Lower spending boosts Kuwait’s fiscal surplus

A sharp decline in expenditure more than doubled Kuwait’s budget surplus for the previous fiscal year despite a drop in revenue because of lower oil prices, according to a key bank in the Gulf OPEC country.

From around KD2.74 billion (Dh34 billion) in the 2008-2009 fiscal year, the surplus shot up to nearly KD6.4 billion (Dh80 billion) in fiscal year 2009-2010, which ended on March 31, National Bank of Kuwait (NBK) said.

“Kuwait recorded its 11th consecutive budget surplus according to the closing accounts of fiscal year 2009/2010,” NBK said in a study.

The surge in the surplus was a result of a sharp drop in actual spending, which plunged by 38 per cent to nearly KD11.2 billion in fiscal year 2009-2010 from KD18.2 billion during 2008-2009, the study said, citing government data.

Revenue dipped by 16 per cent to about KD17.6 billion from KD21 billion due to a decline in oil export earnings to around KD16.5 billion from KD19.7 billion.

“Revenues fell because of lower oil prices and production cuts last year, but they were still 219 per cent of budgeted numbers,” the study said.

“Expenditures decline by around 38 per cent and were 93 per cent of the budgeted amount. The steep spending decline was exacerbated by a large special transfer to social security the previous year.”

The report showed the price of Kuwait Export Crude averaged $68.3 per barrel over the period compared to $78.5 in the previous year while productionlevels were lower as well due to OPEC-decreed cuts.

“The slump in the economic activity in fiscal year 2009/2010 apparently took its toll on the governments’ non-oil receipts, particularly in the first three quarters ofthe fiscal year. The major contributor to this decline was ‘Miscellaneous Revenues’ which plunged by 44 per cent and without which non-oil revenues would have been flat on the year,” it said.

It showed corporate income taxes also dipped by 42 per cent and came at 55 per cent of budget forecasts during 2009-2010 compared with a historic average of 143 per cent in the previous fiscal year.

The report said the sharp fall in expenditure was due to the absence of the extraordinary transfers to the pension fund.

“Excluding all spending categories that do not affect domestic demand, such as transfers, spending on military hardware and the cost of fuel used in power generation, demand impacting expenditures which have more impact on  economic growth were almost flat on the year. These expenditures should be higher in the current budget year as they are assumed up by 15 per cent.”

In its previous forecasts, NBK said Kuwait, one of the world’s largest oil producers, could still bask in a budget surplus in the current fiscal year even if average crude prices dipped below $70 a barrel.

The Gulf emirate has forecast a deficit of around KD6.4 billion (Dh80 billion) in its 2010-2011 fiscal year which began on April 1 as it assumed a very conservative oil price of around $43 a barrel, according to NBK.

But oil prices have average above $60 so far this year and are projected to top $70 through 2010. They are expected to swell further in 2011 as the global economy gains steam in its slow recovery process.

NBK said stronger world economic growth could see global crude demand rise by an amount more in line with the IEA’s prediction of 1.8 mbpd this year.

To avoid prices escalating too far, OPEC might relax members’ quotas, adding around 0.4 mbpd to its output by early 2011, the report said.

“Under these conditions, the price of Kuwaiti crude could reach mid-$80 levels by the first quarter of 2011...these scenarios leave the price of Kuwaiti crude in the $67.3 to 79.9 range for this fiscal year. This is well above the $43 projection used by the government in its current budget,” NBK said.

“Under the government’s projection, the fiscal deficit would reach KD6.4 billion this year. In fact, if, as we assume, government spending comes in at 5-10 per cent below budget levels, our oil price scenarios could generate a fiscal surplus of between KD0.9 billion and 5.7 billion this year, before

allocations to the Reserve Fund for Future Generations…this comes despite an increase in budgeted spending of some 33 per cent this year, and would see the budget record its 12th consecutive annual surplus.”