Moving Beyond Oil: Kuwait’s Vital Economic Shift

by Woroud Aldossari

Oil’s likely loss of its dominant global status in the foreseeable future has prompted Saudi Arabia, the UAE, and other GCC countries to make provisions for the advent of that novel state of affairs. And yet, eschewing any such preparations, Kuwait stands apart, resolutely anchored in the past.

The persistent reliance of Kuwait’s economy on oil may be demonstrated statistically. Around 50% to the country’s GDP, 90% of its total exports, and 90% of the government’s revenue are oil-based. As a result, it can never be certain of its forthcoming income, since global oil prices are notoriously volatile. 

For the time being, Kuwait can afford its intransigence, since it is in a very strong financial position. Not only does it boast the Kuwait Investment Authority (hereafter the KIA), one of the oldest and largest sovereign wealth funds in the world, with assets exceeding $700 billion, but it possesses vast oil reserves and enjoys low levels of public debt. Such advantages, which combine to guarantee a high credit rating should not, however, be allowed to occlude is failure to realise its economic potential.

Flaws in Kuwait’s Economic Arrangements

A fundamental feature of Kuwait’s economic structure, and one with markedly deleterious consequences, is its definition of the relationship between government and state along the lines of a welfare-state model. On this basis, the government subsidises oil and food, even though many citizens are financially capable of providing these commodities for themselves. It also increases salaries even though the level of industry falls considerably below that observable in comparably rich countries. These provisions, which together cast the state in a paternalistic role, have the pronounced effect of encouraging people to live without responsibility, of disincentivising them to play a suitably energetic role in the economic cycle, and even of engendering the expectation that the government will pay off personal debts. The mindset inculcated by this regime is sufficiently pervasive and deep-rooted to preclude an instant overhaul, but gradually reducing government support for products and services could be a potential solution.

Another major challenge facing Kuwait is posed by the dominance of its public sector. Currently, 80% of Kuwaitis are employed by the government. This creates an unsustainable wage bill and hampers overall economic productivity. Worker productivity in Kuwait’s non-oil sector is significantly lower than in the United States (US), with US workers producing four times more than those in Kuwait. The public sector cannot continue to absorb future generations at the current rate while maintaining relatively high wages and comfortable working conditions. For a sustainable future, 70% of new labour-market entrants need to pursue private-sector roles, where wages and career growth are tied to productivity and merit. To promote a trend in this direction and eventually achieve this target, the government must slow the growth of wages across the public sector, whilst reducing bureaucratic inefficiency in the private sector and cutting back on the employment of expatriate labour. These reforms will no doubt run up against political obstacles. Kuwait’s constitutional monarchy, with an active parliament, often experiences political gridlock. But such difficulties cannot be allowed to weaken the country’s determination to shift the balance between public and private sectors.

A third feature of the Kuwaiti economy in urgent need of reform relates to the excessive role played by the KIA in covering fiscal deficits. The government should focus on balancing the budget through fiscal reforms, such as reducing subsidies and public sector employment, rather than withdrawing from the sovereign wealth fund. If Kuwait fails to institute reforms in this area, pressure may mount to tap into the Future Generations Fund to cover deficits. Yielding to these demands could deplete the country’s current savings.

Kuwait also faces low levels of Foreign Direct Investment (FDI). Various barriers, including complex regulations, inadequate infrastructure, and political uncertainties, make it difficult to attract foreign investors to its non-oil sectors. This limits the growth of industries outside oil and reduces innovation, job creation, and economic diversification. In order to encourage foreign companies to invest in Kuwait, they must be spared the bureaucratic hurdles, lengthy paperwork, unclear legal processes, and restrictions on ownership which for the time being encourage them to seek opportunities elsewhere in a more congenial economic environment. A ‘one-stop-shop’ system, such as that employed by the UAE, would appear to be the answer.

Future Recommendations

Above all, it needs to look to a future in which oil plays a less significant role. To this end, it must invest in non-oil sectors such as renewable energy, manufacturing, technology, tourism, and financial services, and encourage the development of export industries beyond oil, such as petrochemicals, and agriculture. The government can play a key role here by fostering public-private partnerships that build industries less reliant on oil.  Over time, Kuwait should focus on making manufacturing a key pillar of its economy to support export growth. Alongside this shift in emphasis away from oil, two further developments are necessary. First, the government must reduce the size of the public sector by implementing hiring freezes, offering early retirement incentives, fostering public-private partnerships, and reskilling young Kuwaitis, particularly in emerging industries like tech startups and small and medium enterprises (SMEs). Providing incentives to companies that hire nationals, such as wage subsidies, can help in this regard.  Second, the paternalistic relationship between the government and its citizens stands in need of urgent reform. The government must transition away from widespread subsidies and encourage citizens to take more responsibility for their economic welfare, fostering a culture of productivity and self-reliance.

The changes envisaged are extensive. Political will, along with consensus, will be vital to their implementation. However, they promise to deliver a more diversified, productive, and sustainable economy, ultimately securing the country’s long-term economic stability and resilience. In this 2035 vision for Kuwait, it addressed many of the challenges facing the nation. I believe change must begin immediately, but it cannot all happen overnight.

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