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No backtracking on financial reforms: Minister Saleh vows

‘No plans to extend subsidy cuts’

Finance Minister Anas Al-Saleh

KUWAIT: Deputy Prime Minister and Finance Minister Anas Al-Saleh has vowed to forge ahead with game-changing reforms to address financial imbalances and diversify national economy, even if oil prices surged again to $100 per barrel.
“I have been very firm in saying there can be no backtracking, the reforms are going ahead,” Saleh said in an interview the Arabian Business magazine published Sunday. Saleh has devised a package of fiscal reforms he hopes would change Kuwait’s economic make-up for good.

Kuwait has already cut electricity, water and fuel subsidies as part of its reform plan, including hiking the cost of petrol by up to 80 percent. Kuwait has also begun looking at alternative means of raising finance, such as its $8 billion debut international bond issue in March, for which orders totaled a reported $29 billion.
Despite such progress, the International Monetary Fund (IMF) said in November that Kuwait would need $114 billion to finance its deficit over the next six years. The deficit reflects the budget shortfall but does not take into account government revenue transferred to the Future Generations Fund or the vast wealth of the Kuwait Investment Authority, which is estimated at $592 billion by the Sovereign Wealth Fund Institute.

Main challenges
In the interview, Saleh mentioned two main challenges. “The first is the short-term challenge, to close down the deficit, and the other is the medium to long-term one, diversifying the economy.”
“On the first, we are doing well. We have a set of reforms we are now revamping to be more efficient. We have been in contact with industry associations from accounting, law, economics and other sectors to take long-term views on what is required, because we have to build up a consensus that reforms are necessary.”

He stressed that previous limp efforts to reduce oil dependence must be sharpened and, finally, brought to fruition. “We still have 90 percent of our revenues coming from oil. Like many GCC states, we are oil dependent and this is definitely not sustainable. But we are dealing with it now and we are dealing with it even if the oil price goes back up to $100 per barrel….”
The first version of the National Program for Fiscal and Economic Sustainability (FES) was published in March 2016 and includes measures such as subsidy cuts, which had already been partially implemented.

The five-year plan to 2021 sets out reforms categorized into four areas: improving government efficiency by cutting public spending while prioritizing capital spending; reducing expenditure by capping departmental budgets and rationalizing subsidies; shrinking the public sector wage bill; and diversifying public revenues by growing the private sector. The program has started to yield positive results, such as $3.6 billion in savings from budgeted to actual expenditure for the last fiscal year, according to the Ministry of Finance.

Saleh is now preparing to publish a revised version of the FES in the next few weeks, in what he hopes would achieve further efficiencies and improve the business environment. The new FES version would focus on achieving greater efficiencies within government “tightening belts within the house rather than touching the pockets of citizens,” Saleh made it clear.

Subsidy cuts
There are no plans to extend controversial subsidy cuts, he said; instead, government entities will face tighter fiscal constraints, such as a ban on signing leases for new office space. “I am saying to departments, it’s top-to-bottom now, this is your budget, give me your priorities,” Saleh stated.

The program also includes measures to help grow the private sector, particularly through public-private-partnerships (PPPs), such as the Al-Zour North power plant last year. Three more PPPs are planned for 2017, including the Al-Zour North Plant II, Umm Al Hayman wastewater treatment plant, and a solid waste management plant in Kabd.

Kuwait is also embarking on a nationwide privatization strategy. Saleh noted that the privatization touched three state assets – Kuwait International Airport, Sabiya power plant and the country’s fixed telecoms network – is expected to commence this year. The government also plans to sell minority stakes in several units of state oil producer Kuwait Petroleum.
Other reforms are aimed at improving business environment, with a long-awaited insolvency law to be passed in the coming weeks; an amendment enacted this month to remove capital requirements for new businesses; and a decision to slash fees for corporate licensing renewals. “We are doing everything possible to enhance our ranking in the World Bank’s Ease of Doing Business report,” Saleh stressed.

The revised plan is intended to help close the deficit “tremendously,” shrinking shortfall by at least $3 billion annually over the next five years, with a targeted budget ceiling of $65.7 billion each year to 2020, Saleh pointed out.
The plan is expected to support the New Kuwait 2035 economic diversification plan while maintaining the country’s Aa2 sovereign credit rating. The privatization of government assets, which include Kuwait Airways and Sabiya power plant, are expected to begin this year.

Long-term sustainability
Despite his concern over Kuwait’s long-term fiscal sustainability, the minister insists in his interview he is not panicking. “Our reserves have given us a strong backbone to face the headwinds coming in…,” he said.
He argued Kuwait Investment Authority’s (KIA) investments – “made overseas for prudency and diversification” – further temper his anxiety about the budget shortfall and support his reasoning that there is no need to impose further cuts on the general public.

“Our reserves are just over $500 billion and KIA has been (generating) average annual growth of 6.9 percent. If it does only three percent, I will still pay my deficit in the next five years,” Saleh explained.
“Having said that, we don’t want to rely on (that income stream). We want to benefit from the drop in oil prices and use it to implement reforms for sustainability.” The minister is also optimistic about foreign investor interest in Kuwait – total foreign direct investment was $1.18 billion last year, a 29 percent increase from $920 million in 2015. High levels of demand for Kuwait’s recent bond sale is further evidence of investor interest, Saleh said. “We were overwhelmed with demand from quality names and the book quickly filled up. We got a spread (calculation) of 75 (basis points) over five years – unheard of in the GCC.”

Kuwait is drafting a law to permit the issuance of longer-term bonds – up to 30 years compared to the five- and 10-year debt issued in March. Saleh reveals such a bond could be issued in 2018, at a smaller scale, possibly with some Islamic instruments, too.

“Our plan is to be a rational prudent borrower and continue to be in the market over the coming years, even after we close our deficit. We want to build up a proper sovereign yield curve and help corporates back home to benefit from that,” he said. “We also want to explore new financing instruments for our budget rather than financing it from our reserves.”
Under the proposals, the legislation will permit the government to borrow up to $65.7 billion over 20 years; the current ceiling is $32.8 billion. Saleh added other planned legislation such as the insolvency law would encourage businesses to set up in Kuwait.

However, he admitted he has shelved plans to introduce corporation tax, fearing it could place Kuwait at a competitive disadvantage unless all of the GCC states impose it simultaneously. That is what the GCC is doing with a value-added tax (VAT) due to be implemented from January 1, 2018.

Saleh cautioned against presuming the VAT will bring about significant fiscal change in Kuwait. He said his present focus is top-down government rationalization. “I wouldn’t lean on (VAT) too much. There is so much tightening we can do within the system that would pay us more. The procedures we are issuing in the new plan include more efficient tightening that will not hurt our tummies too much, but hopefully make sure we do not overeat,” he said. – Material from KUNA and Arabian Business

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