KUWAIT - Limited Economic Vulnerability To Globalisation.

From the Kuwaiti perspective, there are two aspects to dealing with the challenges of globalisation. One is the internal angle, i.e. that of the government and parliament, based on what the emirate feels is required to be done to make the economy more resilient and growth-oriented. The internal perspective is based on the day-to-day macro-economic realities and is linked to the oil price.

The second angle is external, and reflects what Kuwait's Western allies believe the government should do to open up the economy. In the latter case, liberalisation measures envisaged usually involve trying to get Kuwait to open up its oil sector for upstream partnerships. The regime has been resisting such pressure, partly by giving other opportunities to Western companies. It has also emphasised that foreign shares in Kuwaiti oilfields are banned by the constitution.

The government has recognised that Kuwait is suffering from what is referred to in the Arab World as the "oil curse". This curse derives from the fact that the emirate has enough oil to ignore developing other sectors of the economy and until the Iraqi invasion it had done just that. Since liberation, however, there has been a growing emphasis on privatisation and greater involvement by local businessmen in the economy - with privatisation being one of the key pillars of the globalising world. But it is to be noted that the momentum for change is often directly related to the oil price, i.e. Kuwait is less inclined to liberalise when prices are high.

During the years of low oil prices in the mid-1990s, therefore, the push for liberalisation was greater than in recent years - with oil prices at a more satisfactory level from the exporters standpoint. Today the Kuwaiti economy is doing well, in view of high oil prices and a major budget surplus of KD1,700m ($5,474m) at the end of a truncated fiscal year which ended on March 31, 2001, compared with a big deficit in fiscal 1998/99 to end-June. Sovereign debts incurred after the Gulf war have been paid off and the Reserve Fund for Future Generations (RFFG) has grown to $47.6 bn, compared to $45 bn in 1998 when the emirate was in recession because of low oil prices. In 2000, Kuwait's GDP grew by almost 17% to about $29 bn.

Thus, the incentive for liberalisation is minimal and the reform process to make the economy function more efficiently has been slow. But there has been movement. The government has eased restrictions on foreign direct investment, which has helped sentiment. Foreign investment into the Kuwait Stock Exchange (KSE) itself is a moot point, because there is still a provision for levying a 55% capital gains tax on foreigners leaving the market. But the government has never yet used the provision. The KSE is one of the largest markets in the Arab World.

The state continues to maintain its vast overseas assets through the Kuwait Investment Authority (KIA). State assets abroad are estimated at more than $60 bn, compared to $55 bn in the first quarter of 1999. Private Kuwaiti investors have more than $80 bn invested abroad. The state assets administered by KIA include equity in Mercedes Benz and Hoechst of Germany. KPC's major acquisitions overseas in the past decades included the $2.5 bn purchase of Santa Fe of the US in 1981 and a stake in BP. Re-organising its overseas portfolio, on May 15, 1997, KIA sold a 3% stake in BP for $2 bn, leaving it with 6.3% Since 1997, KPC has been selling parts of its Santa Fe holding.

Kuwait has also joined the bandwagon of the other Gulf emirates that have been seeking, through the creation of free trade zones, to turn themselves into transshipment hubs and trading centres - like Oman, Ras Al Khaimah, etc. with Dubai already being one. However, Kuwait was one of the first to consider the free trade zone idea with the passage of the Kuwaiti Free Trade Zone (KTFZ) law in 1955, when the government wanted to develop Shuwaikh into a trans-shipment centre and hub for Iran, Iraq and other countries. The first of three phases at the 2m square metre Kuwait Free Trade Zone (KFTZ) in the port of Shuwaikh was completed in April 1999.