KUWAIT: Kuwait's budget deficit for the seven months of FY21/22 was lower than expected at KD 1.2 billion. The reduction in the deficit came on the back of higher oil revenues thanks to the surge in oil prices. With oil prices at higher than previously anticipated levels and government spending relatively restrained, the full-year deficit could shrink to below our earlier forecast of 10.5 percent of GDP. However, reforms to diversify the economy and improve the sustainability of the public finances should remain a priority.
The government registered a cumulative fiscal deficit of KD 1.2 billion by the end of the first seven months of FY21/22 (April to October), an improvement on the KD 3.8 billion recorded by the end of the corresponding period in FY20/21, according to preliminary Ministry of Finance data. Total revenues increased by a huge 80 percent y/y on higher oil revenues, already achieving 88 percent of full-year budget estimates. This was primarily due to higher oil prices, with the price of Kuwait Export Crude (KEC) rising 104 percent y/y to an average of $72.3/bbl during this period. Crude oil output increased only marginally (+2.8 percent y/y, to an average of 2.41 mb/d).
Non-oil revenues increased by 47 percent y/y to KD 1.1 billion (60 percent of full-year budget estimates). This is largely related to the increase in "other revenues" (+74 percent y/y)-revenues from electricity and water as well as from other governmental services. UNCC compensation payments (a legacy from the 1990 Iraqi invasion) worth $1.47 billion (KD 0.4 billion) were received in April, July, and October, with $ 629 million in reparations still outstanding. Furthermore, taxes and fees (29 percent of non-oil revenues) rose by 3.7 percent y/y to KD 0.3 billion, helped mainly by the recovery of imports from the pandemic.
On the other hand, total seven-month expenditures reached KD 10.8 billion, a sizeable increase of 18.2 percent over the corresponding 2020 figure that is partly a reflection of delays in recording financial transactions last year due to the pandemic. Current spending (92 percent of total spending) increased by 16.6 percent y/y to almost KD10 billion, with the compensation of employees component increasing the most to KD 4.6 billion.
In addition, spending on goods and services (which include the purchases of fuel for electricity generation) increased 22 percent y/y to KD 1.8 billion, while grants (transfers to independent entities) declined to KD 2.2 billion (-27 percent y/y). On the whole, government efforts to pare back spending this fiscal year-which, among other moves, includes targeting a 10 percent reduction in ministerial spending-appear to be bearing fruit, although the provisional nature of the interim data mean this is difficult to say for sure.
Capital spending, which was weak during the first two months of FY21/22, appears to have gained some momentum since June, increasing by 41 percent y/y to average KD 0.2 billion per month over June-October. However, capex is still well below full-year budget allocations at 33 percent. Capex spending is expected to pick up in the coming months with the government having increased its budgetary allocations by 13.4 percent for this year to KD 2.6 billion.
According to the budget documentation, these funds will be directed towards enhancing key infrastructure (airport development: KD 0.4 billion and healthcare: KD 0.14 billion). Still, based upon historical experience, capex may only reach around 80 percent (KD 2.0 billion) of its budgeted allocation, so this will help total expenditures come in below budget for this fiscal year.
Overall, Kuwait's public finances have clearly benefitted from the increase in oil prices in recent months, with the fiscal deficit shrinking by more than anticipated in the first 7 months of FY21/22. The full year outcome is likely to be some way below our earlier estimate of 10.5 percent of GDP, also taking into consideration the efforts the government is making to cut budgeted ministry spending. The success of the national dialogue and the formation of a new government shortly should, hopefully, result in some concrete initiatives.
Tighter liquidity that has resulted from the near-depletion of the General Reserve Fund has highlighted the imperative of passing the debt law or allowing the government to withdraw from the Future Generations Fund to meet its short-to-medium-term financing needs. More broadly, economic diversification and private sector reforms to boost non-oil revenues and reduce the government's exposure to oil price volatility will need to be prioritized.