About Kuwait - The Economy of Kuwait

Oil and oil related products have tended to dominate the economy since the production of oil from the Burgan field commenced in the 1940s. As long as oil remains a valuable energy source, it will continue to play a substantial role in the future economy of the country. Kuwait has about 10% of the world’s proven oil reserves which are estimated to last for another 100 years at the present level of extraction. Exports of oil and oil related products represent more than 90% of total exports. For the year 1997, total exports including re-exports were US$14.3 billion of which oil and oil related products were $13.6 billion. This is a remarkable accomplishment given the fact that the oil industry infrastructure was virtually destroyed during the invasion by Iraq in 1990 and 1991.

A number of the more important statistics for 1997 illustrate the size and various features of the economy. The balance of trade surplus continues to grow at $6.8 billion with the current account balance at a very healthy $6.5 billion. Both of these figures illustrate the robust state of the external trade and current account. Imports from America (20%) and Western Europe (35%) account for the major part of imports. Kuwait has one of the largest gross domestic products in the region at $31.5 billion in current prices. This figure continues to grow each year and was up from $24.1 billion in 1994. GDP per capita of Kuwaiti population is a very healthy $42,000 which again continues to grow each year and was up from $35,000 in 1994.

The Government continues to pursue a policy of a balanced domestic budget. Despite the very high expenditures in the years following the invasion required to rebuild the country and which therefore necessitated deficits, these deficits have been reduced gradually over the years. In fact, provisional data for the fiscal year 1996/1997 indicates that a surplus of over $1.5 billion will be achieved, which is a magnificent achievement. Whilst this outstanding performance can mainly be attributed to the growing oil revenue, the success of the privatization program has reduced the financial burden of a number of public utilities on the central budget.

The demographic figures provide some interesting statistics. According to the latest census carried out in 1997, the total population of Kuwait was 2.21 million. There were 760,000 (34%) Kuwaitis and 1,450,000 (66%) non-Kuwaitis. Of the non-Kuwaiti population, 460,000 or 32 % were from other Arab States, 970,000 or 67% from the Asian countries with the balance mainly from Western Europe and America. There were about 197,000 Kuwaitis in the labor force of which 185,000 (94%) were employed in the public sector, whereas, the majority (84%) of the non-Kuwaiti working population of just over 1 million work in the private sector. The majority of non-Kuwaitis are single expatriates who are employed in households, social services, construction, wholesale and retail trades and restaurants.

The purchasing power of the population mainly lies with the Kuwaiti population. Most expatriates remit the bulk of their earnings home to support their families and only purchase electrical goods at either the time of their leave or at the end of their contract. The distribution of the Kuwaiti population according to age groups indicates the dominance of young people. There were 332,000 (44%) in the under 15 age group and 542,000 (72%) in the under 30 age group. Also, it is interesting to note that of the 99,000 Kuwaitis in the 35 to 49 age group, 45% are males and 55% females.

It is most likely that the Kuwaiti population will continue to grow at a rate of about 5% per annum, confirming the propensity to spend on services and consumer goods targeted at young people. The non-Kuwaiti population will start gradually to decline due to the impact of replacing expatriates in the labor force with the young Kuwaiti graduates and school leavers..

The Oil Sector

Kuwait is a major world oil producer. Commercial production of crude oil commenced in 1946 and peaked at 3.3 million barrels per day in 1972. Currently, Kuwait is pumping just over 2 million barrels per day although it has the capacity to pump up to 2.5 million barrels per day. Plans have been established to move this capacity up to over 3 million barrels per day by the year 2005. Crude oil exports account for about 60% of the output with the remaining 40% used in downstream refining projects

The oil industry which had been managed since 1934 by Kuwait Oil Company, a joint venture between the U.S. Gulf Oil Company and the Anglo-Persian Oil Company (British Petroleum), came under direct Government control in 1980. In that year, management of the oil sector was vested in the government-owned Kuwait Petroleum Corporation (KPC) which has become one of the largest oil conglomerates in the world. KPC manages the sector through various subsidiary companies that are responsible for the day-to-day running of the various activities.

