An Expert's View about Business Environment in Kuwait

Posted on: 28 Feb 2012

Recent Developments
•Oil is Kuwait’s major exports and driver for economic growth. With rising oil prices and a step-up in oil output, Kuwait’s economy expanded 5% in 2010. The IMF expects the Kuwait’s real GDP to grow at 5.3% in 2011.
•Consumer price inflation has moderated from a high of 11.6% in August 2008 to 4.8% in 2011. Inflation is expected to ease to an average of 4.2% in 2012-16.
•Hong Kong’s total exports to Kuwait rose by 23.3% in 2011, driven by higher exports of telecom equipment and computers.

Current Economic Situation

Though official GDP data for 2011 is not yet available, the Kuwaiti economy should be performing well for the year in view of the rising oil price and private consumption. The IMF estimates that Kuwait GDP to expand 5.3% in 2011. Kuwait’s territorial boundaries contain roughly 7% of the world’s total oil reserves and the oil sector plays a dominant role in Kuwait’s economy. Oil exports account for approximately 95% of the country’s total export earnings, 95% of government revenue and 50% of nominal GDP. Major manufacturing industries in the country are related to oil, such as oil refining and petrochemicals. As one leading crude oil producer, Kuwait increased its oil output from around 2.5 million barrels per day (bpd) in 2010 to 3 million bpd at the end of 2011. Increasing oil production provides support to GDP growth as well as government revenue.

Given a small domestic market, Kuwaiti companies tend to expand in the region to gain business. Kuwait has a strong financial sector, with banks extending their reach to other countries in the Gulf. The National Bank of Kuwait (NBK) has business in Lebanon, Jordan, Iraq, Egypt, Bahrain, Qatar, Saudi Arabia, the UAE, and Turkey. NBK holds the highest credit ratings among banks in the region from Moody’s, Standard & Poor’s, and Fitch Ratings. NBK has also maintained its position as one of the 50 safest banks in the world for four consecutive years.

The Kuwaiti government has taken many initiatives to diversify its economy. The 2010-14 Kuwait Development Plan, entailing expenditure of US$ 104 billion, seeks to diversify the economy away from oil and to increase the role of the private sector. It also aims to make Kuwait a regional trade and financial centre by 2014.

In order to meet the ambitious development goals outlined in the five year plan, there is an urgent need for infrastructure development. Most prominent of all is the City of Silk project (Madinat al-Hareer), with a site spanning 250 sqkm, and a tower 1,001 metre tall. The site will comprise residential, commercial, educational and recreational facilities as well as tourist attractions such as hotels and spas. The development cost of the approved project is estimated at US$94 billion. A strong fiscal position enables the Kuwaiti government to carry out other construction projects as set out in the five year plan.

During the Arab Spring of 2011, there were some small demonstrations in Kuwait calling for reforms, along with calls by some residing Arabs for citizenship and jobs. The Kuwaiti government has responded by increasing welfare spending, with no radical political reform expected in the country.

The Kuwaiti government introduced privatisation law in 2011 to encourage private investment. Though growth in fixed investment was dampened by political tensions in 2011, private investment is expected to pick up in 2012.

Trade Policy

Kuwait is a member of the World Trade Organisation (WTO) since 1 January 1995, and maintains a rather liberal trade regime. Imports are subject to few controls except for imports such as arms and ammunition, explosives, radioactive materials, drugs, pesticides and insecticides. Importation of fireworks, oxygen, certain steel pipes, firearms, narcotics, alcoholic beverages, air guns, pork, pornographic and subversive materials and used vehicles over five years old is prohibited.

Import licences are required for all commercial imports, and they are only issued to registered importers. To be eligible for registration, an importer must be a Kuwaiti citizen, or the Kuwait share holding in the capital of the company must be at least 51%.

The tie between Kuwait and its fellow members of the GCC is strong. In November 1999, the GCC agreed to form a customs union, which took effect from January 2003 to zero-rate the goods traded within the GCC. On the other hand, the accord establishes a single external tariff of 5% applying on 1,500 imported items from non-member countries. As a result, Kuwait’s customs duty is calculated on the CIF value at the rate of 5% for most Hong Kong products. It also provides a list of items that can be imported duty-free. Under the accord, goods imported into the GCC area can be freely transported subsequently throughout the region without paying additional tariffs.

It is worthy to note that Kuwait abandoned its currency peg to the US dollar in May 2007, and instead pegged the Kuwaiti dinar to a trade-weighted basket of currencies. Kuwait was the first GCC country to do so.

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Posted: 28 February 2012

See more from Business Environment in Kuwait

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Doing Business in Kuwait   By U.S. Commercial Service
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