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Low oil prices present reform opportunity

Article - March 18, 2016

Kuwait is in the midst of transforming its economy from one reliant on oil, to a knowledge-based, diversified system led by a strong private sector 


With an economic dependence on oil production that stretches back to Kuwait’s discovery of the hydrocarbon in the 1930s, today ‘black gold’ accounts for 95% of export revenue and 89% of government income, and has undeniably brought great wealth to the country.

However, in a global context where oil prices continue to slide – in the past 18 months the price has fallen by 75%, from $110 a barrel to below $27 – the warning bells for oil-reliant countries such as Kuwait are ringing ever louder. For years the International Monetary Fund has given stern caution regarding the consequences of not having a diversified enough economy to cushion the effects of such a scenario.

Understandably then, discussion in Kuwait over recent times has turned towards creating the necessary reforms for achieving such desired alternative, private-sector led growth. In 2010 Parliament passed a $110 billion development plan to reform the country’s economy but so far progress has been slow, something highlighted by Faisal Ali Al- Mutawa, Chairman and CEO of Ali Abdulwahab Al Mutawa Commercial Co. (AAW), one of the country’s biggest private firms. “We haven’t worked hard enough to implement our own reform plans,” he says. “We have so much liquidity that we have been spoiled and we haven’t had the motivation to change.”

Change – the former Minister of Foreign Affairs HE Dr. Sheikh Mohammad Sabah Al-Salem Al-Sabah says – is something that the country can achieve by looking at it pre-oil past as a successful trading nation. “Our national emblem is the ship,” he says. “It was the basis of Kuwaiti culture, we carried people, ideas and cultures long before oil was discovered.”

“Education is important to me, and very much what I am focusing on these days...It is our job to prepare our future generations for the economy after oil.”

HE Dr. Sheikh Mohammad Sabah Al-Salem Al-Sabah, Former, Minister of Foreign Affairs and Deputy Prime Minister

Thankfully, a sovereign wealth fund established in 1953 means the country has set up a platform from which greater diversification can be built, and help fund the country when the resource eventually runs out. As HE Dr. Sheikh Mohammad explains however, it means there are two economies in Kuwait. “There is the current economy which we live in, and the future economy. It is difficult to predict what the future economy is going to look like so we need to ensure that both economies can prosper and provide for future generations.”

As a former Deputy Prime Minister, HE Dr. Sheikh Mohammad’s experience in government means he understands how slow the process reforming a whole economy can be.

Mr. Al-Mutawa, who runs one of the most successful trading and commercial companies in Kuwait, is greatly in favor of more privatization. “No country should rely on one commodity for more than 90% of its income. Why does our government employ over 90% of the workforce and own over 90% of the land?” Mr. Al-Mutawa adds, “I am not trying to be critical, my objective is to push for reform.”

Indeed, in order to diversify and to create a knowledgebased economy focused on a 21st century education system, privatization is key, and is being increasingly acknowledged by the government. Kuwait’s Minister of Education HE Dr Bader Al-Essa said recently, “We need to use the capabilities and expertise of the private sector [to achieve a knowledge economy].”

Although Mr. Al-Mutawa believes that the huge flow of liquidity coming from the high price of oil has so far made Kuwait neglect the importance of education, “proper education and skilled technical training will enable Kuwaitis to participate in the development of their country.”

“Proper education and skilled technical training will enable Kuwaitis to participate in the development of their country.”

Faisal Ali Al-Mutawa, Chairman & CEO, Ali Abdulwahab Al Mutawa Commercial Co. (AAW)

HE Dr. Sheikh Mohammad agrees. “Education is important to me, and very much what I am focusing on these days,” he says. “I am the Chair of the Sabah Al-Salem Al-Sabah Foundation, which provides scholarships to children of all nationalities, sending them to study abroad and expand their horizons.”

Another area of essential focus and potential is healthcare with HE Dr. Sheikh Mohammad believing Kuwait could be “a magnet for healthcare in the Middle East” in the future. AAW is already an example of a private company investing in healthcare. The company recently partnered with the Gustave Roussy Institute, Europe’s leading cancer center to bring a satellite hospital to Kuwait. “It is a courageous move for my company,” says Mr. Al-Mutawa. “No one has ever brought a specialized private hospital to Kuwait before. It should be operating within a year and it also means as a businessman, I can contribute to Kuwait’s healthcare system, whilst also profiting, so it is a win-win situation.”

Overall, Mr. Al-Mutawa has high hopes for the future Kuwait. “We need to change the climate to the extent that oil is no longer a pillar of our budget and create other sources of income. When you think of Singapore, South Korea, or Japan, these are countries without any real natural resources except their people. It proves just how much you can do without natural resources. In the best business schools they say that economic freedom creates wealth. If you don’t have economic freedom and you have an abundance of money, you employ everybody and nobody will work.”

HE Dr. Sheikh Mohammad echoes this sentiment. “It is our job to prepare our future generations for the economy after oil,” he says. “Focusing on education and health is very important for our future success.” Kuwait may be one of the smallest countries in the Middle East, but as two of its most notable leaders from the business and political spheres illustrate, its ambitions are anything but modest.