Windfalls and reforms fuel economic boom: Kuwait is riding high on growing business optimism and sound economic fundamentals. But the country's non-oil private sector would clearly benefit from more intensive market liberalisation reforms.

Author:Siddiqi, Moin

KUWAIT, THE THIRD-LARGEST OF the Gulf Cooperation Council (GCC) six-member economies, is in buoyant shape and prospects for 2006 are favourable.

The removal of a major geopolitical risk from neighbouring Iraq, coupled with recent liberalisation measures have improved business optimism--evident by a surge in private sector investment over the past two years. Real GDP grew at an average annual rate of 7.3% between 2003 and 2005, its fastest pace in 15 years, fuelled primarily by higher crude prices and production.

The oil industry, the emirate's bedrock, contributes about one-half of GDP, plus 90% and 80%, respectively, of total exports and budgetary receipts, the highest ratios in the GCC region. The International Monetary Fund (IMF) noted: "The fastest pace of economic expansion since the 1990 Gulf war, combined with the oil-related terms of trade gains, has boosted per capita income by 34.5% during 2003-04 and helped build up assets for future generations at a record pace." It added: "With oil prices likely to remain firm over the medium-term, Kuwait's medium-term outlook has improved and is likely to remain favourable, supported by large fiscal and current-account surpluses, and low inflation."

The non-oil economy, too, achieved a respectable 5% growth in the three-year period, helped by an expansionary fiscal policy and the spillover effects of the renewed trading with Iraq--benefiting the services industry. One financier told the UK Banker Journal: "The sword of Damocles has been lifted and the glass ceiling over Kuwait has disappeared." The government has agreed in principle to write-off Iraq's $8.2bn debt by 80%, in line with the Paris Club agreement, and offered a $560m grant to fund economic-socio infrastructure projects in the war-torn country.

The public sector, including quasi-governmental organisations, comprises over two-thirds of total GDP, thus providing a major source of consumption, output and jobs within non-oil sectors. The state's revenues in recent years are over-shooting budgetary targets [by wider margins] and hence, increased government consumption and investments have had positive 'multiplier-effects' across the emirate. That, in turn, underpins private sector activity, leading to robust domestic demand and business spending. Kuwait plans to invest about $6bn on its tourism, housing and transport sectors. The construction of a port on Boubiyan Island (a joint public-private venture) should finish by 2008 and a planned North-South GCC train line would contribute to higher intra-regional investment and trade-related activities. Kuwait hopes to reposition its traditional role as gateway to regions in the north and east.

The Kuwait Stock Exchange (KSE) index rose by an impressive 85% during 2005, on top of 102% and 34% during the previous two years, reflecting soaring liquidity, robust corporate earnings and bullish investor sentiment, coupled with some repatriation of offshore private wealth.

The KSE hit record highs of 11,855 last November, with market capitalisation rising to KD37.9bn ($129.6bn). A total of 136 companies are listed on the bourse, of which the top five highest earnings stocks include the National Bank of Kuwait...

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