Kuwait’s economy is undergoing critical transformation as the authorities implement long-awaited reforms to develop the non-oil sector and diversify income.
The Kuwaiti economy is at a turning point. In early February, the Cabinet approved a draft budget for fiscal year 2025-2026, signaling an 11% year-over-year increase in the deficit on slightly lower revenues. The proposal, still awaiting the approval of Emir Mishal Al-Ahmad Al-Jaber Al-Sabah, comes as the Persian Gulf state grapples with the need to diversify the economy in the face of persistent dependence on oil production.
Kuwait’s economy contracted by 1% in 2024 following a 3.6% decline during a 2023 recession. With hydrocarbons accounting for 90% of exports and government revenue, economic performance remains closely tied to OPEC+ production policy, global demand, and competitor output. While the World Bank projects GDP growth will surpass 2% this year, recent calls from US President Donald Trump to cut global oil prices are pressing Kuwait to accelerate its diversification efforts.
For years, political gridlock has stalled reforms. Since 2020, the Cabinet has resigned 10 times and Kuwait has held four legislative elections. But a shift is underway. Last May, the emir dissolved Parliament and partially suspended the constitution for up to four years, a dramatic move aimed at fast-tracking key structural reforms in coordination with international institutions.
“We were very skeptical in the beginning, because they made promises before, but we can see the actions and seriousness about certain reforms,” says Ahmad Al-Duwaisan, acting CEO and general manager of Corporate Banking at Al Ahli Bank of Kuwait (ABK).
Game-changing transformations such as cutting public-sector wages and subsidies, which account for 80% of total spending; introducing a value-added tax (VAT); updating the emirate’s mortgage law (see sidebar, page 78); and passing a new debt law aimed at allowing Kuwait to borrow on international markets, are still under discussion. But some legislation has been approved, signaling momentum toward reform.
In line with the Organization for Economic Cooperation and Development’s Pillar Two requirements on minimum tax rules, Kuwait is introducing a 15% corporate tax for foreign firms with revenues exceeding $750 million in at least two of the last four years. Finance Minister Noora Al-Fassam estimates the tax will target over 300 companies, raising up to $825 million annually.
“This is part of a government strategy to build a more diversified economy, attract foreign investment, and create jobs for citizens,” Al-Fassam told the local media. It also shows Kuwait is “serious in going ahead with the fiscal and economic reforms.”
While some multinationals may look to increase local partnerships or relocate regional headquarters away from Kuwait to mitigate compliance costs, the overall objective of the new measures is to position Kuwait as a competitive business hub, compliant with best global and regional practices.
“The alignment of Kuwait with global tax standards could improve credibility at a global stage and prevents the country from being seen as a tax haven for foreign investors, which could drive more sustainable and high quality FDI [foreign direct investment] inflows,” says Ali Khalil, CEO of Markaz, a Kuwaiti asset management and investment bank. “In addition, this reform sets the base for the implementation of further tax reforms, which could diversify revenue sources for the government. The additional revenue would likely be ploughed back into the non-oil economy to aid in further improving business infrastructure.”
In parallel, the government aims to improve investment frameworks and litigation procedures, and ease foreign ownership rules.
“Kuwait’s economic reforms are paving the way for significant opportunities for financial institutions,” says Khaled Yousef Al-Shamlan, CEO of Kuwait Finance House (KFH), the emirate’s second largest bank, behind the National Bank of Kuwait. “Initiatives aimed at enhancing the business environment, such as public-private partnerships and regulatory simplifications, will facilitate greater investment inflows.”
Infrastructure Revamp
Improving infrastructure is also a priority. Kuwait’s road system, once ranked the worst in the Gulf Cooperation Council (GCC), will be revamped thanks to $1.3 billion in maintenance contracts signed last October with 18 companies.
Project activity has surged in sectors including housing, health, water, waste management, electricity, and oil and gas (see sidebar, page 80). Last year, $8.7 billion worth of projects were awarded, marking a 44% year-over-year increase and the highest value since 2017, according to reports from National Bank of Kuwait (NBK), the emirate’s largest bank. Along with the 2025-2026 budget, the Cabinet has approved close to $5.6 billion for 124 projects.
KAMCO Invest, one of Kuwait’s leading non-banking financial institutions, expects “thriving economic activity, government’s resolve to execute projects before the deadlines, a supportive and strong banking sector, an expected fall in interest rates, stability in the regional geopolitical scenario, elevated oil prices, and supportive government policies for private sector participation” will continue to drive markets this year.
Overall, Kuwait has $121 billion worth of planned projects in the pipeline, with several to be awarded this year.
Among the most recent, Turkey’s Proyapi Consulting in January won the first phase of a 110-kilometer railway tender to connect Kuwait to Saudi Arabia by 2030. The new line will be part of a broader, 2,100-kilometer network spanning the GCC, expected to transport 8 million passengers and 95 million tons of cargo annually by 2045. Also last month, the Cabinet inked a contract with China State Construction Engineering Corporation to implement, manage, and operate the new Mubarak Al Kabeer port.
For banks, this is all good news. Reforms and capital expenditure could enhance the momentum of economic recovery and growth, in turn driving more lending activity.
