Kuwait today in the 21st century is a country of extreme wealth with new skyscrapers, extravagant shopping malls such as the 100,000 square foot Villa Moda shopping centre selling the latest in expensive Western brands. This rich Arab oasis is currently in a very much different setting when compared to year 1991 when Kuwait was then recovering from a devastating war that saw this peaceful nation ravaged with violence. After Gulf War I in 1991, then President Saddam Hussein of Iraq had his military set on fire 782 Kuwaiti oil wells out of a total of 950 resulting in the burning of 2 billion barrels equivalent of Kuwaiti oil. The result was a massive financial loss and unthinkable environmental damage. Fortunately, those wells were under control within 10 months. Kuwaiti society as a whole is slowly transforming to a more Western culture including greater freedoms such as a free press as many would now regard Kuwait as a moderate Islamic country. Today, the majority of Kuwaiti infrastructure and industry has since been rebuilt from Gulf War I in 1991.
POLITICS: stable, constitutional Emirate. In July 2003, Emir Sheikh Jabbar al Ahmed al Sabah appointed his brother as prime minister of Kuwait, Sheikh Sabah al Ahmed al Jabbar as Sabah. The political structure follows that of a monarchy with the ruling family consisting of 5,000 members. Kuwait has no national political parties. Within the parliament, Kuwait City tends to back Liberal candidates while rural Kuwait that is tribal supports Islamists legislators. The emir is the supreme leader while the parliament approves all legislation, the National Assembly parliament basically serves at the pleasure of the ruling family. The government is much more moderate when compared to neighboring Islamic countries such as Saudi Arabia, Iran, etc. Parliamentary elections in July 2003 have the Islamists and supporters of the royal-led cabinet maintaining its hold onto power in parliament. The opposition Liberals who support more freedoms and rights lost this parliamentary election. The challenge for the monarchy is to balance Western influence with traditional Islamic culture as small steps have been made with regard to women’s rights.
ECONOMY: oil based. The state has a firm reign of control over the economy with the government in charge of an estimated 80 percent of the Kuwaiti economy including industries such as oil, utilities, etc. Higher world oil prices have dramatically helped Kuwait financially. Kuwait has fully recovered while also receiving UN damage claims from Gulf War I. Kuwait spent much of its pre-Gulf War I national savings/reserves upwards of $100 billion USD on rebuilding. Today with relatively high oil prices in USD pricing, Kuwait has again rebuilt its national reserves to healthy levels. In Kuwait, upwards of 90 percent of its nationals work for the large state bureaucracy, essentially subsidized work. The government plans to increase foreign direct investment with economic reforms including the lowering of corporate taxes for foreign firms, liberalizing trade as FDI in previous years has been low due to government red-tape. There is basically no agricultural industry due to geography although little fish resources are available.
Economic Statistics
GDP as measured by purchasing power parity at $36.9 billion USD (2002) with corresponding GDP/Capita at $17,500 USD. GDP growth 2004 estimate at 0.7 percent and year 2005 at 2.7 percent, GDP growth 2002 fell 2 percent, 2001 grew by 3.7 percent. Inflation for 2002 at 1.4 percent, 2001 at 1.7 percent, year 2000 is low at 1.8 and inflation has stayed low since 1992. Inflation is projected to stay low for both 2004-05 at 2 percent. Kuwait’s current account surplus for year 2003 was measured at 21 percent of GDP, year 2002 at 11.9 percent, surplus was 24.3 percent of GDP for 2001 and 2000 was extraordinarily high at 39.6 percent. Even during year 1998 when oil prices were low, Kuwait’s current account surplus came in at a modest 8.5 percent. Large fiscal surpluses are the norm, including 2001 at 21.5 percent of GDP, 2002 at 24.6 percent, 1998 for comparison was in a modest deficit position at 2.3 percent. External debt is zero. Kuwait unemployment stands at 7 percent. Large export partners include Japan, South Korea and United States. Import partners include the United States, Japan and Germany.
Oil and Kuwait
The Kuwaiti oil economy represents 50 percent of GDP, 95 percent of export revenues and 80 percent of government income. Kuwait’s vast crude oil reserves are estimated at 98 billion barrels or 10 percent of world reserves or equivalent to over 100 years of oil reserves remaining assuming current production levels. Kuwait has large slack in oil production and has the ability to produce far more than OPEC quotas - an extra 1,000,000 bpd for export. Actual OPEC oil production quota for Kuwait is set at 1.745 million bpd. Crude oil exports are measured at 1.138 million bpd plus refined oil products at 572,000 bpd. Cost to produce is very low at only $1 USD per barrel. Potential for greater industry privatization in Kuwait’s upstream oil operations since the industry was nationalized in 1980. There is an aggressive goal of having Kuwait increase oil production capacity o 4 million bpd within 10 years, the industry would have to liberalize and open up to foreign investment to realize this objective as significant capital investments would be required. Kuwait’s oil industry like Saudia Arabia is vulnerable to terror attacks ie. pipelines, refineries, etc. Kuwait’s natural gas reserves are approximately 1.548 trillion cu m (2001). Kuwait’s natural gas production and consumption for year 2001 came in at 9.5 billion cu m.