Oil prices have fallen in 1998 to levels as low as $10 per barrel from an average for 1997 of about $18 per barrel. This was due to falling demand from the Asia Pacific region. This region has been the fastest growth area in the world and as soon as it recovers and gets back on track, the demand for oil will begin to recover as well as the price. The forecast of the International Monetary Fund is that the Asia Pacific region economies will begin to pick up in 1999 and continue to grow very strongly once again. The World Bank are forecasting that the average price of oil in 1999 will be around $14 per barrel. Kuwait and the Gulf region have very low costs of oil recovery and production at under $2 per barrel compared to other oil producers’ costs which vary from $7 to $20 per barrel. This means that it will be the high cost producers that will suffer during this short period of low oil prices.

The Public Sector

The public sector runs the Government’s affairs and comprises over 30 ministries, public authorities and institutes. The major ministries are defense, oil, public works, finance and planning, interior, health, education, communications and electricity and water.

A number of major projects are under way within the various ministries. Current projects include extensions to the highway system, construction of three electricity sub-stations, redevelopment of the Kuwait University campuses and a very large construction project of an industrial water treatment plant in Sulaibiya with a capacity of 16 million gallons per day. Five consortia have been approved in the pre-tender qualification and bids for the water treatment project which is valued at upwards of $250 million are expected to be submitted in early 1999. This list continues to grow and is by no means exhaustive, but serves to illustrate the scale and variety of current projects.

One of the largest public authorities is the Public Housing Authority, which is responsible for meeting the increasing demand for housing. A number of projects are on the drawing board, including a new city at Subiya in the north eastern part of Kuwait. This will involve the construction of a multi-lane causeway across Kuwait bay. It is very likely that this project will involve private sector participation which will help to reduce the growing demands on the budget.

The state-owned Touristic Enterprises Company (TEC) manages most of Kuwait’s tourist facilities, including the famous Kuwait Towers – a landmark and emblem of Kuwait, the Entertainment City at Doha, sea club developments along the coastline including a luxury development at Khiran near the border with Saudia Arabia. TEC is involved in a number of schemes that are expected to open in 1999, the major one being the underwater aquarium and Imax theatre complex in Salmiya with funding coming from the Kuwait Foundation for the Advancement of Sciences (KFAS).

Kuwait Airways (KAC) is another public utility that may be privatized with the Government retaining a 40% share and a further 10% being allocated for KAC staff. KAC has undergone a fleet modernization program with two Boeing 777’s recently added to the fleet of 18. The attendants received their new uniforms in 1998 and its on-board services have been upgraded to bring its standards of customer care into line with the world’s top airlines.

Banking and Finance

The Central Bank of Kuwait (CBK) is the Government’s sole agent for control of monetary policy and the supervision of banks, insurance and investment companies. There are six Kuwaiti-owned commercial banks – Al Ahli Bank, the Bank of Kuwait and the Middle East, Burgan Bank, the Commercial Bank of Kuwait, Gulf Bank and the National Bank of Kuwait. In addition, there is the Kuwait Finance House which is a Kuwaiti-owned Islamic financial institution offering Islamic banking services. The Bank of Bahrain and Kuwait (BBK) is a 50% locally-owned branch. Also, there are three specialist banks - the Industrial Bank of Kuwait, the Kuwait Real Estate Bank and the Savings and Credit Bank (SCB).

Consolidated total assets of the commercial and specialist banks (except for BBK and SCB) were over $42 billion at the end of 1997. Total shareholder’s funds were $4.2 billion which represent very healthy debt-to-equity ratios in line with the world’s top banks. Distribution of bank credit to the private sector was mainly in personal facilities.

The Kuwaiti Dinar (KD) is a freely convertible currency. It floats against a trade weighted basket of currencies with daily fixings. The U. S. Dollar is the dominant currency in the basket as it represents about 60% of trade. Consequently, the KD has remained relatively stable against the U. S. Dollar since 1993 ranging from a low of 297.62 fils per US$ to a high of 305.57 fils (there are 1000 fils per Kuwaiti Dinar).

The Discount Rate - against which all local commercial rates are linked - is set by the Central Bank of Kuwait and has also been relatively stable during the 1990s. It has ranged from a low of 5.75% for most of 1994 to a high of 7.5% in early 1993. The policy of stable interest and exchange rates provides the required fertile ground for sound economic growth.

