Introduction to Kuwait Economy
Kuwait is one of the richest countries in the Muslim world. In addition to these it’s a sovereign Arab emirate. It’s mainly an Arab speaking country with its population estimated to be 3 to3.5 million people which includes approximately 2 million non nationals. Kuwait’s GDP growth mostly picked up in the 1970s. The GDP went down in the 1980s due to un-sustainability. But through increased oil demand in the international market the economy was to later on pick up in the 1990s.Kuwait is a small country geographically with a relatively open economy. It uses the Kuwait Dinar as its currency.
The economy is mainly an oil producer. It has crude oil reserves of nearly 105 barrels which is 9% of the world’s oil reserves. Oil accounts for about 50% and 95% of GDP and Revenue respectively. This has instigated its desire to reach a production of 4million barrels every day by 2020. No wonder the government has been actively sponsoring numerous public activities and social welfare. The government is truly committed to ensure that the economy grows at a steady rate. Suitable measures have been developed to carter for housing loans, education, health care facilities, retirement benefits, and employment guarantees for citizens as well as marriage allowance All this have been aimed at increasing more economic activity. With this the economy will be able to build itself and spur continued growth. It does not enjoy fertile land since it consists mostly of dry land but all is not lost as the government has been trying to experiment agriculture production. This has been tried by growing food through hydroponics. The ability of Kuwait to practice agriculture products was mostly derailed when Iraqi troops set its oil fields on fire, destroying land.
The economy practices commercial fishing which is mostly done either individually or in the Indian Ocean. The country has small industrial activities. Most of them are export oriented petrochemical units and oil refineries. There are also a range of small manufactures that are not heavily industrialized though they are involved in production. They mostly deal with water purification and desalination, in the process manufacturing salt, fertilizers and other related products. Kuwait also has some flourishing shipping business. It has numerous companies that deal with shipping among which is the giant Kuwait Oil Tankers. In recent times the economy has been having some surplus in its budgets which has helped it to advance well. The country has an investment authority that is tasked with encouraging more investments into the country. The country has done fairly well in aiding other neighboring nations through Arab Economic Development fund. So far the fund has given out 754 loans to a total of 101 countries.
The government has been moving fast to come up with more reforms aimed at encouraging oil explorations and establish free trade so that the country can experience enormous investments both foreign and domestic. Kuwait’s economy mainly government dominated especially in the oil sector where it has most of its wealth.
Kuwait mostly runs a balance- of payments. On the other hand the country produces electricity. It has not been able to venture into exporting of electricity because what is has been producing is enough for its own consumption. 100% of the all electricity comes from fossil fuels while the other viable sources have not been exploited as expected. The country is not an agricultural country which has made it to massively import food to be able to feed its population, the land is predominantly arid with sand and this is not anywhere good for agriculture. This is why it focused more on the relevant sectors of its economy to be able to sustain importation of food and other agricultural products.
Kuwait also imports most products like vehicles, building materials, food among others. Currently the country is encouraging more investments in these areas that it is mostly importing. Kuwait has a well developed and maintained network of roads and highways that have stimulated moving the economy as expected. It has one main civil airport that serves most of its global activities. It can not be forgotten that the country has a flourishing banking industry.
The growth in the banking industry has enabled many people to access the all important banking services. Kuwait’s leading Bank, National is also considered among the best in the world. To shy away from more reliance on oil to spur the economy the government has been trying to focus on tourism as an income earner. All these are aimed at making it a trading and tourist hub in the Middle East. There is also some progress in the real estate industry with many investments being witnessed. So far the planned US$ 77 billion City of silk project seems to be a big boost that will help revolutionize the real estate sector. The country’s Central bank has been putting in place good monetary policies. These paid when in 2007 its currency became the highest valued in the world.
Economy through 2007 to 2009
GDP
This gives the valuation of all goods and services in a country and is mostly ascertained form PPP or purchasing power parity. Petroleum accounts for nearly 50% of the country’s GDP. Kuwait’s gross domestic product growth was around 4.7 percent is 2007. The country’s total GDP was $115 billion; in 2008 it increased to $ 148 billion. The GDP has been growing consistently as follows: 4.7% (2007), 8.5 %( 2008) and finally in 2009 it dropped to -1.7% because of the global economic crisis. In 2009 51% of the GDP came from the industrial sector while 49% came from the service sector. The country’s GDP expenditure has been mostly spend on domestic demand.
