Economy and Trade
Kuwait is an almost entirely flat, desert plain. Britain oversaw foreign relations and defense for the ruling Kuwaiti Al-Sabah dynasty from 1899 until independence in 1961. Kuwait was attacked and overrun by Iraq on August 2, 1990. Following several weeks of aerial bombardment, a US-led UN coalition began a ground assault on February 23, 1991, liberating Kuwait in four days. After the liberation, Kuwait had to spend more than US$5 billion to repair oil infrastructure damage which occurred during the Iraqi occupation. The Al-Sabah family has ruled since returning to power in 1991. It reestablished an elected legislature that, in recent years, has become increasingly assertive. More than 90% of the population lives within a 500 km2 area surrounding Kuwait City and its harbor. Although the majority of people residing in the State of Kuwait are of Arab origin, fewer than half are originally from the Arabian Peninsula. The discovery of oil in 1938 drew many Arabs from nearby states. Kuwait’s 93.3% literacy rate, one of the Arab world’s highest, is the result of extensive government support for the education system.
Economic Policy over 12 Months
Kuwait has a small, relatively open economy, dominated by the oil industry and the government sector. Approximately 90% of the Kuwaiti labor force works in the public sector, and 90% of private sector workers are non-Kuwaitis. Kuwait’s proven crude oil reserves of about 100 billion barrels—9% of world reserves—account for nearly 45% of GDP, 95% of export revenues, and 90–95% of government income. The country has the fourth largest oil reserves in the world. Kuwait puts 10% of its annual oil revenue into a Fund for Future Generations, in preparation for transition to the period after its oil resources are depleted. Kuwait’s economy has benefited from high oil prices in recent years, as well as the economic activity generated following Operation Iraqi Freedom (Kuwait is a major logistical and transit hub for coalition operations in Iraq). Non-oil sectors such as banking, financial services, logistics, telecommunications, and construction have enjoyed strong growth in the past three to four years.
According to an IMF report published in August 2011, the government posted large saving rates during the pre-crisis boom years, which allowed it to accumulate large external buffers in the form of foreign assets and placed it in a relatively strong fiscal and external position to address the impact of the global financial crisis. In this context, the government launched a four-year development plan in early 2010—which emphasizes much needed investment in health, education, and infrastructure—with the objective of transforming Kuwait into a regional trade and financial center, while expanding the role of the private sector in the economy. Government spending in the fiscal year 2010/11 (excluding energy-related subsidies and recapitalization of social security) is estimated to have increased by 21½%. Higher international oil prices bolstered revenue with oil export receipts increasing by 19%. In 2010, fiscal and external surpluses are estimated at about 21% and 28% of GDP, respectively, compared to 28% and 24% in 2009.
The Kuwaiti dinar has had its exchange rate pegged to an undisclosed basket of currencies since 2007, and this provides a key influence over monetary policy. In August 2011, the IMF said that over the previous 12 months monetary policy had been accommodative, with the central bank adjusting its interest rates in line with the peg.
Economic Performance over 12 Months
Although Kuwait has largely avoided the domestic unrest seen in other Arab countries in 2011, it has faced a recent spate of militant violence. Security forces have clashed with Islamist militants, some of whom are alleged to have links with Al-Qaeda. The authorities say extremist groups have plotted attacks on Western targets.
The economy recovered to grow by around 3.2% in 2010 according to the IMF, following a slump in 2009 when the economy contracted by 4.4%. Government spending was the key driver of growth in 2010. In August 2011, the IMF forecast that the economy would grow steadily in 2011 and over the medium term as the government implements its development plan and a global recovery supports demand for oil. Real GDP is projected to increase by about 5% in 2011, reflecting an increase in oil GDP of about 3¼% and non-oil GDP of 6%, spurred by government spending. Inflation is projected to pick up in 2011 to about 6¼%, driven by imported inflation. The annual rate of inflation slowed to 4% in 2009, its lowest level since 2006, and down from a peak of 10.6% in 2008. It fell further in 2010, reaching 3.8%. Moody’s Investors Service raised Kuwait’s sovereign ratings outlook to “stable” in August 2010 after the country’s parliament approved long-awaited legislation on the fiscal and trade fronts. The new legislation includes laws dealing with privatization, capital markets, and labor, as well as the four-year development plan. These laws should help to develop the country’s limited private sector and attract foreign investment, according to the rating company.
The country has had “impressive fiscal and current account surpluses” despite some effects from the global financial crisis, Moody’s said. Kuwait’s government budget and trade surplus will remain strong over the medium term based on current oil price projections even as public investment spending rises, the agency added.
Support for Inward Investment and Imports
Investors seeking to do business in Kuwait need to apply for a license from the Ministry of Commerce and Industry, and these are only available to Kuwaiti nationals and to Gulf Cooperation Council (GCC) nationals and companies. Any joint ventures with Kuwaiti citizens have to be structured to give the Kuwaiti partners not less than 51% of the total capital. However, there is a Kuwait Free Trade Zone in Shuwaikh, which allows 100% foreign ownership of businesses within the zone, with no import duties or foreign corporate income tax.
Tax exemptions are available in the Kuwait Free Trade Zone (see above). Further information can be obtained from the Ministry of Commerce and Industry.
GDP growth: 3.2% (IMF, 2010)
GDP per capita: US$48,900 (2010 est.)
CPI: 3.8% (central bank, 2010)
Key interest rate: 2.5% (August 2010)
Exchange rate versus US dollar: KD0.2888 (2010)*
Unemployment: 2.2% (2004 est.)
FDI: US$1.281 billion (December 31, 2010 est.)
Population: 2,595,628 (July 2011 est.)
Source: CIA World Factbook except where stated