Kuwait’s latest standoff is deeply concerning for both the near and long term, writes Andrew Cunningham

The decision by Kuwaiti emir Sheikh Mishal Al-Ahmad to dissolve the country’s recently elected parliament just days before its inaugural session on May 14 presents overseas investors and Kuwaiti citizens with more uncertainty.

The situation raises concerns about the country’s economic prospects over both the short and long term.

Disputes and stand-offs between Kuwait’s emirs and its boisterous parliament are nothing new. Parliament has been dissolved, and the constitution suspended, numerous times over the past 40 years. The country has held four elections in the past four years.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

Squabbling between the two sides is rooted in political disagreements and this most recent outbreak is no different.

A major factor behind the latest dissolution is believed to have been parliament’s objection to Sheikh Mishal’s choice of crown prince. Although the crown prince is nominated by the emir, the appointment has to be ratified by the parliament.

But these political, and sometimes personal, disputes have real consequences for Kuwait’s economy and financial system and, ultimately, for the long-term welfare of its citizens.

Kuwait is a prosperous country. If we take a snapshot today, we see it producing nearly 2.5 million barrels of oil per day (bpd), and there are plans under way to increase production capacity to 4 million bpd by 2035.

State foreign reserves are around $930 billion, according to National Bank of Kuwait, the country’s largest bank. With a population of a little over 4 million, its GDP per capita is one of the highest in the world.

In March this year, rating agency Fitch described Kuwait’s fiscal and external balance sheets as among the strongest of any of the governments it rates.

But when we look at long-term trends, the picture is more complex and less secure.

Kuwaiti government spending remains overwhelmingly dependent on oil and gas revenues. The government has made almost no progress, over many decades, in diversifying the economy away from oil, or in reducing the huge burden of government salaries and welfare payments.

Oil and gas revenues currently account for nearly 70 percent of total income and, according to IMF projections, will continue to do so for the rest of the decade.

These revenues have served the country well in the past, despite the volatility of oil prices, but such overwhelming dependence looks foolhardy when consumers worldwide are striving to reduce consumption of oil and gas and investors and energy firms have pivoted towards renewables.

Nearly all of the Kuwaiti government’s non-oil and gas revenue arises from overseas investments and from dividends from state-owned companies. Tax revenues account for less than 1 percent of total government income.

Looking beyond the fiscal imperative to diversify the economy is the need to provide employment opportunities for Kuwaiti citizens.

No less than 84 percent of the Kuwaiti workforce was employed by the government at the end of 2022. It is hardly surprising that nearly half of government expenditure is allocated to the salaries of public employees.

Pressure for social spending will increase in the years ahead. A World Bank report, published last year, showed that levels of obesity and Type 2 diabetes were higher in Kuwait than in any of the other GCC countries and nearly double the average in OECD countries.

Partly as a result of this, the World Bank estimated that Kuwait’s old age dependency ratio – the number of people over 65 years old in relation to those of working age – will be nearly double that of its neighbours by 2040.

Kuwait is also a country that is being significantly affected, even today, by climate change. Temperatures during the summer can exceed 50 degrees, making Kuwait one of the hottest places on earth.

These are difficult and complex challenges, both economic and social, but they are hardly unique to Kuwait. That they are, in some cases, more acute in Kuwait than elsewhere is due to decades’ long procrastination and political paralysis.

The government’s General Reserve Fund, which held most of its liquid assets, was entirely depleted in September 2020, according to Kuwait’s own ministry of finance. With AA ratings, the obvious solution was to borrow money – Kuwait’s debt-to-GDP ratio is less than 5 percent. Yet the parliament has still not passed a so-called ‘Liquidity Law‘ that would allow modest issuance of foreign currency debt.

The parliament also held up the introduction of Value Added Tax (VAT), making Kuwait one of two of the six GCC countries not to fulfil a joint commitment to implement a minimum VAT of 5 percent.

Over the past four years, all three of the big international credit rating agencies have downgraded the government of Kuwait.

In their rating reports, all agencies cited a dysfunctional and slow-moving political environment that was reducing the country’s financial flexibility and delaying much needed economic and financial reform.

Politics matters.

It is unrealistic to think that after decades of enmity the ruling family and the parliament will soon form a harmonious working relationship.

But they do need to find some common ground that will enable them to start addressing fundamental economic and social issues while the country still has large financial reserves and strong credit ratings.

Time is running out.

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems

At the 3rd Tashkent Investment Forum, the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan took a significant step forward in their partnership to empower small and medium-sized enterprises (SMEs) and foster economic growth in Uzbekistan. The forum, held in the capital city of Uzbekistan, brought together key stakeholders from the public and private sectors to discuss investment opportunities and economic development strategies for the region. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is aimed at boosting the private sector in Uzbekistan.

During the forum, ICD and JSC Ziraat Bank Uzbekistan formalized an expression of intent to collaborate on various initiatives aimed at supporting SMEs. One of the key elements of this collaboration is the provision of a Line of Financing (LoF) facility by ICD to JSC Ziraat Bank Uzbekistan. This LoF facility will enable the bank to fund private sector projects as an agent of ICD, thereby providing SMEs with access to the necessary capital to initiate and grow their businesses.

The partnership between ICD and JSC Ziraat Bank Uzbekistan is expected to have a significant impact on the SME landscape in Uzbekistan. By equipping entrepreneurs with the resources they need to succeed, this collaboration will not only support the growth of individual businesses but also contribute to the overall economic development of the country. SMEs play a crucial role in driving economic growth, creating jobs, and fostering innovation, and this partnership will help strengthen the SME ecosystem in Uzbekistan.

