World Economy

Kuwait Starts Cutting Energy

Kuwait Starts Cutting EnergyKuwait Starts Cutting Energy

Kuwait’s government has started reducing some state subsidy payments and is in an advanced stage of preparing a plan to cut subsidies for kerosene and electricity, the International Monetary Fund said.

Subsidy cuts are an important economic reform for Kuwait because lavish subsidies, mostly on energy, swallow about KD5.1 billion ($17.7 billion) annually, or roughly a quarter of the government’s projected spending this fiscal year, according to government figures, Reuters reported.

Despite Kuwait’s vast oil wealth, such spending threatens to push the state budget into deficit later this decade, the IMF has warned.

So far, the government – like other governments in the Persian Gulf Arab region – has shied away from major reform of its subsidy system because of political sensitivities.

But in a report released this week after regular consultations with Kuwaiti authorities, the IMF said some reforms had now started.

“Subsidies have been eliminated for diesel (with potential saving of 0.5 percent of GDP), and the government is in advanced stages of sending a proposal to the cabinet for reducing subsidies for kerosene and electricity,” the report said.

“Moreover, the government recently rationalized some allowances for Kuwaitis traveling for healthcare abroad,” it added.

 Restrain Spending

The IMF has been urging Kuwait to restrain spending on public wages and subsidies to make its finances more sustainable in the long term.

The government said in June that it had decided in principle to remove subsidies on diesel fuel, pending a study on how to deal with the negative impact on consumers, according to state news agency KUNA. That measure was expected to save around $1 billion a year.

“Staff’s analysis shows that a $20 decline in oil prices relative to the baseline would result in reversing of the fiscal position – excluding investment income – from a surplus to a deficit in the medium term,” the IMF said in its latest report.

“Fiscal restraint in the medium term is...needed to help reduce fiscal vulnerabilities and bring the fiscal stance closer to benchmark sustainability level.”

 Budget Surplus

The budget surplus edged up to 12.9 billion dinars in the last fiscal year to March as government spending fell, largely because of a drop in capital expenditure.

In its latest report, the IMF slashed its GDP growth forecasts for Kuwait to 1.3 percent this year and 1.7 percent next year, from 2.6 percent and 3.0 percent predicted in April.

It also estimated that Kuwait’s economy shrank 0.2 percent in 2013, its first contraction since 2010, compared with its previous estimate of 0.8 percent growth.

The downturn was mainly due to a 1.8 percent drop in oil-related GDP as growth in the non-hydrocarbon sector accelerated to 2.8 percent, the report showed.