome foreign investors, the country is one of the lowest ranked regionally for FDI. As the study notes, the ranking is explained by the fact that on the ease of doing business index  “(Kuwait’s) regulatory environment, business operations and permit and registration procedures are ranked last in the GCC and 97^th in the world.”
It is not just government inertia that explains that remarkable statistic: the powerful merchant class is not keen to open itself up to outside competition and will therefore, as the LSE report says, work to “hinder policy reforms that are seen to threaten their social, political and economic activities.”
Meanwhile Kuwait’s fractious parliament ensures that economic reform will continue to be hobbled. MPs and the government are more often than not fundamentally at odds with one another. After the collapse of oil prices in 2014, the government attempted to rein in public spending, raise taxes and cut subsidies but Parliament was having none of it and has thus far blocked every effort including the imposition of VAT which, by mutual agreement was supposed to be instituted by all members of the GCC in 2018. Kuwait, thanks to a parliament that largely defines itself in opposition to the ruling Al Sabah family, has yet to implement VAT.
All of this has led the author of the LSE report, Sophie Olver-Ellis, to conclude that “it remains questionable as to whether Kuwait will be able to successfully implement Vision 2035 within its ambitious timeframe.”  For that to happen all the key players in the country – the ruling Al Sabahs, the merchant elite, parliamentarians and perhaps most importantly Kuwaiti citizens – will have to give ground. Thus far there is little sign of that happening.