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French Version

Saddam's fall leads to an economic renaissance

In the words of one Kuwaiti banker, it was as if the sword of Damocles had been lifted suddenly. The ouster of Iraqi President Saddam Hussein in 2003 has led to an economic renaissance in the tiny constitutional emirate ruled by the Al-Sabah family.

The government has launched a massive infrastructure spending drive amounting to billions of dollars, moved to open Kuwait's historically closed economy, and watched as the stock market soared to record levels.

The fall of Saddam, who invaded and occupied Kuwait in 1990, happily coincided with a boom in oil revenue which led to 16.4 percent nominal GDP growth in 2003. Nominal GDP climbed by an estimated 20 percent in 2004.

Moreover, Kuwaiti firms are winning lucrative contracts in Iraq's rebuilding process. Two of Iraq's three telecom operators are Kuwaiti owned and the National Bank of Kuwait has recently purchased the Credit Bank of Iraq.

The Sabah family is taking advantage of the windfall to try to secure the emirate's long-term economic health. In the past two fiscal years, spending on infrastructure has jumped from 14 percent of Kuwait's budget to 23 percent.

Evidence of this new spending spree is everywhere. Kuwait's highway system is undergoing expansion, highlighted by the construction of 22 kilometer bridge across the Bay of Kuwait. The bridge, which connects Kuwait City to the underdeveloped northern desert region, will be the fifth longest in the world. With a surging population in mind (growth was estimated at 8 percent in 2004), the state has set aside no less than $3 billion for a new Kuwait University campus.

Then there are the development projects on Kuwait's Failaka and Bubiyan islands, which boast Greek ruins and sandy beaches Kuwait believes can become tourist magnets.

The scale of it all is staggering, at least for a country with only 950,000 people.

"We estimate we could reach over $30 billion in spending over the next two years," National Bank of Kuwait chief economist Randa Azar Khouri told The Daily Star. "If we're talking about the next five to six years, it will be closer to $60 billion."

While the Sabah family throws oil money at long-term development projects, is it doing enough to prepare for the day the wells dry up?

Currently, 92 percent of Kuwaitis enjoy government jobs, certainly not a sustainable situation without high oil revenue. Azar Khouri asks: "Is it real employment or is it just masked unemployment? Maybe 50 percent are not really working. Productivity suffers."

With almost 10 percent of the world's supply, Kuwait still relies on its oil exports for 90 percent of its revenues. To reduce this dependency, Central Bank governor Sheikh Salem Abdel-Aziz al-Sabah is moving to eliminate tax exemptions for Kuwaiti nationals. Local companies currently pay negligible taxes, compared to a tax rate of up to 55 percent for foreign companies.

But by raising taxes on local companies, the government risks stifling a private sector it says needs to develop.

"Going from paying 3-5 percent in taxes to 20 percent can be quite a big burden for local companies," Azar Khouri says. "You're not helping promote the private sector."

Reforming its tax code is part of Kuwait's obligation to the World Trade Organization, which it joined in 1995. Under WTO provisions, Kuwait must further liberalize its economy. Progress, however, has been checkered.

The state is still heavily involved in the economy, owning the national airline, utilities, and hospitals. Parliamentary laws are required for any privatization to proceed.

Conservative elements still resist foreign investment, such as the $7 billion "Project Kuwait" plan to develop oil fields in the northern desert.

The government is moving forward anyway, signing a deal last month with a group of U.S. based investors to build a petrochemical complex south of Kuwait City.

Kuwait also announced in early July that it is accepting bids for tenders on a new oil refinery worth hundreds of millions of dollars.

Foreign expertise, the government believes, is essential for meeting its goal of raising output capacity from 2.7 million barrels per day (bpd) to four million bpd by 2020.

By all accounts, Kuwait's future looks strong. For now, the state has enough money to keep unemployment at only 2.5 percent. The rebuilding of Iraq will take years and will continue to profit Kuwait's export industry enormously. Meanwhile, foreign investment is pouring in and shows no signs of tapering off. Finally, Kuwait's Reserve Fund for Future Generations is flush with $75 billion, providing a measure of long-term stability.

"Reforms have boosted investor confidence in the region," Azar Khouri says. "Liquidity is high and with the rise in oil prices people are looking for a brighter future. You've got all the prospects of a boom."

Beirut,07 25 2005
Will Rasmussen
The Daily Star
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