Graph showing how GDP has been growing over the years
The government expects a 3% GDP growth rate in 2010 with most focus aimed at increased spending on government projects. This will be achieved because the non oil sector is expected to grow at 4% while on the other hand the oil sector will grow by 1.4%. Currently the consumer sector is growing and there have been massive improvements in the real estate sector. The other sectors are set to improve with increased government spending which will in turn stimulate activities on the
Interest Rates
The country has been trying to cut interest rates so as to attract more investments, both lending and deposit rates. This has been because of the risk estimations and the more recent negative macroeconomic statistics. Most of the country’s domestic interest rate has continued unaffected. In 2007 the rate stood at 6.25%. In 2008 the interest rates were cut to 4.5% due to the pressure that was building on the economy (Kandil and Morsy, 2009).
As of 2009 the interest rate was later on cut from 4.5% to 4% but there is more pressure to reduce the rates since the economy needs to jump start especially after the global economic crisis. These cuts have been hailed by financial analysts and bankers as a step in the right direction. The future lending and deposit forecasts are projected below:
Lending Rates
Source: Zawya business development.
Deposit rates
Source: Index Mundi.
Inflation
This has been the annual change in prices from years that have been following each other since 2007. Kuwait’s inflation has been changing every year as it is not fixed. Inflation hit an all year high of 15 years in 2007. The rate stood at 7.3%in the first few months of the year before it was eased. Inflation has been increasing because of a boost in incomes that come from oil. Most of the high inflation in the early months of 2007 was from price rises in products and services. According to Papageorgiou (2009) the main contributors of these mostly came from consumable products.
Graph showing the interest rates versus the year
Unemployment rate
The unemployment rate has been the percentage of the labor force that doesn’t have jobs. Kuwait’s unemployment rate is the lowest among the Arab countries. Though it has good figures to show for its low unemployment rates the government is still determined to ensure that the countries unemployment rates are reduced further. Its unemployment rate is almost 2.2%. This rate has reduced from the initial rate of 7% in the year 2004.
The country’s unemployment rate has been declining at 2.6%. This drop has because of the expatriate segment. Most of the increase in employment has been from the government sector. There has also been a considerable change in gender towards employment with many women being employed. All said the government is still under pressure to offer more jobs.
The good relationship between the government and the private sector has helped to reduce the level of unemployment in the country. Currently the government is involved in a restructuring programs aimed at increasing job opportunities for its unemployed citizens. Parliament has also been in the forefront to support its national labor through enactment of proper labor policies.
Graph showing unemployment rates in Kuwait
The country has not changed its unemployment rate but the government is working to reduce it to 1.8% by 2012.
Budget Deficit
Kuwait seriously suffered a budget deficit in 2007, which was estimated at $5.9 billion. The deficit came about as a result of an overpayment of $7 billion to the state’s pension agency. The budget deficit was experienced because of a decline in oil prices and an increase in government expenditure. From there on the budget has been having a surplus which was mostly experienced in the 2008-2009 financial year (Reuters, 2009).
This was a drop and it was estimated at $23.29 billion. Ten percent of this surplus has been put into a future generation’s fund. In the 2009 budget the government slashed it’s spending through lowering of infrastructure investment and welfare contributions. In the first months of the 2009/2010 financial year the government had recorded a budget surplus of KD 6.32 billion in the first few months.
Its budget forecast projections for the whole financial year are projected to be $22 billion. Most of these forecasts are based on high oil prices that are expected. As at May 2010 the budget forecast had been adjusted to $28 billion because the oil prices are above its budget assumption of $43 a barrel. On the other hand it is also projecting a deficit of $7.41 billion in the financial year 2010/2011.
Foreign exchange rates
Kuwait uses the Kuwait Dinar as its official currency. In 2007 the country’s currency was the highest valued currency unit around the globe. 1 Kuwait Dinar is equivalent to 3.1 U.S dollars. The exchange rate between its currency and the dollar has almost been stagnant over the years.
Graph showing the exchange rate between the KD and the US dollar
Kuwait later on abandoned the dollar peg that it had adopted before to allow for monetary integration with other countries. The country has been forced to minimize inflationary pressure that results from consistent depreciation of the dollar. It has also increased its foreign reserves from its major oil trading partners, mostly Japan. There has been an attempt to redefine the weight of the currencies in the basket. The country is in the process of joining other countries in unification of the currencies to stabilize its exchange rates (Marzovilla et al., 2010, p. 1). 80% of Kuwait’s population is composed of expatriates and they have always stimulated the market. Kuwait gets most of its foreign exchange from oil.
Oil prices and other key commodity prices
There has been an escalating rise in prices over the last few years. Most of the high prices have been brought about by food scarcity and international market trends. There is no agricultural production that can cushion high food prices in the country. The government needs to give out incentives that will encourage agricultural production and create jobs in the rural areas. According to Mital (2008, pp. 12) skyrocketing food prices since 2007 have made basic staples to increase and in the long run hurt the low income groups.
Apart from the food sector the real estate sector prices have been increasing drastically from 2007 to 2009 because of the increased population that needs to be housed. Transport prices have not been left behind whenever the county has experienced increases in oil prices as most emphasis on sale has been put on the international market.
