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	Kuwait		Info-Prod Country Guide
CHARACTERISTICS   INDICATORS   THE ECONOMY   INVESTMENT ISSUES   PROJECTS   PROSPECTS

The Economy Oil Sector Kuwait’s crude oil production is currently running at two million barrels per day and production capacity is estimated to be two and a half million barrels per day. The country’s refining capacity, likewise, has been restored to 800,000 barrels per day. The state operated Kuwait Petroleum Corporation (KPC) has taken several steps to diversify its revenue pool. The company signed a deal in 1996 with the Italian Agip SpA to acquire a 50 percent share in the Italian firm's Milazzo refinery. With this deal, KPC receives 330 filling stations with an estimated value of US$ 500 million. These stations have an annual output of about 500 million liters, which constitutes 1.5 percent of the Italian retail market. The deal will raise the KPC’s European output to about 250,000 bpd. KPC’s only other overseas refinery in Rotterdam has a capacity of 80,000 bpd. Non-Oil Sector Kuwait’s non-oil economy has been flat since a reconstruction boom which followed the country’s liberation after the Gulf War. The poor economic performance can be traced, in part, to the country’s changing demographics following the Gulf War. Even now, Kuwait’s population is less than 80 percent of the pre-war population. Furthermore, many of the Palestinians and Jordanians who lived in Kuwait with their families prior to the war have been replaced by unmarried expatriate workers who tend to remit their earnings home rather than spend them in Kuwait. These two factors have had a negative effect on the consumer-oriented businesses that make up much of Kuwait’s non-oil economy. Government Role in the Economy Kuwait’s government presently dominates the local economy. With increased pressure from the business community and the public, however, that role will decline and the country should move towards privatization and rationalization of the economy. Kuwait’s economic system, modeled on a welfare state, provides for a large measure of government regulation. These regulations restrict participation and competition in a number of sectors of the economy and strictly control the roles of foreign capital and expatriate labor. The Kuwaiti government owns interests in many of the private companies in the country including most of the nation’s banks. In some cases, the government bought these shares to ameliorate the Souk Al-Manakh stock market collapse in 1982. In other cases, the government ownership was used to provide capital for local industries. The era of government ownership seems to be coming to an end, however. As a part of ongoing privatization efforts, the Kuwaiti government has begun to relinquish its interest in these companies, generally by offering its shares for sale on the Kuwaiti Stock Exchange. Private foreign investors may participate in this privatization process by purchasing up to 40 percent ownership of Kuwait’s national industries, subject to prior Kuwaiti government approval. Finally, the Kuwaiti government is, by far, the largest employer of Kuwaiti nationals, 92 percent of whom work for the government or a government-owned company. Through efforts to “Kuwaitize” its work force, the government of Kuwait, in effect, has guaranteed employment to all Kuwaiti nationals. While this has had a social benefit, at least superficially, it has resulted in many government ministries being over-staffed and under-productive. It has also made it difficult for private companies to recruit Kuwaitis for meaningful, but rigorous, jobs. Balance of Payments Kuwait’s balance of payments situation is healthy, with expimports by a comfortable margin. Since crude oil and refined petroleum products comprise more than 90 percent of the value of exports, the country’s balance of payments is highly susceptible to changes in oil prices. The Kuwaiti government generally takes a conservative pricing position for oil revenue in its budget projections. Reforms The World Bank has recommended that Kuwait shed holdings in a wide range of firms and utilities, introduce taxes, cut subsidies and increase charges on state services. Kuwait is considering equalizing income taxes for Kuwait and non-Kuwaiti firms and giving incentives for some types of commercial activities. This could be a call to introduce a tax on the profits of Kuwaiti firms. Presently, corporate tax is levied only on foreign companies and the profit share of foreign shareholders in Kuwait firms. No tax is levied on the profits of wholly Kuwaiti-owned companies or on Kuwaiti shareholders in joint ventures with foreigners. The top company tax rate is 55 percent, applicable to annual profits of US$ 1.25 million or more. Kuwait has also expressed interest in recent months in replacing the variable tax on foreign company profits with a fixed rate of 30 to 35 percent. The local banking sector, as in other parts of the Arab world, finds it difficult to take advantage of the growing opportunities in private financing for projects because of limited capital. The 1996 merger agreement between two Kuwaiti banks, “Burqan” and the “Middle East,” however, provides some hope for the modernization of the banking sector. As it is, the Kuwaiti government holds majority ownership of both banks, and this made the merging process less cumbersome. Previous Chapter Contents Menu Next Chapter

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