Year of austerity

Muna Al Fuzai

Muna Al Fuzai

Predicting oil prices seems like a futile endeavor, since there are many variables that interfere in decisive ways. But for the moment, it seems that 2016 is the year of austerity in Kuwait, where HH the Amir Sheikh Sabah Al-Ahmad Al-Sabah has asked the government to reduce expenses in the budget of the Amiri Diwan and its affiliates in order to rationalize expenditure.

The decision coincides with the low price of a barrel of Kuwaiti oil – from about $100 in June to $21.6 at the moment and perhaps less in the coming months. Kuwait pumps 3 million barrels of crude oil a day, and has fiscal surpluses accumulated during the past 16 years. Kuwaitis number 1.3 million people, while financial reserves are estimated to be around $592 billion, which are invested overseas, especially in the United States. This should be a key point in understanding why Kuwait is safe in the short term from possible change in oil prices.

Gulf states have taken several steps to tackle massive spending to confront falling oil prices. Saudi Arabia, for example, has carried out a number of measures to reduce the 2016 budget deficit, including raising gasoline, electricity and water prices.

Last week, Kuwait announced the new fiscal year budget for 2016-2017, with revenues of around KD 7.4 billion against expenses of KD 18.9 billion, a KD 12.2 billion deficit, or about $40 billion. KD 700 million in revenues will be deducted for the future generations’ fund. It is noteworthy that Kuwait calculates the deficit after deducting allocations for this fund. According to the Institute of Sovereign Funds, this fund is estimated to be worth $400 billion.

Finance Minister Anas Sale stated in a news conference that the government will not adopt any austerity measures that may affect the implementation of projects in the budget. I hope this would mean the new airport terminal will not be affected because we do need a new airport as soon as possible. Saleh said Kuwait will use its reserves to cover the deficit.

Saleh also commented on the process of rationalization of subsidies on gasoline, water and electricity in line with other Gulf states, saying that this matter will be decided during a National Assembly session on Feb 9. I hope that the MPs will not use this issue as a topic for election use by rejecting austerity measures.  The call by HH the Amir was good as a role model – that we must be rational and wasteful spending must be stopped. He pointed out the government intends to implement 287 projects in the next year amounting to KD 3.16 billion.

It is worth noting that with the booming US shale oil industry and growing concern about the strength of the global economy, it is becoming clear that the current decline in oil prices will continue for some time. It’s hard to imagine what will happen in the future. But experts seem to agree that improvement will not be great and every nation must stop all forms of government waste and revise its policy to face the future to ensure the financial stability of the country, citizens and interests.

Due to the potential weakness on demand as a result of slowing global economic growth, the price of a barrel of oil will remain below $100 for years to come. The futures market indicates that the price will improve slowly, up to $70 per barrel by the year 2019. At the same time, most experts predict prices of $40-80 a barrel over the next few years. It is futile to speculate on the price with more accuracy.

The oil market is passing through large transformations, and volatility in prices in expected. Reform measures are important and should not be controversial, but they must be gradual and rigorous.

This article was published on 30/01/2016