Oil prices have been fluctuating and rising over the recent years due to changes in the international markets. In 2008 oil prices increased reaching a high of $150 per barrel and then collapsed to $40 per barrel later on. Whenever oil prices have gone up they have always threatened food and commodity prices. The demand for oil has always been increasing especially in the rapidly developing countries and this has always pushed oil prices up and down.
From 2009 to 2010 the Kuwait government has projected that oil prices will be between 75 dollars to 90 dollars per barrel, which they feel is good for business. Prices have been hurt by speculation and volatility from the industry players. Oil prices in Kuwait mostly depend on production. These trends are expected to continue in the coming years. Kuwait monitors the market trends carefully so that it can also gain from the rises in oil prices considerably. Current oil prices being charged in the market will not hamper economic growth as fluctuations were put into consideration when coming up with forecasts.
Business Cycles
Business cycles have been predictable long term patterns meant to alter periods of economic growth and decline. The business cycles have been aimed at changing the employment, industrial productivity and interest rates. There has been recurring fluctuations in growth and decline. The Kuwait economy has had periods where real output has gone up and down (fluctuating). The country has had varying cycles from 2007 to 2009.
In 2007 the economy had a positive growth which increased for the better in 2008. Kuwait’s economy suffered more in 2009 when it registered negative growth which was attributed to the global economic crisis. To have a good business cycle the government has come up with a stabilization policy. These policies have been used to offset most of the undesired changes in its private spending. The first approach that the government has taken to change its cycles positively has been through a cut in spending so that it does not have a high budget deficit.
Through a manageable budget the economy has been able to prioritize more demanding issues. Unemployment has been a big headache especially before they managed to reduce the rates to 2.20%. When there was a high unemployment rate it implied that the economy was not performing well. In the end the Kuwait government crafted good measures towards increasing jobs for the citizens. The public sector has created a good number of jobs. In addition to these the private sector has not been left behind as good policies have been put in place to encourage more investments.
Kuwait has been having high inflation rates which have always hampered growth of businesses. An inflation rate of 9% is not good for a country and that is why they have come up with measures to reduce these rates. Inflation destabilizes the economy and come about as a result of a lot of money being in circulation. Kuwait’s economy is vulnerable to inflation because it can not control the prices of agricultural products as they import their food. To correct these imbalances the government has encouraged more agricultural production through incentives.
This has paid of as the country has started experiencing some agricultural activities. All economies need investments and a proper investment climate which Kuwait has been striving to increase. The government has established an investments authority to encourage massive investments in the country and create more money. In trying to increase individual investments it has reviewed its interest rates by reducing them every year so that there is more domestic borrowing.
When borrowing increases more people will be able to invest and in the process stimulate the economy to grow. Foreign exchange rates have always influenced business in an economy. The impact of foreign exchange fluctuations has always increased and reduced the value of imports and exports. The Kuwait government through its Central bank has been striving to ensure that it has enough foreign reserves that can be used to cushion it whenever there are fluctuations.
The economy has been mostly reliant on oil and this has always reduced its revenues whenever oil prices have dropped. Kuwait does not have many industries and the authorities have realized the need to correct these. More energy has been directed towards attracting more industrial activity in the country. It is argued that the tourism sector has the potential to turn around the country if well exploited and in the process lead to economic growth.
The commercial sector has been resurrected so as to cushion the country should there be an economic crisis like the recent global economic crunch. Governance has a great impact on influencing the direction that an economy takes. The Kuwait government has been involved in drafting good governance, monetary, macro economic and micro economic policies that will help revise the negative growth that the country experienced in 2009.
Kuwait’s economy has mostly suffered during the global economic crisis (The Arab Monetary Fund, 1995). In the process the government is investing a lot of its surplus money so that it can help improve the economic outlook and reduce internal debt. The government is finally concentrating on infrastructure development so that it can reduce the cost of doing business in the country. In addition , investments targeting alternative energy are springing with a view to mitigating on overdependence on oil and gas. Through reduced domestic demand there will be surplus to export and the returns will be ploughed back to the economy.
Salt and Chlorine industry in GCC and Kuwait
Salt in the GCC and Kuwait is mostly produced by the Al Kout Industrial projects company. Having invested in chlorine plant and PIC salt in 2000, its salt production doubled. In processing salt, seawater is dialyzed to give a concentrated solution; from there on pure salt is produced. The final product comes about due to vacuum distillation and further processing.
Salt that is produced in this industry is used for food manufacturing and oil drilling which is the main activity in the GCC and Kuwait. Its further use is in chlorine, caustic soda and sodium hypochlorite processing. These products are very important when it comes to producing water for the entire GCC world. This area is a dry land and as such there are no other sources of water apart from the sea. Al Kout Industrial projects have been reliable in assisting to ensure that there is safe drinking water.
