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Kuwait: the cost of participation.

Last year, the Kuwaiti government restored the elected National Assembly. Faced with chronic budget deficits and little room to cut expenditure, it is looking at modest measures to cut subsidies and impose taxes. They will certainly be politically sensitive and must be phased in gradually. But if implemented, they could mark the beginning of a significant change in the relationship between the Kuwaiti public and its rulers.

THE KUWAITI government is facing pressure to cut its expanding budget deficit by undertaking unprecedented measures to levy taxes and increase the prices of utilities. Since the liberation from Iraq, the authorities have spent heavily beyond their resources, partly to reconstruct the damaged economy and partly to mollify popular grievances. Elections to the new National Assembly last year witnessed a remarkable display of strength by opposition candidates, many of whom (however guardedly) have been critical of the conduct of the ruling Al Sabah family before and during the Iraqi invasion.

The budget for 1993/1994 announced in September indicates a major drop in the deficit to KD1.2bn ($4bn) from the previous year's estimated KD1.8bn ($5.9bn). This will be brought about entirely from a projected 20% increase in oil income from last year's planned KD2.2bn to KD2.7bn in the present financial year. Kuwait has been particularly insistent in demanding an Opec approved oil production quota of at least 2m b/d to allow it reap additional oil revenues. The organisation's failure last June to allow it to produce more than 1.6m b/d led to Kuwait temporarily stepping aside from the Opec production regime.

Expenditure, by contrast, will remain virtually the same as last year at KD3.9bn. Government salaries represent a huge proportion of this, accounting for KD1.16bn ($3.83bn) in 1993/94. Current spending on the military establishment accounts for the biggest chunk at KD2.1bn ($6.98bn).

These two items are the most problematic in Kuwait's less than convincing attempts to balance its budget. In its attempts to restore confidence and retain public loyalty, it dare not take severe measures which would have a major impact on the standard of living of state employees. But local analysts say that the government is confronting the possibility of instituting some politically sensitive reforms which would have the effect both of alleviating the deficit and instilling a sense of civic responsibility among pampered nationals, and especially civil service bureaucrats.

The measures the government has in mind can hardly be called drastic. They include stricter controls on public sector wages, charging fees for public services and, less controversially, speeding up the privatisation of public sector industries. Top of the agenda is a reduction in the government's wage bill, which accounts for almost a third of budget expenditure. Cutting salaries is not on the cards, nor is saving on the heavily subsidised price of petrol.

But the government is discreetly letting it be known that the free ride is over, even if the price to be paid will stay ludicrously out of line with costs. At present, education and health services are free for all Kuwaitis, and electricity charges bear no economic relation to consumption.

Since the liberation from Iraq's brief if devastating occupation, the government has deliberately tried to reduce the country's dependence on expatriate (especially Palestinian) labour. The government would like to see most of the vacated posts occupied eventually by Kuwaiti nationals.

The first hesitant steps are being taken to change the economic and social relations between the state and its citizens. Caution is the watchword. A team from the IMF is reported to be in Kuwait for a lengthy stay while it advises on economic recovery. It is understood that the IMF will advise on taxation and privatisation measures. Whatever form these take, they will have to be implemented gradually over a period of at least five years. No additional charges are expected to be imposed for two years. In another effort to avert alarm, government officials have promised to protect low-income residents by ensuring they will continue to have access to free telephones, utilities and free medical services.

Weaning Kuwaitis away from the free or heavily subsidised services they take for granted and imposing taxes will be a delicate job. Opposition leaders in the National Assembly are bound to argue that if they are asked to participate further in meeting the state's finances, they should in return be given a greater say in government.

For the time being, however, the assembly is cooperating with the government. Amid much acrimony at the end of August, it approved a crucial law outlining repayment terms for the $20bn debt settlement programme.

The law allows corporate and personal debtors to be relieved of their obligations if they pay off a proportion of their debts over two years. The exact amount will be determined by a graduated scale ranging from 25% for those owing less than KD50,000 ($168,000) to 40% for those owing more than KD500,000 ($1.68m). The top category accounts for $18bn of the total debt.

With these funds, the government will be able to redeem 20-year bonds authorised in 1992 which local banks have taken in return for government purchase of their bad loan portfolios. The authorities will also be relieved that the law passed by the National Assembly does not include two contentious demands - that the government should privately release the names of the debtors and that they should be obliged to reveal their current financial position.
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Title Annotation:Business & Finance; economic reforms
Publication:The Middle East
Date:Nov 1, 1993
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