Economy: The Biggest Challenge for Kuwait

Interview with Bader Al Humaidhi, Former Minister of Finance of Kuwait

You have always talked about reducing public spending in Kuwait because the oil prices might suddenly change. Now we are getting to this point. You have been ringing the alarm for the past four-five years.

Actually it’s a very crucial time for all the oil exporting countries, but mainly for my country Kuwait. As you quite rightly said, I was talking about the subject even when I was the Minister of Finance in 2006/2007. I was worrying about the point at which the oil prices would drop.  A drop which is out of our hands and that’s what is happening now. What does that mean for our budget?

In Kuwait, our annual budget starts from 1st April up until 31st March every year, so we now have almost eight months, two thirds of the year-one third of the year which is done. Now, our budget is 23.2 billion Kuwait dinars. That’s the budget which was approved by parliament. And as you know, by the end of the year, it doesn’t mean that all of the budget will be dispersed- usually there are some surpluses. Of course, some of the projects haven’t been implemented etc… but let’s go back. If the 23.2 billion budget was supposed to be completely dispersed, it could be the price of oil which means equal between expenditure and revenue is supposed to be 104. I am trying to compare now where we are now, which is 54, with 104. Putting it more simply, I mean as a quotation. Let’s suppose that the expenditure is only the average of last year. The average of last year’s expenditure for Kuwait was 19 billion Kuwaiti dinars. If we go for that, we need the price of oil to be 89.

I’m going further than that. With the price of oil in Kuwait, what happens is they usually deduct from the budget 25% of the revenues and they transfer that to the future generation fund. Let’s suppose that we don’t even do that. We don’t make the deduction. Even by not doing that, we need the price of oil to be equal between expenditure and revenues of 72. Comparing all of this with the prices I gave you, we have to compare it with 54. Now, the question is where do we go from here? I’m not an oil expert and I checked with my colleague and with some reports during the last few weeks and it especially varies from last time. Some people from Exxon and from the World Banks think it’s a supply and demand problem. They are over-supplying.

The world needs 93 million barrels per day and we are producing 97 million barrels per day. You have to add to this the many tankers all around the world owned by all the oil exporting countries, which also carry oil which is not being sold- anybody can buy this so it’s an over-supply.  Over-supply also includes Shell oils, which nowadays is mainly produced in the United States. Some countries have not gone as far as the United States. The average cost for producing that oil, as I understand from my colleagues, is between 70-75 dollars so maybe this oil in the future will stop the price continuing to be below their cost, but who knows.

Also, the other problem we have is the slower growth in India and China. What’s more, both of them used to be the main importers of oil so slower growth means lower demand from their side to the oil from the gulf and also the United States will now become self sufficient in oil. They don’t need any more oil from Venezuela, the Middle East or Nigeria. So how long can oil prices stay at this level and is there a chance they will go down? I also checked this with my colleague. Most of them are thinking if the price of oil is not going to go down, it’s not going to go up and that it might stay at this level for the next six months, maybe seven. Some of them quoted to me 2015. So the question to ask would be: how will this affect the oil exporting countries?

I saw a graph yesterday of the countries who benefit, the winners and losers of what’s happening. Of course countries like China, India, and Korea benefit from what’s happening because for them there’s our oil importing bill. Now who’s affected most? The most affected country because of that is Kuwait, more than the United Arab Emirates. You know why? Because oil revenues represent around 57% of our GDP which is higher than any other country. For the Emirates it’s 24, for Qatar it’s 22 and I can’t remember the figure for Saudi Arabia but I think it’s around 30.

Secondly, oil revenues represent 94% of our total revenue which is the highest in the region. So for us Kuwaitis, it’s not the only but it’s really the main source of income. In Kuwait now, the best scenario for us is 71. If that continues to happen, of course we’re going to have a deficit. How are we going to finance it? We have to borrow from the future generation fund. But then the question will be asked, what can we do within the budget, before transferring some money from the future generation?

