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Kuwait - Economy

Kuwait is a geographically small but wealthy country with a relatively open economy and self-reported crude oil reserves of nearly 105 billion barrels--approximately 8% of world reserves. Petroleum accounts for nearly half of GDP, 95% of export revenues, and 95% of government income.

Economic activity in Kuwait picked up in 2014. Non-oil growth is projected at 3.5 percent driven by a combination of continued increase in domestic consumption and some pick-up in government capital spending and private investment. Flat oil production would keep the overall real GDP growth positive at 1.3 percent. The average inflation rate is forecast to remain at about 3 percent. The current account and fiscal surpluses are expected to remain high. The medium-term economic outlook is favorable. Non-oil GDP growth is expected to pick up to 4 to 5 percent in the medium term, supported by government investment in infrastructure and the oil sector, and by consumption.

The execution of the governments Five Year Development Plan (DP) (201014) was below target and public investment has stalled. Public investment remainrf lower than in other emerging market economies. Frequent changes in governments since 2006 partly delayed the implementation of some mega projects. Spending rigidities and increased reliance on oil revenues highlighted fiscal risks.

Kuwaiti officials committed to increasing oil production to 4 million barrels per day (bpd) by 2020. Due to a budget surplus generated from oil prices, Kuwait survived the economic crisis that began in 2008, and in 2010 it posted its twelfth consecutive budget surplus. Kuwait has done little to diversify and reform its economy, in part because of this positive fiscal situation, but also due to the poor business climate. In addition, the acrimonious relationship between the National Assembly and the executive branch has stymied most movement on economic reforms. Nonetheless, in 2010 the government passed an economic development plan that pledged to spend up to $104 billion over 5 years to diversify the economy away from oil, attract more investment, and boost private sector participation in the economy. There is speculation whether such an increase in spending over the planned time frame is even possible.

The Kuwait National Assembly passed a law on December 26, 2007, amending the Income Tax Decree No. 3 of 1955 and setting the foreign corporate tax rate at a flat 15% to attract more foreign investment. The foreign corporate tax rate previously ranged from 0% to 55%.

In 1934, the ruler of Kuwait granted an oil concession to the Kuwait Oil Company (KOC), jointly owned by the British Petroleum Company and the Gulf Oil Corporation. In 1976, the Kuwaiti Government nationalized KOC. The following year, Kuwait took over part of onshore production in the Divided Zone between Kuwait and Saudi Arabia. Kuwait Gulf Oil Company (KGOC) produces jointly there with Saudi Arabian Chevron, which, by its 1984 purchase of Getty Oil Company, acquired the Saudi Arabian onshore concession in the Divided Zone. Saudi Arabia renewed Chevron's concession in the Divided Zone for another 30 years, effective from February 2009. KGOC also manages offshore production operations, while Aramco Gulf Oil Company (AGOC) manages the Saudi portion of the offshore Divided Zone.

Kuwait Petroleum Corporation (KPC), an integrated, state-owned oil company, is the parent company of the government's operating companies in the petroleum sector. It includes Kuwait Oil Company, which produces oil and gas; Kuwait National Petroleum Company, which manages refining and domestic sales; Petrochemical Industries Company, which produces ammonia, urea, ethylene, propylene, and styrene and participates in a number of successful joint ventures with Dow Chemical within Kuwait and abroad; Kuwait Foreign Petroleum Exploration Company, which is responsible for exploration and upstream production outside Kuwait (in several developing countries and Australia); Kuwait Oil Tanker Company; Kuwait Gulf Oil Company, responsible for exploration and production in the Kuwait portions of the offshore and onshore Divided Zone; and Kuwait Petroleum International, which manages refining and retail operations outside Kuwait (in Europe and East Asia).

According to official Organization of Petroleum Exporting Countries (OPEC) figures, Kuwait has approximately 101.5 billion barrels of proven oil reserves (including the Kuwaiti share of proven reserves in the Divided Zone), the fifth-largest oil reserves in the world after Saudi Arabia, Canada, Iran, and Iraq. By 1993, Kuwait had restored its oil production capacity to its pre-occupation levels of 2.4 million bpd. Kuwait's current oil production capacity is estimated at 3 million bpd. Kuwait plans to increase its capacity to 3.5 million bpd by 2015 and 4.0 million bpd by 2020. Many analysts question whether these goals are feasible. Kuwaiti export crude averaged $82 per barrel in 2010.

KPC purchased refineries in the Netherlands and Italy and service stations in the Benelux nations, Italy, and Scandinavia from Gulf Oil Company. In 1987, KPC bought a 19% share in British Petroleum, which was later reduced to 10%. KPC markets its products in Europe under the brand name Q8. In 2006, KPC announced plans to participate in a joint venture to build and operate a refinery and associated petrochemical plant in China. In April 2008, KPC signed a joint venture agreement with Idemitsu Kosan-Japan to hold a 35.1% stake, worth $6 billion, of Vietnam's second refinery. Both projects are pending processing of domestic licenses.