“As a bank, we have to take advantage of the contracts that are rolling out as we speak,” says Al-Duwaisan, noting that ABK has received a fair share of the new projects. “We have a very good coverage in multiple industries, be it infrastructure, civil, power, energy.”
Adds KFH’s Al-Shamlan, “I see growth potential in sectors that are critical to the global economy’s infrastructure and energy needs: specifically, oil and gas, construction, and services.”
Changing Landscape For Banks
The financial sector stands at the cornerstone of Kuwait’s non-oil economy. Despite fluctuating global energy prices and a tense regional geopolitical landscape, Kuwaiti lenders are showing resilience.
Standard & Poor’s (S&P) assigned a stable outlook to Kuwaiti banks in January, noting that they “operate with strong capital buffers and typically retain 50% or more of their bottom line, which supports their capitalization. The quality of capital remains strong, with a modest share of hybrid instruments.”
The financial landscape nevertheless is undergoing significant change.
In July, the government introduced legislation to bolster transparency and reduce fraud by adding more stringent screening measures for opening bank accounts. At the same time, the banking sector is beginning to mirror regional trends as consolidation efforts gain momentum.
In December, Burgan Bank announced plans to acquire Bahrain’s United Gulf Bank in a $190 million deal, set to close in the coming months. The deal “aligns with the bank’s new asset reallocation strategy and efforts to build new and diversified revenue streams,” said Burgan Group CEO Tony Daher in an announcement. With subsidiaries in Algeria, Tunisia, and Turkey as well as a corporate office in the United Arab Emirates, Burgan may also leverage the merger to expand further across the MENA region.
Other deals are in the works. In January, Warba Bank announced it would buy a 32.75% share in Gulf Bank from Alghanim Trading, one of Kuwait’s largest family businesses. Last summer, Boubyan Bank floated the idea that it might acquire Gulf Bank which would have created Kuwait’s third-largest bank, with assets exceeding $50 billion. The transaction was later called off.
Since 2018, the number of banks in the GCC has dropped from 77 to 60, primarily through mergers and acquisitions that have created regional giants. Kuwait, however, largely stayed on the sidelines until KFH completed the acquisition of Bahrain’s Ahli United Bank (AUB) in 2022, marking the MENA region’s first major cross-border consolidation and creating the world’s second largest Islamic bank, with $120 billion in combined assets.
But with 21 regulated banks serving a population of over 4 million, Kuwait, like many GCC countries, is still considered overbanked. Moreover, the sector is largely dominated by NBK and KFH, which collectively hold some two thirds of total banking-sector assets, resulting in severe competition between the other players.
“We’re all fighting over good clients, and that creates compression in margins and returns,” says ABK’s Al-Duwaisan.
The anticipated mergers are unlikely to cause significant disruption, however. Typically in GCC bank consolidations, the major shareholders—powerful families or state-owned entities—remain unchanged, with only asset restructuring taking place.
In the case of Burgan and United Gulf Bank, both entities are subsidiaries of Kuwait Projects Company (KIPCO), one of the MENA region’s largest holding companies, backed by the royal family. Boubyan Bank is a subsidiary of NBK, and had it acquired Gulf Bank or any other retail bank, it would have ended up reinforcing NBK’s already dominating position on the market.
Kuwait’s recent initiatives to promote the financial sector also focus on building up its capital markets to drive private-sector growth. The expansion of the Kuwait Stock Exchange (KSE) and reforms to streamline foreign ownership rules are starting to show results.
Last year, 69 million shares were trades on the KSE, making it one of the GCC’s most active and best performing stock markets. While investors remain mainly locals, foreign participation in trading activity represented 7.8% of total trades in 2024, up from 5.8% in 2021.
“Reforms undertaken to deepen the capital markets and improve liquidity have helped increase the visibility of Kuwait markets among foreign investors and allowed asset managers to launch new products such as ETFs and REITs, which was previously not possible,” says Markaz’s Khalil, who recently launched the GCC Momentum Fund, Kuwait’s first passive investment fund. Markaz also hopes to widen its product portfolio focus on thematic funds and products based on alternative asset classes like Private equity and Private Credit.
Following the privatization of Boursa Kuwait, which operates the KSE, in 2016, the stock exchange was upgraded to “emerging market” by global index providers MSCI, FTS Russell, and S&P. It is currently in the third phase an ambitious Market Development Plan, with attracting local family businesses to list being one of the main challenges ahead.
“The IPO wave sweeping through some other GCC countries is yet to take off in Kuwait markets,” notes Khalil. “Similarly, deal activity in Kuwait is subdued. Measures to incentivize the listing of family businesses, privatization of state assets, introduction of parallel markets, and products like ETFs would aid in market development.”
The Road Ahead
For the first time in a long while, change has come to Kuwait. By modernizing its fiscal framework and ramping up project activity, the authorities are demonstrating commitment to enact some of the long-awaited changes observers have said the country needs to step away from oil dependency.
Enthusiasm over ongoing reforms, in turn, supports increasingly positive investor sentiment. But much remains to be done to encourage and support private-sector growth that eases the state’s dependence on hydrocarbon revenues, especially as the government plans to increase oil production substantially.