Unfortunately, we have limited action we can take because 48% of our budget is for salaries and wages, 25% is for subsidies and only 13% is for project investments.

So what do you do? You cannot reduce wages and salaries. I don’t recommend, I hope they don’t reduce project investments because that’s where you can generate and build more revenues, more oil revenues. So the only one which I think they must do, is to reduce the subsidies. Everything is subsidised so much. I’ll give you one example: electricity. In Kuwait to produce kilowatts it costs 44 fils. And as you know one dinar is 1000 fils. It costs 44 fils. The only charge is 2 fils which is almost 5% of the production cost. So many things are subsidised including water and then you have subsidies for gasoline etc… Then there are subsidies for the unemployed who were supposed to be helped by being employed in the private sector.

Unfortunately, during the last two years, the government and the parliament did much more. They took action to discourage people from working in the private sector rather than working in the public sector. This increased at a high level. They increased the salaries in the public sector which made it very attractive for people to go and work in the public sector rather than in the private sector. So now, we can reduce around 500 million Kuwaiti dinars for that kind of subsidies programme so we can reduce that too.

I’ll give you another example. You know in all other countries, students pay fees to study in the universities. Here in Kuwait, the government pays 200 or 300 dinars, which is almost 1000 dollars for a student who is studying at university. Contrary to all other countries in the world we have to pay them to study which is unbelievable – we have to cut that too. I’ll give you one more example. We have, as you know, free health care in Kuwait. There are hospitals everywhere in Kuwait.

We have public hospitals which are free and private hospitals. Most people who go to private ones have insurance from their companies or from wherever. Every year, the government spends from our budget 400 million KD to send people outside for health care to send them to America or to Europe. 400 million Kuwaiti dinars over 1 billion dollars. So there is waste here and there in the budget especially in the subsidies. That’s the only way we can reduce our expenditure waste.

I hope and I would really dislike it if we were to touch any allocation for investment projects because there is a need for them. The private sector needs them for the improvement of our infrastructure but at the end of the day we are limited. We have to start reducing some fees and charges from now on. I don’t want to touch low income earners, but we have to start elsewhere. Why should a man who has a small house and who consumes very few kilowatts pay the same price as a man who has a palace, a factory or a hotel? Why should he? All other countries have brackets. People with low income would be subsidised, but those with a higher income shouldn’t be subsidised but instead pay the cost price.

That’s what I wanted to say. I just wanted to give you a very brief view about it but we have to act. We have to act sooner rather than later because this is the best time for us to start tackling and trying to address some of these financial structures because if we don’t touch these financial problems now when we have this oil price, then we will not be able to do it. If you ask me my opinion, I’ll tell you. I don’t see much hope because even with what we are seeing nowadays, there are some members of parliament close-by, who are asking to increase salaries, to increase wages etc… and some other proposals which add to our costs rather than reduce them, which they oppose. These people don’t want the government to impose any tariffs or charges. So how can I do it?

If we continue, the problem is no one can predict the price of oil. If we go back six years ago, who was expecting the price of oil to go to 100 and for it to be different now? Nobody knew, nobody knows what the price of oil will be tomorrow. Even Kuwait’s Minister of Oil will never know. I was speaking to him last night and I understand what he’s saying. He said, I don’t know what the price of oil is going to be tomorrow and he’s right in saying that because it’s not in our hands.

The demand is not in our hands, the supply our supply is in our hands but the supply from Iran, America or Saudi Arabia is not in our hands as we don’t really control it. Again, if you ask me, I’m not very optimistic and I hope the government takes very strong action regardless of what parliament says. They have to know we are heading for disaster if we don’t act now.

Don’t you think that even if salaries are paid to the people, the salaries will ultimately end up in the banks, so banks will have money to lend for capital projects? So the money will get re-invested anyway?

No, in all the countries in the world, they call it a saving ratio. Saving ratio- how much you get and how much you save. Unfortunately, the saving ratio in Kuwait is very low. There are many people who actually borrow money to travel outside, who borrow money to buy a car or to buy a house so the saving ratio is not very high, especially in the low and middle class income category. The other thing is, the problem is not finding the cash but rather finding an attractive, suitable investment project in Kuwait.