The Kuwait Stock Exchange officially regulated trading in 1983. Trading previously had been on an informal basis. In 1995, the Exchange introduced electronic trading that eliminated settlement delays. Quoted companies fall into eight main sectors: Banking, Investment, Insurance, Real Estate, Industrial, Services, Foodstuffs and non-Kuwaiti companies. For the year 1997, there were 588,172 deals transacted representing a turnover of $35 billion of which over 50% was in the Investment and Real Estate sectors. There are moves afoot to expand the market by allowing non-GCC nationals to participate in the market.

The Private Sector

For over two centuries, Kuwaitis have been traders. It is because of this historical background and the presence of an active merchant community that trading plays an important role in the private sector today. The older generation remember the shipment of timber from Africa and drinking water from the upper regions of the Gulf by the traditional Kuwaiti dhow. Today, private company trade is mainly the importation of automobiles, white and brown goods, and foodstuffs by container ships or roll-on-roll-off vessels.

There are very few manufacturing companies in Kuwait, although this could change as there is a move by the Government to attract large scale downstream oil projects and plans for an aluminum smelter are well developed . The private sector mainly comprises construction, automotive importers, business equipment importers, hotels, restaurants and retail outlets. A small number of major trading houses owned by prominent Kuwaiti families control the sector.

A number of waterfront developments are in the process of being developed by the private sector on a BOT (build – operate – transfer) basis, some of which involve the provision of housing for the National Housing Authority. These BOT projects are for twenty year periods from the end of construction after which the projects revert to the Municipality. In addition to the Sharq Waterfront Project which opened in late 1998 and built at a cost of over $50 million, there are two further projects that will commence construction in 1999 which will involve the provision of housing or public buildings. First, a stretch of 4.5 kilometers along the Shaab waterfront at a cost exceeding $125 million and providing accommodation for 250 families. Secondly, a 3 kilometer stretch in Salmiya involving the construction of a number of public building including a public library at a cost of about $80 million.

A number of areas in the private sector have achieved very good growth rates in recent years. There are a number of new fast food outlets planned especially to cater for the growing younger generation Also, mobile telephony and the provision of internet services have been a rapid growth market in recent years. At present, one private company dominates the provision of mobile phone services but another company has been established which will make this area very competitive in the light of the growing demand. Also, there are presently only two internet service providers but again a number of new providers will ensure a competitive rate structure for this growing area of the market.

Foreign Businessmen in Kuwait

There is excellent potential for export to Kuwait as it imports almost all of its requirements. Also, there is a growing need for consultancy firms in a variety of disciplines from Human Resources to Environmental Controls. The usual starting point for new businessmen to Kuwait is participation in one of the many trade missions organized by various Chambers of Commerce or Trade Associations abroad. Commercial sections of local foreign embassies are highly effective in promoting and facilitating these visits. They are also the places to obtain up-to-date legal and tax information as well as introductions to the many law and accounting firms which employ a number of foreign nationals.

In order to be effective in obtaining business in Kuwait , it is best to have a local agent. An agent’s business and Government connections and his knowledge of the local market are essential ingredients for success and a list of reliable and well established ones can be obtained from the commercial sections of the various embassies. Also, shrewd foreign business persons will make sure that their agent has no conflicting products or services.

Kuwait Free Trade Zone

The Government established this initiative in 1997 which came to fruition in 1998 by the formation of the privately owned and funded Kuwait Free Trade Zone (KFTZ). The KFTZ is fully backed by its parent – the National Real Estate Company one of the best managed companies in Kuwait with a paid-up capital of $144 million.

The location of the KFTZ is in the industrial and trading zone of Mina Al-Shuwaikh that is very close to the main commercial area and port of Shuwaikh. It is ideally situated to take advantage of the local infrastructure. The KFTZ offers an unbeatable combination of incentives including tax-free personal or corporate income, minimal bureaucracy and absence of monetary restrictions and attractive insurance rates. Commercial and trade licensing applications can be processed in 24 hours of receipt and industrial licenses can be granted in less than a week.