Kuwait’s acting Minister of Finance, Nayef al-Hajraf, made a startling admission on 22 March that sheds light on the Gulf state’s Achille’s heel. Speaking just days after a twenty-five per cent pay increase for public sector workers who had not received a recent increment, and the ending of a series of damaging strikes, by customs workers and employees of Kuwait Airways, he suggested that current rates of expenditure would require oil prices of $109.50 to balance the budget in the 2012-13 fiscal year. Moreover, al-Hajraf added that if spending patterns remain unchanged, Kuwait would be required to continue producing three million barrels of oil per day, at an astronomical price of $213.50 per barrel, by 2029-30. More broadly, he identified serious bottlenecks in Kuwait’s current political and economic development, citing, in particular, ‘the rapid growth in salaries, the huge increase in current expenditure compared to investments made, as well as the lack of diversified source of income.’
This remarkable intervention made reference to several issues which pose a profound challenge to policy-makers in Kuwait and the other Gulf Cooperation Council (GCC) states. In these major oil-exporting countries, the state has been a distributor, rather than an extractor, of wealth. This has underpinned a social contract that has endured the upheavals of Arab politics elsewhere in the Middle East and North Africa, and shown its resilience again over the past year. However, the policy responses to pre-empt potential unrest have, paradoxically, heightened the Gulf States’ vulnerability to deeper economic and fiscal challenges of unsustainable development.
The challenges are clear to see, and were laid out by al-Hajraf’s citation of the $109.50 price of oil required to meet public sector expenditure requirements. In all Gulf States, the break-even price of oil deemed necessary to balance their budget has increased inexorably over the past decade, as public expenditure soared during the prolonged post-2003 oil price surge. Since 2004, budgeted spending in Kuwait has trebled, and by 2011, the cost of meeting public sector salaries was estimated to be equivalent to eighty-five per cent of the country’s annual oil revenue. High public sector wage increases exceed the rise in the cost of living and pose a major problem for the state budget in the long-term. Moreover, they further discourage Kuwaitis from seeking jobs in the private sector, undermining one of the major pillars of the Four-Year Development Plan approved in 2010.
This steady rise in public spending leaves the Kuwaiti government (alongside the other Gulf States) dependent on oil prices remaining high. Any significant drop would leave them exposed, and although their massive capital accumulations and budget surpluses in recent years provides a buffer of sorts, it does leave them a hostage to fortune should prices remain low. It is, after all, only three years since prices plunged to $33 a barrel, and while they have since recovered, the massive shifts underway in the (unconventional) global energy landscape could yet portend a coming glut on the market.
Here, two further issues present themselves. The first is that it is politically very sensitive to tackle the entrenched economic interests and layers of subsidies that shield GCC nationals from the market price of most commodities and public services. Furthermore, Kuwait’s parliamentary system, in which organised parties do not exist, instead encourages such populist initiatives by individual MPs seeking public and political (rather than ideological or party-based) support. As if on cue, days after al-Hajraf’s warning, leading opposition MP Waleed al-Tabtabae announced he was forming a parliamentary committee to press for a thirty per cent salary increase for public sector employees. The enduring relevance of populist initiatives was visibly borne out by a 2006 survey of Kuwaiti voters conducted by the National Assembly to rank public perceptions of national priorities. Then, a parliamentary proposal to have the government pay off consumer debts emerged as the most popular, in stark contrast to stock market reform and policies to encourage foreign direct investment, which came bottom of the nineteen possible priorities.
The second issue concerns Kuwait’s oil and gas prospects. Al-Hajraf referenced a three million barrels per day benchmark for 2030. At first glance, that seems unproblematic; Kuwaiti oil production rose above three million barrels per day in 2011 for the first time since 1973, and the government has plans to raise capacity to four million barrels per day by 2020. However, important hurdles remain to be tackled. These include Kuwait’s ageing oil infrastructure and the political deadlock surrounding major upgrade initiatives, most notably the stalled Project Kuwait plan to develop five northern oilfields near the Iraqi border. Other challenges are the technological complexities of developing Kuwait’s substantial reserves of heavy oil and sour gas, both of which would benefit from the expertise of international companies, but which have been delayed by the parliamentary gridlock over the degree (and desirability) of the level of foreign participation in the hydrocarbons sector.
Finally, one of the most pressing problems, which combines the political sensitivities and production challenges outlined above, is how to restrain rapidly-rising domestic energy consumption. Figures for 2010 suggest that some sixteen per cent of Kuwaiti oil production (equivalent to 413,000 barrels per day) were consumed domestically, and that this had risen by sixty-six per cent since 2000, far outstripping the production increase of only fourteen per cent over the same period. This is not uniquely a Kuwaiti problem; in summer 2011, a widely-reported paper by Riyadh-based Jadwa Investment last summer painted a near-apocalyptic picture of a looming fiscal crunch in Saudi Arabia should its spending and oil consumption trends not change. It forecast that domestic oil consumption could rise from its present level of 2.4 million barrels per day to 6.5 million barrels per day by 2030 if current trends continue, by which time the break-even price of oil would have risen from its 2011 level of $84 to an unsustainable $320 per barrel. It warned that three major trends – sharply rising domestic oil consumption, rapid growth in public expenditure, and the increasing break-even price of oil, could, if unchecked, ‘portend a much more difficult energy and revenue future for the Kingdom.’
These are deeply problematic trajectories, as they strike at the heart of the social contract that underpins redistributive polities. The oil-exporting Gulf States do not make money by extracting oil; they do so by exporting it at international market prices. Yet domestic trends threaten to tamper with this in increasingly disruptive ways. In so doing, they reduce the government’s room for manoeuvre and leave them dangerously reliant on factors beyond their control, such as oil prices remaining high. At this time of transformative change and upheaval across the Arab world, the old ‘tried and tested’ mechanisms of wealth distribution are coming under strain as never before. The challenge for Kuwait and the other GCC states is how to manage the processes of reform, and the difficult political choices that necessarily accompany it, to ensure that change is incremental and consensual, rather than sudden and violent.