POSITIVE: cheap gas, cheap water & power, minimal poverty, excellent infrastructure.
CONCERN: economy dependent upon oil price, water issues as much of it is imported & distilled - desalination, women’s rights are still not up to par, drug abuse is up as many Kuwaiti nationals still suffer with social scars from Gulf War I.
BANKING SYSTEM: sound. Foreign exchange reserves at $9.25 billion USD (2002) or 8 months import coverage. At present, the Kuwait Investment Authority (KIA) manages over $60 billion USD in overseas investments, the fund is replenished since the fallout of Gulf War I. The banking system and economy encountered severe economic malaise in 1982. The Central Bank of Kuwait is responsible for mantaining sound monetary policy as well as issuing the dinar.
REGIONAL ANALYSIS: Persian Gulf, Iraq, Saudia Arabia
The U.S. Navy patrols Persian Gulf shipping lanes thus providing Kuwait the necessary vital sea security as the United Sates is a close ally to Kuwait. Saudia Arabia, located to the south of Kuwait is increasing in risk volatility with internal uprisings and bombings from al-Qaeda groups with a stated goal of removing the Saudi royal family from power. Domestic security for Kuwait is enhanced by strong United States military presence within the country coupled with Kuwait’s high proportion of defense spending. The delicate situation in Iraq located to the north of Kuwait appears to be under control by British and American forces mostly, however the medium to long term picture is quite unclear as the risk of Iraqi civil war remains. Kuwait’s close relationship with the U.S. military further enhances Kuwait’s internal stability and helps to mitigate external risks posed by neighboring countries. In BI.C’s view, the threat of terror attacks within Kuwait is also a lesser risk when compared to both Saudi Arabia and Iraq.
KNOWLEDGE: Middle East - Democratization
Kuwait is probably not going to be leaving its monarchy anytime soon as Kuwaiti citizens are realizing a very high standard of living with extensive social benefits including modern medical that is a free service, free education, minimal taxation and other generous benefits to Kuwait’s 2.35 million people of which include 1.3 million non-nationals. Long term trend however is towards greater democracy and freedoms as with United States presence in the region will significantly provide pressure to the Middle East to make progress forward. This was recently noticed in Libya as they agreed to halt their mass weapons of destruction programs. Surprisingly, Kuwait has a revealing demographic trend that will impact future Kuwait. Today, 50 percent of Kuwaiti nationals are under the age of 15, it is an extremely young population. Many of these youth may desire a Western culture as is the trend in Iran with its young population.
CURRENCY: ISO Symbol ‘KWD’, Kuwaiti dinar. At time of review on April 21, 2004, the Kuwaiti dinar had an exchange valuation of 0.295 KWD to the US-dollar (‘USD’). The dinar has remained stable now for several years. The exchange rate regime currently in use is that of a managed peg to the US-dollar since January 2003. The dinar fluctuates within a thin band to the USD of plus/minus 3.5 percent. Henceforth, the KWD follows a direct correlation in value to movements in the USD to other currencies. No capital controls are in place.
CURRENCY HISTORY: from March 1975 to year-end 2002, the KWD was pegged to a weighted basket of currencies with the valuation of the dinar calculated daily reflecting Kuwait’s then trade and capital flows. The USD during this time represented half the basket weight. Historical quotes for the dinar: January 2003 at 0.29939 KWD to the USD, year 2000 at 0.3063, August 1998 at 0.30718, 1993 at 0.3017.
CURRENCY FORECAST:
The dinar is backed by large foreign asset position giving the KWD the necessary pillar of exchange rate stability. BI.C forecasts a relatively high oil price for the next 3 to 5 years, particularly if inflation adjusted USD priced oil is calculated reflecting the 35 percent decline in the US-dollar in relation the Euroland euro over the last 2 years. In the long term, it is difficult to forecast especially in a world of quickly changing technology. Quite possibly, Kuwaiti authorities may have to think again towards repegging to a basket of currencies if indeed the USD takes a steep downturn in 2005 as BI.C forecasts after the scheduled U.S. presidential election in November 2004. There has been an implementation for trade of an Islamic gold back currency in Asia that is in circulation in an early phase of market development. The rise of a gold-based currency for the region is a significant possibility. For further background information on the Middle East region, please visit SAUDI ARABIA in this BI.C currency index.
UPDATED: April 21, 2004