JSC Ziraat Bank Uzbekistan, as a strategic partner for ICD, brings a wealth of experience and expertise to the table. As a prominent commercial bank with foreign capital, JSC Ziraat Bank Uzbekistan has a strong track record of supporting SMEs and promoting economic development. The bank’s partnership with ICD further underscores its commitment to advancing the private sector in Uzbekistan and its dedication to supporting the country’s economic growth.

ICD, for its part, is a leading multilateral development financial institution that focuses on supporting the economic development of its member countries through the provision of finance and advisory services to private sector enterprises. By partnering with JSC Ziraat Bank Uzbekistan, ICD is furthering its mission of promoting economic development and fostering entrepreneurship in Uzbekistan and across the Islamic world.

The LoF facility provided by ICD to JSC Ziraat Bank Uzbekistan is just one example of the many initiatives that the two entities are undertaking to support SMEs in Uzbekistan. In addition to providing financial support, the partnership between ICD and JSC Ziraat Bank Uzbekistan will also include capacity-building initiatives and technical assistance programs to help SMEs succeed in today’s competitive business environment.

Overall, the partnership between ICD and JSC Ziraat Bank Uzbekistan represents a significant step forward in supporting SMEs and fostering economic growth in Uzbekistan. By working together, these two institutions are helping to create a more vibrant and dynamic private sector in Uzbekistan, which will ultimately benefit the country’s economy and its people. The collaboration between the Islamic Corporation for the Development of the Private Sector (ICD) and JSC Ziraat Bank Uzbekistan is expected to have a far-reaching impact on the private sector in Uzbekistan.

By James Swanston

Positive news for non-GCC Arab economies has been in short supply of late. The Gaza conflict, missile attacks in the Red Sea, war in Ukraine and last month’s tit-for-tat missile strikes between Israel and Iran have weighed on sentiment, undermined limited confidence and cut into growth.

But some positives have emerged. Headline inflation rates have slowed across much of North Africa and the Levant, implying lower interest rates, a return to real growth and more stable exchange rates. March data show inflation at an annualised rate of just 0.9 percent in Morocco and 1.6 percent in Jordan. Tunisia’s inflation rate has also come down, although it is still running at over 7 percent year on year.

Egypt’s inflation rate jumped earlier this year as the government implemented price hikes to some goods and services – notably fuel. In February, the effect of the devaluation in the pound to the level of the parallel market affected prices. But March’s reading eased to an albeit still high 33 percent year on year.

Elsewhere, Lebanon’s inflation slowed to 70 percent year on year in March, the first time it has been in double – rather than triple – digits since early 2020 due to de-facto dollarisation and lower demand for imports. That said, inflation in these economies is vulnerable to increases in the prices of global foods and energy (such as oil) due to their being net importers. If supply chain disruptions persist, it could result in central banks keeping monetary policy tighter with consequences for growth and employment. And in Morocco’s case, it could undermine the Bank Al-Maghrib’s intention to widen the dirham’s trading band and formally adopt an inflation-targeting monetary framework.

The strikes by Iran and Israel undoubtedly marked a dangerous escalation in what up to now had been a proxy war. Thankfully, policymakers across the globe have for the moment worked to de-escalate the situation. Outside the countries directly involved, the most significant spillover has been the disruptions to shipping in the Red Sea and Suez Canal. Many of the major global shipping companies have diverted ships away from the Red Sea due to attacks by Houthi rebels and have instead opted to go around the Cape of Good Hope.

The latest data shows that total freight traffic through the Suez Canal and Bab el-Mandeb Strait is down 60-75 percent since the onset of the hostilities in Gaza in early October. Almost all countries have seen fewer port calls. This could create fresh shortages of some goods imports, hamper production, and put upward pressure on prices.

For Egypt, inflation aside, the shipping disruptions have proven to be a major economic headache. Receipts from the Suez Canal were worth around 2.5 percent of GDP in 2023 – and that was before canal fees were hiked by 15 percent this January. Canal receipts are a major source of hard currency for Egypt and officials have said that revenues are down 40-50 percent compared to levels in early October.

The conflict is also weighing on the crucial tourism sector. Tourism accounts for 5-10 percent of GDP in the economies of North Africa and the Levant and is a critical source of hard currency inflows.

Jordan, where figures are the timeliest, show that tourist arrivals were down over 10 percent year on year between November and January. News of Iranian drones and missiles flying over Jordan imply that these numbers will, unfortunately, have fallen further.

In the case of Egypt, foreign currency revenues – from tourism and the Suez canal – represent more than 6 percent of GDP and are vulnerable. This played a large part in the decision to de-value the pound and hike interest rates aggressively in March.

The saving grace is that the conflict has galvanised geopolitical support for these economies. For Egypt, the aforementioned policy shift was accompanied by an enhanced $8bn IMF deal and, while not strictly bilateral support, the bumper Ras el-Hekma deal seems to have been accelerated as the pressure on the Egyptian economy ratcheted up. This is providing much needed foreign currency. At the same time, Jordan recently renewed its financing arrangement with the IMF for $1.2bn over four years.

Tunisia, however, is an exception. President Saied’s anti-IMF rhetoric and reluctance to pass reforms, such as harsh fiscal consolidation, in an election year, mean that the country’s staff-level agreement for an IMF deal is likely to remain in limbo. If strains on Tunisia’s foreign receipts are stretched, and the central bank and government continue with unorthodox policies of deficit financing, there is a risk that Tunisia’s economic crisis will become messier more quickly in the next year – particularly large sovereign debt repayments are due in early 2025.

James Swanston is Middle East and North Africa economist at London-based Capital Economics