A World Bank official said on Tuesday Kuwait will probably find it hard to sustain its level of government spending in the medium term as oil prices may fall soon. He also warned that the indifference of the private sector put the Gulf state’s economic development plans at risk.
Bassam Ramadan, World Bank country manager for Kuwait, warned that the average price of various crude oil types could fall by 10-15% from current levels to around $85 per barrel by 2020.
“This would put pressure on the oil rich state’s finances, especially given a series of public sector wage hikes over the past six months,” he added.
“This country has put its development plan and its spending pattern basically at a price of $85 per barrel,” Reuters quoted the official as saying on the sidelines of a Euromoney conference in Kuwait.
“You have such a high price already and it is mostly recurrent spending, and then when you have an oil revenue windfall you are immediately leapfrogging salaries.
“The medium-term fiscal framework is not looking good if they continue at this rate of spending without putting much more systemic process into such salaries and compensations.”
Kuwait’s newly-elected government recently announced a 25% wage increase for public sector workers on the back of several wage hikes for individual sectors during last year.
The government is trying to deflect pressure from increased union activities since last year’s Arab uprisings in the region. Customs and airline workers staged industrial action earlier this month. They returned to work last week.
“The government’s wage hikes are not systematic, they are not done on a scientific basis. This is not just a Kuwaiti reaction to the situation in the region but a Gulf reaction,” Ramadan said while addressing a panel discussion.
Kuwait’s economic authorities plan to spend 22 billion dinars ($79 billion) during the next fiscal year, registering a 13% spending increase. However, recently announced wage hikes are not included in the multi-billion dollar figure.
The World Bank official said that Kuwait could tap its large monetary reserves if it needed to keep up spending.
“This country is not going to go bankrupt,” he said. “What is happening is that the development plan – without being able to open the field for the private sector – will suffer.”
Kuwaiti parliament passed a $110 billion development plan in February 2010 that aimed at diversifying the oil income-dominated economy and boosting the country’s private sector. Bickering between different political groups has held these plans from materialising, as several governments resigned during the last couple of years.
“The development plan is based on creating half of the investments from the private sector. But you talk to the private investors here and they want to run away from Kuwait,” Ramadan said.
He claimed that trying to do business in Kuwait was a headache, as trying to find and register a property, enforcing contracts, and red tape have left businesspeople traipsing from one government office to another.
High public sector wages are hurting the private sector by creating wage distortions, Ramadan added.
“A sense of entitlement of the Kuwaiti public sector workers is creating a disincentive to work in the private sector,” he said, echoing concerns raised by several senior Kuwaiti policymakers.
A Reuters poll on Tuesday suggested that the oil rich state is forecasted to post a huge surplus of 20.4% of GDP this year.