In 2008, KPC awarded a $14 billion project to construct a fourth refinery to several international firms. The project was to increase refining capacity from 930,000 barrels per day to 1.5 million barrels per day by 2012. However, this project was canceled in March 2009. Under political pressure, the tendering process was reviewed and found illegitimate, as it was not awarded under the Central Tenders Committee bidding process. As of now, the fourth refinery has not been retendered.

The government has sponsored many social welfare, public works, and development plans financed with oil and investment revenues. Among the benefits for Kuwaiti citizens are retirement income, marriage bonuses, housing loans, virtually guaranteed employment, free medical services, and education at all levels. By Amiri decree, the government occasionally disburses a portion of its budget surplus as a grant to all Kuwaiti citizens. In 2006, an Amiri grant of 200 Kuwaiti dinars (approximately $700) was paid to every citizen who applied. In 2007, the government implemented a debt forgiveness scheme for Kuwaiti citizens amounting to just over $1 billion. In February 2011, the government announced an Amiri grant of estimated 1.5 billion Kuwaiti dinars (approximately $5.3 billion), including 1,000 Kuwaiti dinars (approximately $3,500) to be paid to every citizen along with free monthly food baskets to each Kuwaiti family for 14 months. Foreign nationals residing in Kuwait do not have access to these welfare services. The right to own stock in publicly traded companies, real estate, and banks or a majority interest in a business is limited to Kuwaiti citizens and citizens of Gulf Cooperation Council (GCC) countries under limited circumstances.

Industry in Kuwait consists of several large export-oriented petrochemical units, oil refineries, and a range of small manufacturers. It also includes large water desalinization, ammonia, desulphurization, fertilizer, brick, block, and cement plants. The U.S. and Kuwaiti governments signed a Trade and Investment Framework (TIFA) agreement in 2004, providing a forum to address mutual trade concerns and needed economic reforms. Kuwait and the other GCC nations signed a free trade agreement with Singapore in 2008, and with the European Free Trade Association (EFTA) in 2009. Kuwait does not attract significant foreign direct investment (FDI), largely due to bureaucratic obstacles and barriers to doing business in Kuwait.

Agriculture is limited by the lack of water and arable land. The government has experimented in growing food through hydroponics and carefully managed farms. However, much of the soil that was suitable for farming in south central Kuwait was destroyed when Iraqi troops set fire to oil wells in the area and created vast "oil lakes." Fish and shrimp are plentiful in territorial waters, and large-scale commercial fishing has been undertaken locally and in the Indian Ocean.

The Kuwait Oil Tanker Company has 24 crude oil, liquefied petroleum gas, and refined product carriers and is the largest tanker company in an OPEC country. Kuwait is a member of the United Arab Shipping Company.

The Kuwaiti dinar is pegged to an undisclosed basket of currencies. As of December 1, 2011, one U.S. dollar was equivalent to 0.2749 Kuwaiti dinars. Soaring oil prices in 2010 contributed to a budget surplus for fiscal year 2010-2011 (ending March 31, 2011). As of November 2011, the budget surplus was estimated at $29.9 billion for the first 7 months of the 2011-2012 fiscal year.

The Kuwait Investment Authority's (KIA) Kuwait Sovereign Wealth Fund manages the Kuwait General Reserve Fund and the Kuwait Future Generations Fund. KIA is prohibited by law from publicly discussing the size of its holdings, and avoids any but the most general discussions of asset allocation. KIA does, however, provide closed-door presentations on the full details of all funds under its management--including its strategic asset allocation, benchmarks, and rates of return--to the Council of Ministers as well as to the National Assembly. Media reports in 2011 speculated that KIA's holdings were approximately U.S. $250 billion.

Kuwait has been a major source of foreign economic assistance to other states through its Kuwait Fund for Arab Economic Development (KFAED). The fund is an autonomous state institution created in 1961 on the pattern of western and international development agencies and is chaired by the Kuwaiti Foreign Minister. In 1974, the funds lending mandate was expanded to include all non-Arab developing countries. According to the most recent statistics, the funds paid capital amount is $7 billion. The fund has granted 805 loans with a total value of about $15.6 billion since its inception, and has extended technical assistance on 102 countries, including 16 Arab countries, 40 African countries, 35 Asian and European countries, and 11 Latin American countries. During 2011, the fund signed 15 loan agreements, valued at $316.27 million, with four Arab countries, five African countries, three countries in East Asia, South Asia, and the Pacific, two countries in Central Asia and Europe, and one country in Latin America and the Caribbean region.



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