Low oil prices and Kuwait’s Economy

Bader Al Humaidhi, Former Minister of Finance of Kuwait talks about the price of oil and Kuwait’s economy.

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.