Economic stagnation amid falling oil prices

Kuwait’s economy continues to improve, thanks to strong oil prices, and inflation is under control. Increases in local and foreign demand helped boost non-oil GDP growth to +4% in 2022. As a result of this and an uptick in oil production, real GDP growth in 2022 jumped to +8.2%. Growth in non-oil GDP is expected to remain robust, driven by domestic demand, and steady over the medium term. In contrast, growth in oil GDP is likely to fall owing to production cuts, with a current level of 2.5mn barrels per day (mbd) on average, compared to a previous average of around 3mbd. We expect overall GDP growth to remain below the historical average of +2.8% in 2024 after an estimated stagnation or mild recession in 2023, confirming the volatile nature of Kuwait’s GDP.

Inflation is kept in check with the support of monetary policy tightening and the peg to a basket of currencies, resulting in a stable level of KWD0.3 per USD throughout the past eight years. Subsidies for staples such as rice and sugar, as well as controls on domestic fuel prices, have also helped counterbalance volatility in international prices. Core inflation (excluding food and transportation) has been falling since Q2 of 2022. We project an average inflation rate of 3% for 2024.

Both the external and internal balances have improved, and external buffers are growing. In 2022–2023 (April–March), the government reached a surplus of +23.4% of GDP, thanks mostly to high oil income but also to expenditure discipline, which should have allowed it to transfer the equivalent of more than 10% of GDP to the sovereign wealth fund. The size of the sovereign wealth fund is more than five times that of GDP. The current account surplus surpassed 30% of GDP in 2022, thanks in large part to rising oil revenues, and is estimated to have remained high in 2023. The country’s official reserves alone amounted to around USD50bn as of the end of 2023, equal to ten months of projected imports. Financial institutions have ample capital and liquidity, and provisioning ratios for non-performing loans are stable.

The opposition-dominated single-chamber parliament approved the 2023–2024 (April–March) budget in August after continuous negotiations. Overall spending is expected to increase by +15% to about USD85bn, yet only 9.5% of the budget is allocated to capital spending, despite the need for long-delayed infrastructure upgrades and development projects. The fiscal breakeven has been conservatively set at an oil price of USD70 per barrel.

In May 2024, the new Emir Meshal al-Ahmad al-Sabah dissolved and suspended the National Assembly for up to four years, just a few days after a new round of elections had taken place. This decision came after years of political instability and tensions between the Royal family and an opposition-led Parliament. This move consolidated power in a smaller group of leaders, which could bring short-term stability, but defers addressing the nation's divides among different societal groups. Since taking office, the new leadership has proposed a set of measures that would address gaps according to OECD standards in trade and investment sectors, including the introduction of a 15% business tax to all business – until now only due for non-GCC companies – an excise duty and new rules on transparency, all with the aim of reducing reliance on oil revenue. However, the new rules would not significantly expand government revenues. All major reforms to do so, including a VAT and a new debt law that would allow the country to raise money in money markets, providing new sources of funding ahead of oil prices, have been ruled out.

Iraq’s invasion of Kuwait in the 1990s left a lasting impact on the country's parliamentary system and foreign relations are now under scrutiny. Kuwait hosts the largest number of US troops in the region, while having strong economic ties with China and Iran. Yet, recently, Kuwait agreed to start extracting gas from Durra gas field together with Saudi Arabia. This field is located between the Iran-Saudi Arabia-Kuwait maritime border and Iran claims its sovereignty. Kuwait’s flexibility in managing its foreign relations has allowed it to benefit from being under the US security umbrella while receiving increased Chinese investments, as well as retaining strong ties with its Sunni and Shia neighbors.

Kuwait’s biggest threats are dictated by its geography, rising temperatures due to climate change and a difficult regional environment. Climate events in Kuwait will continue to be more extreme. As seen in the UAE, extreme rains could become the norm during specific periods. Rising temperatures will also take an increasing toll on Kuwaitis and foreign labor: it is estimated that more than 10% of deaths will be due to extreme heat and above 15% of foreign workers are exposed to long hours of heat. The regional context of war in the Middle East could also play an important role in the country’s future. Relations with Iraq remain tense as it considers a UN-approved international border at the Khor Abdullah canal unconstitutional and keeps pressuring Kuwait to redraw the borders to control the entire canal. Finally, Kuwait is highly dependent on the open maritime borders of the Strait of Hormuz. More than 60% of Kuwait’s oil exports cross the strait by boat and the growing LNG economy is also expected to use the same route. Given current geopolitical instabilities, Kuwait’s economy could be collateral damage from a potential closure of the strait.