Kuwait: Gas Half Full

Kuwait is enjoying high hydrocarbon prices, but the lack of reforms weighs heavily on the oil-rentier’s economic outlook.

Late in January, Jasem Albudaiwi was appointed secretary general of the Gulf Cooperation Council (GCC). A former ambassador to the US, Albudaiwi is the second Kuwaiti in a row to assume leadership of this regional organization. He promises to shake it up, boosting, for example, AFAQ, the GCC’s new cross-border payments system, which Kuwait joined in 2022.

Last year the Gulf monarchies were among the world’s fastest-growing economies. High energy prices in 2022 pushed Kuwait’s oil revenue up 85%, translating into 8.5% GDP growth and a 70% decrease in the fiscal deficit—the first drop in three years.

“While the world was faced with tensions due to the war in Ukraine and its impact on the global economic scene … the operational backdrop in Kuwait was mainly positive, owing to the rising oil prices and to post-pandemic pent-up demand encouraging consumer spending,” says Salah al-Fulaij, CEO of NBK-Kuwait, the country’s largest bank, which saw its net profits increase 40.5% in 2022 from the prior year, to reach $1.7 billion.

Because it sits on the world’s ninth-largest oil reserves, Kuwait is relatively sheltered from the looming global recession, soaring inflation and disrupted supply chains. Still, it faces strong challenges of its own.

“Last year, Kuwait was fortunate that oil prices have risen. That gave the economy some leeway in terms of liquidity,” says Yaqoub Ahmad Baqer Alabdullah, assistant professor of finance at Kuwait University. “But looking at the bigger picture, the situation is really unsustainable.”

While other GCC countries are actively reforming their economies to be less reliant on fossil fuel production, Kuwait has always maintained a conservative approach to diversification. Oil still accounts for 91% of both exports and revenue, according to Ministry of Finance data, making Kuwait an extremely rich nation but also a very vulnerable one.

The economy moves in sync with global barrel price charts. When oil prices dropped in 2014, the country recorded five years of budget deficit, which it covered with money from the General Reserve Fund—one of its two sovereign wealth funds. In 2020, when oil revenue got even thinner with the pandemic, GDP contracted 9.9% and Kuwait almost ran out of liquidity to pay civil servants’ salaries.

“Oil prices will continue to fluctuate, impacting the GDP of Kuwait. Quick reforms in areas such as economic diversification, fiscal management, labor markets and housing are a must in this stage,” comments Jehad al Humaidhi, CEO of Ahli United Bank–Kuwait.

Oil Still Rules

But no matter the headwinds, oil is still very much the name of the game for Kuwait. In late 2022, the government started operating a new oil refinery in Al Zour and plans to expand production until 2027. The authorities also announced a $120 million investment to build the world’s biggest petroleum research center, geared toward improving production and refining techniques.

International and local observers have repeatedly warned Kuwait against the “oil curse” and called for fiscal reforms—but the rentier culture is deeply rooted. Kuwaiti citizens are used to an all-encompassing welfare system that provides for all their needs, from housing and health to pensions and even employment. An imposing 84% of the population works in the public sector for an average monthly salary of $5,000. As a result, wages and subsidies represent 76% of public spending, leaving very little room for capital expenditure.

Too Little, Too Late?

In absence of reform, Kuwait will soon reach the limits of its model. With 52% of the population currently under 24 years old, experts predict that 96,000 new jobs will be needed to absorb young graduates by 2025, and 298,000 by 2035. To free up some space, Kuwait aims to cut the number of expats in the labor market and has started sending hundreds of thousands of Egyptian, Indian and Pakistani workers back home. But even that is only a temporary solution.

In 2020, a group of 29 scholars from Kuwait University’s College of Business Administration tried to raise the alarm among the public and decision makers in a 30-page document titled, Before It’s Too Late. “It is inconceivable that the already inflated public sector will be able to absorb these numbers even as non-Kuwaiti employees are replaced,” they wrote. “The affluent privileges that generations of Kuwaitis have grown accustomed to since the discovery of oil are under threat of extinction … [T]he sustainability of the welfare state for future generations is not possible without sacrifices.”

Kuwait University’s Alabdullah was among the signatories of this paper. “We raised the alarm many times but unfortunately nothing has been done. The political turmoil between the government and the parliament prevented any reforms from happening,” he tells Global Finance. “People need to see really how big of a hole we are in right now and take responsibility for it.” 

For a number of years now, Kuwait has faced a power struggle between pushing for austerity and demanding support such as stronger pensions, debt amnesty and higher salaries. Since 2017, political gridlock has made it impossible to adopt a public debt law that would allow the country to borrow on international markets. Political instability has become a structural element, paralyzing the economy. In January, Prime Minister Ahmad Nawaf Al-Sabah’s cabinet was the fifth to resign in two years over public spending disputes.

A few days before, Fitch confirmed its previous downgrade of Kuwait’s profile to AA-, stating that “key weaknesses include frequent institutional gridlock and political constraints on reforms that would address fiscal and structural challenges stemming from heavy oil dependence, a generous welfare state and a large public sector … [T]he outlook for reforms remains weak.”


A few years back, things actually started off pretty well for Kuwait. It was among the first countries in the region to enact a Public Private Partnership law, allow 100% foreign ownership of companies in most sectors and establish an investment agency—the KDIPA—to oversee foreign direct investment (FDI), license companies and arrange tax exemptions.

The plan—laid-out in Kuwait’s Vision 2035 strategy—was to leverage Kuwait’s location between Europe and Asia to turn the country into a trade and logistics hub. Kuwait dreamt big. The idea was to build at least three new economic zones as well as Silk City, a $130 billion futuristic urban conglomerate that should push non-oil GDP by 13% to 16% and create over 200,000 jobs. The total value of projects in the pipeline amounts to over $170 billion, the KDIPA claims, but little has actually come of it. The authorities blame some of the recent delays on the pandemic and claim that business will now get back on track.

In fiscal year 2021-22, Kuwait attracted $350 million in FDI, including a $102 million infrastructure deal between the Kuwait Oil Company and Chinese Egyptian joint venture SinoThawra Building. In early 2023, Google Cloud partnered with the government of Kuwait to support the country’s digital transition.

“There are efforts to make sure that Kuwait is an attractive investment port for FDI, but there is still work to be done,” says Alabdullah. “Bureaucracy is certainly an obstacle, and in terms of ease of doing business, I think Kuwait lags behind other GCC countries.”

In 2022, Kuwait ranked last in the Expats Insiders Index, a survey by German-based expat network InterNations. Participants pointed to a lack of business opportunities, poor infrastructure and an overall negative business culture.

“Payment processes need to improve. This is particularly true for certain sectors, like property rental or some government transactions. There are also foundational services that need to scale, like digital signature, digital identity and open banking … Important enablers like regulation and connection to APIs and government systems are currently being worked on,” says Abdullah Al Tuwaijri, CEO of Consumer, Private & Digital Banking at Bank Boubyan, a local Shariah-compliant lender.

Mindsets, however, are changing with the new generation. In 2022, eight Kuwaiti family-owned businesses—traditional structures that usually like to keep to themselves—announced they would enter IPOs in the next two years.

Looking ahead, the World Bank expects growth to slow to 2.5% in 2023, but the outlook remains positive for Kuwait. While reform is slow, the monarchy can always use its $790 billion sovereign wealth fund to stomach external shocks and buy more time. Kuwait’s sovereign net foreign asset position will average 470% of GDP in 2022-2024, Fitch forecasts, the highest among all the agency’s rated sovereigns.