Kuwait spending may be unsustainable

Kuwait will probably struggle to sustain its level of government spending in the medium term because oil prices may fall, a World Bank official said on Tuesday, warning that the Gulf state's economic development plans were also at risk because of the indifference of the private sector. Bassam Ramadan, country manager for Kuwait at the World Bank, said the average price of various types of crude oil could fall by 10-15 percent from current levels to around $85 per barrel by 2020. This would put pressure on the oil exporter's state finances, especially given a series of public sector wage hikes over the past six months, he said. "This country has put its development plan and its spending pattern basically at a price of $85 per barrel," he told reporters on the sidelines of a Euromoney conference in Kuwait. "You have such a high price already and it is mostly recurrent spending, and then when you have an oil revenue windfall you are immediately leapfrogging salaries. "The medium-term fiscal framework is not looking good if they continue at this rate of spending without putting much more systemic process into such salaries and compensations." Kuwait's government announced a 25 percent wage increase for public sector workers earlier this month, after a series of wage hikes for individual sectors last year. The government has been under pressure from increased union activity since last year's Arab Spring uprisings in the region. Customs and airline workers walked out earlier this month, although they have since returned to work. The government's wage hikes "are not systematic, they are not done on a scientific basis. This is not just a Kuwaiti reaction to the situation in the region but a Gulf reaction," Ramadan told a panel discussion. Kuwait's draft state budget for next fiscal year envisages a spending increase of about 13 percent from the current year's plan to 22 billion dinars ($79 billion). That figure, however, does not include all of the recently announced wage hikes. Ramadan said Kuwait could tap its large reserves if it needed to keep up spending as the crude oil price fell. "This country is not going to go bankrupt," he said. "What is happening is that the development plan - without being able to open the field for the private sector - will suffer." Parliament passed a $110 billion development plan in February 2010, aiming to diversify away from oil and boost the private sector, but little has been spent so far, partly because of political clashes which prompted two governments to resign last year. "The development plan is based on creating half of the investments from the private sector. But you talk to the private investors here and they want to run away from Kuwait," Ramadan said. He said trying to do business in Kuwait was a headache, from trying to find and register a property to enforcing contracts. Businesspeople were left traipsing from one government office to another, entangled in a trail of red tape. High public sector wages are hurting the private sector by creating wage distortions, Ramadan added. "A sense of entitlement of the Kuwaiti public sector workers is creating a disincentive to work in the private sector," he said, echoing a concern of several senior Kuwaiti policymakers.