Kuwaiti Finance Minister Barak Al-Sheetan said Wednesday that his country has 2 billion dinars ($6.6 billion) worth of liquidity in its Treasury and not enough cash to cover state salaries beyond October.
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The government is withdrawing from the General Reserve Fund at a rate of 1.7 billion dinars ($5.57 billion) a month, meaning liquidity will soon be depleted if oil prices don’t improve and if Kuwait can’t borrow from local and international markets, the finance minister told parliament.
“In the medium to long-term, in the absence of borrowing, more austerity measures will have to be applied to public spending,” the minister said. “In several decades, the FGF will run out, affecting the welfare of citizens and the state.”
Kuwait expects its budget deficit to widen in its 2020/21 fiscal year to 14 billion dinars ($46 billion), according to a ministry of finance estimate in a parliamentary document, as the economy reels from the coronavirus outbreak and weak oil prices.
The projection compares with a previous forecast of 7.7 billion dinars ($25.2 billion), according to the document seen by Reuters. Kuwait’s fiscal year runs from April 1 to March 31.
The document, which was reviewed by Reuters, stated that the General Investment Authority believes that the cost of borrowing currently from local or international banks with an expected interest rate between 2.5 and 3% will be cheaper than the cost of withdrawing or borrowing from the Future Generations Fund or liquidating assets.
The Central Bank of Kuwait expressed its belief that failure to fulfil the economic reform pledges that Kuwait made to international lenders would make any financing round abroad “difficult.”
The document quoted the Kuwait Investment Authority as saying that the General Reserve Fund was 5 billion dinars ($16.37 billion) at the beginning of the current fiscal year and decreased 4 billion dinars ($13.1 billion) within 100 days.
The depletion meant that the government may not be able to pay all the August-September salaries and other expenses, the KIA said.
Kuwait is debating this week a debt law in the parliament that would allow the country to borrow as much as 20 billion dinars ($65.5 billion) over 30 years.
The oil-rich Gulf state is scrambling to boost state coffers badly hit by the coronavirus crisis and low crude prices, and has been rapidly depleting its General Reserve Fund to plug a budget deficit.
A total of 8 billion dinars ($26.2) from the debt amount will be used to cover the deficit, while the remaining amount will be used for capital projects.
The debt raised will be paid back through a surplus in the budget or will be refinanced, the document showed.
Kuwait has failed to implement the economic reforms that it pledged to the donor community due to the popular and parliamentary rejection of any reduction in government subsidies or the reduction of the number of employees in the public sector who have become a burden on the public finances.
The coronavirus crisis and the collapse in oil prices increased the pressure on the Kuwaiti government to speed up economic reforms and rationalize spending, after its previous attempts had failed in a country where the majority of citizens rely on government jobs.
In recent years, the Kuwaiti government have slowed down the implementation of required reforms.
Experts, however, warn that the Kuwaiti government can no longer ignore the growing need to curb the breakdown in government spending and implement reforms, especially after the recession of pressures imposed by the global outbreak of the coronavirus pandemic and the decline in oil revenues.
Experts believe that rationalising spending has become an urgent necessity and that the current crisis represents a last chance to overcome the long-delayed obstacles to implementing reforms, diversifying resources and curtailing the rentier nature of the economy so as to mitigate the risks of oil price fluctuations.
The Kuwaiti economy is dominated by traditional laws, as the state controls all productive sectors and finds it difficult to reduce spending due to the political and popular rejection of any reduction in subsidies and government support, at a time when the role of the private sector is still limited in reducing the burden on the state.
Economists consider that these conditions have led to the flight of local and foreign capital, hindering the diversification of financial resources.
Even in its Vision 2035, which it announced years ago, Kuwait has not lost its dependence on oil revenues to finance government jobs, as more than 75% of Kuwaiti citizens work in the public sector, in addition to lavish government subsidies for a long list of services and goods.
Experts believe that no significant results have emerged so far from the Kuwaiti reform programme, which was first introduced in 2010 to diversify the economy, reduce dependence on oil revenue revenues, cut government spending and limit the role of the public sector in employing citizens.
Kuwait, like the rest of the Gulf countries, whose budgets are heavily dependent on exporting oil, has been affected by the paralysis of the global economy and the halting of factories in Asia, which is the main market for Arab Gulf oil.
Oil represents about 90% of budget revenues, with spending this year reaching about 22.5 billion Kuwaiti dinars ($74 billion).
The demands to speed up the treatment of financial imbalances have recently gathered steam after the pandemic exacerbated negative indicators, suggesting a record budget deficit.
Last May, Kuwaiti Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah warned of the repercussions of the coronavirus pandemic on the economy and called for tightening belts and rationalising expenses.
The emir described the pandemic as a test that requires lessons to be learned, calling for rationalising government spending and working to diversify sources of income to reduce dependence on oil revenues.
He pointed out that the pandemic “shook the foundations of the world economy,” noting that “Kuwait faces a great and unprecedented challenge to preserve the safety and durability of our national economy from external shocks resulting from this pandemic, especially the sharp decline in oil prices and the decline in asset values and investments.”
The issue of reforming the Kuwaiti economy has been at the heart of political wrangling in the country for years, with the country failing to take practical steps towards diversifying its resources, reducing spending, and fighting corruption.
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