In addition, the company processes hydrochloric acid utilized in drilling among other chemicals. It has been having a high demand for salt and chlorine products and it has not disappointed as all the customers have been satisfied. The company has also been producing salt that has been used for home consumption by families across the entire region with Kuwait included.
Chlorine has come out as a major raw material in most industrial activities. Most of the world’s production of chlorine is used in production of PVCs. On the contrary chlorine produced by the company is mostly used for water treatment and power sectors in Kuwait and the entire Gulf region. Chlorine that is produced by the company has been tested and produced as per the laid down regulations of the world chlorine requirements.
Through further production, the company has also been producing caustic soda that has been used to produce soap for the entire Gulf world. Because the region relies on oil production to boost its economies there has been a high demand for hydrochloric acid. This acid has been used in oil fields and metal treatment. It’s produced in bulk and sold to the entire Gulf region with the surplus being exported to other markets around the world.
Chlorine produced has also been used to derive sodium Hypochlorite which is the main component in water treatment. The company has also been contributing positively to the progress of the entire GCC and Kuwait by proving technical assistance and unrivalled training to the customers. The firm is also listed on the Kuwait stock exchange market and it has been consolidating its operations so as to maintain profitability.
The industry has been growing and attracting more investments because it’s lucrative. In the long run the salt and Chlorine industry in Kuwait is exporting to other emerging markets like India and Pakistan. It has also made some considerable success in the European market. High sales have been experienced in the domestic market because the industry operates as a monopoly. This industry seems to be very lucrative as it has been recording high turnover and profitability every year.
Salt and Chlorine in Kuwait
SWOT
Strengths
The industry has had unrivalled competition in the market because it is a monopoly. Being the only producer of salt and chlorine the company has the capability to capitalize on this and ensure that it offers high quality products that will ensure that its market is solidified. High investment portfolio is unrivalled in this sector as the government has been creating a good environment through diversification of funds. Another strength that is manifesting itself is the high production capability availing itself in both frontiers. These can be used to sustain productivity in the industry.
Weaknesses
Though the industry has many opportunities its major undoing is monopoly. All the market is controlled by one firm which is not good for healthy business and should be ratified. Investors need to be encouraged to venture into this business and help make it to be more competitive. Currently the industry is not opening up well for more investments and this doesn’t sound ethical at all.
Opportunities
There are many emerging markets that the Kuwait salt and chlorine industry can capitalize on and expand further beyond the traditional Gulf world. More investments are being made towards oil exploration which is increasing the market base that the players in the industry can later on explore. Kuwait’s population is ever increasing and in the process it’s exerting more pressure to the industry. The industry therefore needs to offer more products, which is a challenge that it can take positively. When well approached the industry can use to this great opportunity to grow.
Threats
The industry is facing a lot of threats from all horizons. The Salt and Chlorine industry in Kuwait is facing a high and unpredictable demand that must be satisfied. In the end the industry has strained to satisfy their domestic market well (though with a surplus). Competition has been intensifying every day and the industry needs to devise good strategies that will help it counter foreign competition from other firms.
Conclusion
Kuwait is an emerging economy that has the potential to grow. The economy is mostly built on oil which is not a good trend as oil is always subjected to constant fluctuations in world prices. The government is supposed to be congratulated as it has managed to keep unemployment at a very low rate of 2.20%. This is largely due to its policies that guarantees its citizens jobs and has been a result of its economic achievements.
The country has been encouraging more investments in the country to make it more competitive in the global world. To stimulate more domestic investments, there has a backward trend in ensuring that interest rates are reduced (both lending and deposit rates.); this has increased domestic spending and I hoped to continue to help in improved economic growth and sustainability. The economy is still picking up after it registered a negative economic growth in 2009(-1.75%) but the future seems to be headed in the right direction as it is projected to grow at 2.3% in 2010. Inflation rates have been skyrocketing of late but the measures that were put in place to reduce the rate have finally been able to pay as the rate is slowly going down
References
- Index Mundi, 2010.Kuwait economy. Web.
- Kandil, M.& Morsy, H., 2009.Determinants of inflation in GCC: IMF working paper. Web.
- Marzovilla et al. 2010. From dollar peg to basket peg: the experience of Kuwait in view of the GCC monetary unification.
- Mittal, A., 2008. Food Price Crisis: A Wake up Call for Food Sovereignty. Oakland: The Oakland Institute.
- Papageorgiou, C., 2009.Does trade and financial globalization cause income inequality.
- Reuters, 2009. Kuwait lets Markets Guess over Peg with Dinar Fall. Web.
- The Arab Monetary Fund, 1995. The Arab Economic Report.