You know in Kuwait, if you look at the last six years, we haven’t had any single major project implemented, either by the private sector or by the government. Maybe one by the private sector- the Avenues Mall project, if you know about that one? But the government has done nothing in terms of major projects. There are still some projects which have not yet been finished. It’s not just the problem of saving, it’s also the problem of bureaucracy and the problem of encouraging the private sector. I believe that if we want to overcome the problems we have nowadays, we should encourage Kuwait’s private sector to act like it used to in the 60s, 70s and part of the 80s.

With the government starting to have more control as a private sector. If it has more control than the private sector, then we start to have lower growth, more corruption and also the government has the big burden of employing a lot of graduates who want to come to the labour market.

You know, in the next ten years, we have 350,000 people coming onto the labour market. Where will they go?

Where will they go if we don’t have a very active private sector?

Two years ago we spoke about the Kuwait development plan. It was earmarked the game changer in Kuwait with a lot of spending on capital projects. I think the plan was approved last year but since the low oil prices, what is going to happen in your opinion?

You see unfortunately, the five year plan was actually approved four years ago… or more than that but none of it has been implemented. You know the plan usually has an objective. Then you put in place programmes and then the project. I remember one of the plan’s objective was to reduce the percentage of non-Kuwaitis in the total population of Kuwait, to increase the participation of the private sector ie: in the GDP ratio.

Anyway, you then put in place projects and also programmes and sometimes you implement all of your projects but you don’t achieve your objective. You control things but if you don’t reduce the percentage of non-Kuwaitis to the Kuwaitis as you plan it, it means you don’t achieve your objective.

I remember at that time, the first stage of the plan, the Minister of Planning said I achieved 50% of the plan which was totally untrue. Some of them don’t understand, some of them want to implement it but they don’t understand it. Now they have another plan which I think they have submitted and are now discussing it with parliament.

The other plan didn’t materialise so will this one materialise? I don’t know. What will happen to the plan with oil prices going down? At that level, I don’t know. It’s very uncertain at the moment. You actually came at a very crucial time and I’m glad you came at this time because this time you will hear different views, my views but you will hear others too but you came at a very crucial time for Kuwait and other crucial countries.

What are the implications for the private sector?

Well as you know, in Kuwait and to some extent in other gulf states, the main motivator of the economy is the government because the government has the spending power. If the government is spending the wages, salaries, subsidies, projects – especially infrastructural projects, this ought to activate the other sectors. Activate contracting, cementing, steel, everything. Now if the government reduced its spending, this will have a negative effect on all of the sectors. There will be no more demand for steel, no more demand for cement, no more demand for labour.

No more demand. And as you know, most of the non-skilled labour in Kuwait are non-Kuwaitis. If they don’t see opportunities for jobs in Kuwait, they will leave Kuwait. If they leave Kuwait it will also have an effect on real estate because they were renting an apartment. This would also affect the demand for buying food produce, cars etc. and appliances, so it can have an effect on all sectors of the economy.

So your question is a crucial one now and the government shouldn’t reduce the investment projects. They have to continue with them because they will affect all other sectors of the economy. Also the only thing our government has to do now is to try to cut subsidies, as even if you cut them they will not affect the economy. It will put a greater burden on the people but it will not affect the economy negatively in a big way as it would if you were going to cut the investment programmes.

Last night I saw a report. Due to reducing oil prices in America, it currently saves the Americans 375 billion dollars every day, because now when they go to the gas station they pay less: before it was 4 dollars and now 2.6 dollars.

Some of the food produce is lower! As they say in Arabic, a problem for some people is beneficial for others. So something which is a problem for us, other people will benefit from it. We used to be the beneficiary and they had the problems, now it’s the other way around.

But in the globalised economy we have these days, there are no losers and winners in the globalised economy because we are one big world at the end of the day.

