November 22, 2020 | finance & economy

Wanted, an economic stimulus package


Nine months in the shadow of COVID-19 has wreaked havoc on Kuwait’s economy, with all sectors being adversely affected. Any hopes of a speedy economic recovery by year-end have been dashed by the continuing high number of virus cases being reported daily and growing fatality figures.

Moreover, continued worries about the government’s ability to finance its budget deficit, the dampening of market sentiment due to the ending of temporary policy measures such as debt repayment deferrals, and with public-attention currently diverted to the upcoming elections, any hopes of a robust economic rebound have faded, unless the government steps in with a substantial economic stimulus package.

Waiting for election results and the swearing-in of a new parliament before taking decisions on rejuvenating the economy is not a plan, it is procrastination. In the meantime, latest data from the Central Statistical Bureau (CSB) show that economic disarray caused by the global pandemic has led to a 34 percent decline in Kuwait’s trade volume (imports/exports) in the first-half of 2020 (IH20). During this period, the country’s trade surplus fell by 64 percent to KD1.8 billion, from the KD5.1 billion during the same period a year earlier.

Oil exports, which constitutes around 93 percent of total exports and fuels the country’s economy, dropped by 42 percent year-on-year (Y/Y). Kuwait Export Crude price has fallen precipitously since the crisis began and has averaged US$39 per barrel during the first-half of the year. Brent crude prices have also been more than 40 percent down so far this year and prospects of any early rebound in oil demand growth now looks increasingly slim.

The arrival of a second-wave of the virus in Europe and elsewhere, a larger than expected crude stock build-up in the US, and the recently brokered peace deal between warring factions in Libya that could soon see the return of Libyan crude to the market, have all combined to hold oil prices stubbornly low.

In its October oil market report, the International Energy Agency (IEA) expressed concern about the waning oil demand outlook due to tighter mobility restrictions from the ongoing pandemic. The agency has since lowered its estimate of oil demand growth in 3Q20 by 200,000 barrels per day in view of weaker global oil consumption, especially in the US and India.

It is not just oil revenues that have fallen due to the pandemic, non-oil exports have also fared poorly since the start of the crisis. According to analysts at the National Bank of Kuwait (NBK), Kuwait’s leading commercial lender, export of intermediate goods — accounting for 63 percent of total non-oil exports — fell by 26 percent y/y in 1H20, while capital goods (10% of non-oil exports) fell by 53 percent.

In addition, export of consumption goods (26%) declined by 33 percent, in part due to the decision by the Ministry of Trade and Industry to ensure sufficient stock of foods and goods. In early March, the ministry prohibited exports of all kinds of goods, food products, medicines, medical supplies and equipment without prior approval. Figures show that overall exports to the top-five destinations for non-oil products — Saudi Arabia, China, India, the UAE, and Iraq, which together account for 63 percent of total non-oil exports — declined by 35 percent.

But more than non-oil exports, it is oil receipts that drive Kuwait’s economy; any fall in oil prices has a significant direct or indirect negative impact on all sectors of the economy. Nowhere is this impact more apparent than in the construction sector. Although the second-largest sector after oil, construction work in the country is almost wholly reliant on big-ticket government projects, with the trickle-down from these projects lending support to many other related economic activities.

A persistent low oil-price scenario, recurring budget deficit, and inability of authorities to get a long-pending debt bill passed through parliament, have combined to constrain the government’s ability to fund projects in the construction sector. Without adequate government funding for projects, the pandemic’s effect is likely to be compounded and it is expected that the sector could witness a contraction by 9.5 percent this year.

According to one construction industry report, there were more than KD43 billion worth of government projects under construction in Kuwait in 2019, including schemes worth $62 billion in the oil and gas sector, urban buildings ($48bn), and infrastructure ($30bn). A further KD104 billion worth of projects, including KD20 billion in the oil sector, KD75 billion in urban buildings and nearly KD10 billion of infrastructure projects were reportedly in the planning, design, and tender stages.

In the absence of state bank-rolling, many of these major projects have faced delays or been shelved with some even being completely scrapped. Even prior to outbreak of the ongoing pandemic, Kuwait’s construction industry was already struggling, with output declining by 7 percent in real terms in 2019 due to weakness in awarding of several planned projects in energy and civil engineering work.

The unexpected arrival of COVID-19 in the midst of a slowdown in pace of constructions has exacerbated the situation. Construction activities were severely impacted by government measures to curb and contain the spread of the virus, including lockdowns and the temporary suspension of work in all sectors. According to the Kuwait Business Impact Survey, released by Bensirri PR (BPR), around 40 percent of businesses in the construction sector have entirely shut down their operations since the lockdown measures were introduced.

What a difference a year under COVID-19 can make. At the start of the year, the World Bank Group’s Doing Business 2020 Study had applauded Kuwait as one of the world’s top 10 improvers amongst 190 economies. Kuwait notched an enviable jump in the Ease of Doing Business ranking, going from 97 in 2019 to 83 in 2020.

The country’s noteworthy achievement was underpinned by several reforms in the business regulatory framework that the authorities undertook in the 2018/19 period, including in construction permits. Dealing with construction permits was made easier by streamlining its permitting process, integrating additional authorities to its electronic permitting platform, enhancing inter-agency communication and reducing the time to obtain a construction permit from 194 days to 103 days.

But that was in January; the situation at the tail-end of the year is quite different. Not only has the time taken for issuing permits increased due to office closures and lack of manpower, in many cases there are also no takers for approved licenses as construction activity has ground to a halt in many places due to absence of workers and supply-chain constraints.

Official figures reveal that the number of building permits issued in various sectors during the year was more than 50 percent less than that in 2019. The number of building permits in private housing decreased by 46 percent to 4821 from the 8,863 in 2019. Investment housing fell by 65 percent, from 652 licenses last year to 222 so far this year. And, in the industrial sector it dropped by 57 percent, going from 224 licenses in 2019 to 91 this year. The decline in building licenses reflects the extent of deterioration in local construction enterprises and in the entire economy.

Industry analysts point out that the construction sector sits at the top of an intricate supply chain process that drives various other sectors of the economy, many of them small and medium enterprises. The slowdown or stagnation of construction activity thus has an oversized impact on these businesses and the economy in general, and many firms linked to the sector are likely to face bankruptcy.

Experts warn that the government’s continuing reticence to provide meaningful support to the sector at this stage could snowball and cause heavy losses over the coming period to both private and government sectors. They stress that any delay in taking action will ultimately increase the mitigation costs of stimulus packages that the authorities will have to come up with, in order to ensure a return to ‘normal’ for the economy.

But the government’s ability to provide a suitable response to the situation remains hamstrung by over-dependence on oil revenues. Repeated governments at the helm have in the past promised to fast-track economic reforms and diversify the economy away from its dependence on hydrocarbons, encourage non-oil activities and support the private sector. Sadly, most of these policies and plans have yet to be implemented and continue to remain only on paper.

One reason often cited for the slow progress in implementing plans in Kuwait has been non-ending political tensions between the government and the parliament. But in all fairness, this is only one part of the equation. A government unwilling or unable to take resolute decisions, and play hard-ball if necessary in implementing its plans and policies on an urgent basis, is equally to blame. An overstaffed, incompetent bureaucratic environment, which continues to be a challenge to realizing projects on schedule, is also to blame for why people in Kuwait only dream about experiencing grandiose projects in their lifetime.

timeskuwait

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