Yes but there are, there are. In the past, when it was 100 dollars, we got more revenue – more dollars coming to us. Now the American, European and the Chinese customers are saving more. They go to the petrol station in the UK or in the US and pay 2.6 so they’re saving 1.4.

Maybe the oil price decreasing is a good thing to make Kuwait react.

Maybe. Yes you are right. Let me tell you something. It’s never too late. There’s always a chance. You are right also saying about the Iraq invasion. It might have had an effect but it’s not the main reason. It might have had an effect. You know Germany came out of the Second World War, and now it has the largest economy in Europe. So it’s never too late.

You are right, it might be that this is the right time for us but as I said before, unfortunately I’m not seeing any rise in oil. It has been two months since it started to go down? I don’t see any solid action being taken by the government to at least start to solve the process of overcoming the problem. You see the problem in Kuwait is also that the main source of income for us is oil. So why have we not converted oil to some petrochemical project? It can have huge added value if we have petrochemicals.

Unfortunately, the democracy in Kuwait sometimes has damaged the process. It’s not because of democracy itself, it’s because some people who were elected to be a member of the parliament who came 3-4 years ago cancelled their agreement with Dow. That project was one of the good projects. We cancelled it as soon as they took over. It was not only the cost of the cancellation, but we had to pay 2.6 or 2.7, I can’t remember the figure, billion dollars for Dow.

It was because of the political struggle at that time. We should have continued it. If you were to ask me what’s the best thing to do now? As I said to you before, we should continue with our infrastructure project and the KPC Kuwait Petroleum Corporation should especially continue with their fourth refinery. They have to go for this petrochemical project again.

Now we have a discouraging environment for people to come and invest in Kuwait. I don’t know if you heard just a few days ago, that Dow again has a petrochemical project shared between Kuwait and the private sector with the government on one side and Dow on the other side. They want to sell their shares and get out of Kuwait because there is no kind of incentive for them to stay in Kuwait. It’s never too late, we can do it, but the problem is again what we have to achieve. As I previously mentioned, I’m talking about reducing the subsidies, cutting expenditures etc. but some of our members of parliament are living in a different way to what we are.

What is the outlook and the ease of doing business in Kuwait? Do you see a positive evolution?

Not yet. We are still an exporter of FDI Foreign Direct Investment. I mean we export more. There’s more investments going outside than going inside. As I previously mentioned even the Dow now with their existing projects, they’ll want to liquidate it and get out of Kuwait. So I don’t see anything promising. The bureaucracy in Kuwait is killing all motivation. Just a few days ago I saw an article about which country is doing business the best of course Singapore is number 1, Emirates is number 22, Qatar I think was number 26-28, Kuwait was number 104. It takes 180 days to establish business in Kuwait. Why? The problem we have in Kuwait is that everything is really discouraging investments.

I heard that nowadays that more Kuwaitis are liquidating their assets. Even the Kuwaitis have transferred their money outside because they cannot do business in Kuwait. They have tried to do short term business. Even in the stock market you see what’s happening nowadays and people are suffering. I don’t see any help.

Now we want to also talk about your family. You are one of the oldest families in Kuwait. Could you give us a little background? What was the evolution of your family, your roots, where you came from?

We came from, actually most Kuwaiti families, let’s say 75-80%, and come from Nejd in Saudi Arabia, the desert. My family comes from a small town north of Riyadh but they came 250-300 years ago to Kuwait, as did other Kuwaitis because at that time Nejd was a very poor area.

Most of them at that time migrated to other areas, so most of my family came to Kuwait. It has a nice harbour and so they started trading with India and Eastern Africa. They started diving for pearls and doing other business, mostly because of the sea.

My great-grandfather was from the early 20th century. Maybe 1901 or 1902. He started working as the Minister of Finance. Then his son, who was my grandfather, took over in 1914/1915. And then at the time of Kuwait’s independence, my family were handling all the financial affairs of Kuwait and then some of us after that started doing private sector business. And some others, like myself, started in the government. Not me, but my cousins own Ikea, food produce, Burger King so that’s a brief view of that.