Identifier
Created
Classification
Origin
08KUWAIT613
2008-05-28 11:10:00
CONFIDENTIAL
Embassy Kuwait
Cable title:  

THE IMPORTANCE (AND FINANCIAL BENEFITS) OF BEING

Tags:  ECON EFIN ETRD TIP KU 
pdf how-to read a cable
VZCZCXRO4805
PP RUEHDE RUEHDIR
DE RUEHKU #0613/01 1491110
ZNY CCCCC ZZH
P 281110Z MAY 08
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC PRIORITY 1557
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 05 KUWAIT 000613 

SIPDIS

FOR NEA/ARP

E.O. 12958: DECL: 05/16/2018
TAGS: ECON EFIN ETRD TIP KU
SUBJECT: THE IMPORTANCE (AND FINANCIAL BENEFITS) OF BEING
KUWAITI

Classified By: DCM Alan G. Misenheimer for reasons 1.4 (b) and (d).

Summary
-------

C O N F I D E N T I A L SECTION 01 OF 05 KUWAIT 000613

SIPDIS

FOR NEA/ARP

E.O. 12958: DECL: 05/16/2018
TAGS: ECON EFIN ETRD TIP KU
SUBJECT: THE IMPORTANCE (AND FINANCIAL BENEFITS) OF BEING
KUWAITI

Classified By: DCM Alan G. Misenheimer for reasons 1.4 (b) and (d).

Summary
--------------


1. (C) For a small country with a population of approximately
3.2 million, Kuwait possesses tremendous wealth; according
the CIA World Fact Book, Kuwait has the world's sixth largest
GDP per capita in terms of purchasing power. Kuwaiti
citizens, an exclusive group that makes up about one third of
Kuwait's overall population, enjoy an array of economic
benefits courtesy of the petrostate's largesse. This system
of government benefits is rooted in the belief that Kuwait's
oil is a gift from God and the patrimony of the entire
nation. Some local economists describe the production and
export of Kuwait's oil as a liquidation of the nation's
inherited assets. Hence, the wealth derived from the sale of
Kuwait's oil should be distributed among all Kuwaitis. This
distribution of oil wealth also forms a part of an implied
social contract between the Kuwaiti citizenry (especially
powerful merchant families) and the ruling Al Sabah family.


2. (C) Many of these benefits are government-sponsored
entitlements, including guaranteed public sector jobs,
subsidies, free services, and transfer payments. Other, less
savory opportunities for easy financial gain stem from
institutional corruption, including rampant bribes and
kickbacks in public contracting, earnings from sponsoring
expats for work visas without providing employment, and
revenue earned from selling votes to well-financed
politicians. The illicit economic activities listed are
obviously problematic, but even legitimate,
government-sanctioned benefits have the effect of obstructing
important economic reforms that would benefit both the
Kuwaiti economy and American companies. Kuwait's leadership
has expressed the goal of diversifying the country's economy
by returning to its mercantile roots, but the comforts and
benefits currently provided by the petrostate make it
exceedingly difficult for the Government to implement the
structural reforms needed to realize such a vision. End
Summary.

Public Sector Jobs
--------------



3. (SBU) Kuwaitis enjoy the option of taking a relatively
well-paid, undemanding government job for life. About 95% of
the Kuwaiti work force (both male and female) works in the
public sector, which makes up about two-thirds of Kuwait's
GDP. Though official working hours generally run from 7:30
a.m. to 2:30 p.m., in practice most Kuwaiti government
employees work about three to four hours per day; others
rarely, or never, show up but continue to receive a full
paycheck. (Note: There are, of course, exceptions. The
Kuwait Investment Authority is renowned for hand-picking and
cultivating the cream-of-the-crop of intelligent and
ambitious young Kuwaitis. Within the oil sector, the most
senior ranks of the oil sector are filled with hard working
and highly professional managers and engineers, though many
are now reaching retirement age. End note.) Official
statistics released on May 27 placed the unemployment rate
among Kuwaiti nationals at 5.5% percent, though reportedly
only about one-third of those unemployed were actively
seeking jobs. In contrast, Kuwaiti economist Jassem
Al-Saadoun estimates that Kuwait's "hidden unemployment
rate," which he defines as Kuwaitis who receive a paycheck
but don't actually work, is as high as 50 percent. Many of
these absentee public sector employees supplement their
government income by operating small private sector
businesses or speculating on the Kuwait Stock Exchange in
their ample free time.


4. (U) The civil service pay scale is a two-tiered system
with Kuwaitis receiving higher compensation than expatriates
for doing the same job. The starting civil service pay
package for a high school graduate includes a KD 165 (about
USD 620) monthly salary, a social allowance of KD 147 (about
USD 550) for a bachelor or KD 222 (about USD 830) for a
married person, and KD 50 (about USD 190) for each child.
For a married high school graduate with two kids, this
amounts to a starting salary of USD 25,215 (untaxed). For a
university graduate, the total starting salary amounts to USD
34,260. Military salaries are reportedly about 30 percent
higher than civil service salaries. Salaries and wages
(including social security payments) account for about half
of government spending. In order to compensate for rising
costs of living, the GOK recently announced a monthly pay
raise of KD 120 (USD 450) for Kuwaitis and KD 50 (USD 187)

KUWAIT 00000613 002 OF 005


for non-Kuwaitis to take effect this year. In fact, the
debate over public sector salaries was a major preoccupation
of the previous parliament and generated huge public
interest, while other legislative issues (e.g. labor reform,
privatization, counter-terrorism law) languished.

Social security
--------------


5. (U) Kuwaitis become eligible for social security payments
after 20 years of employment (public, private, and/or
self-employment) for men, and after 15 years for women,
regardless of the employee's age. This policy reportedly
encourages many Kuwaitis to forego higher education so they
can enter the work force and start their social security
clock as early as possible. The minimum social security
payment is 65 percent of final salary for those who terminate
their employment at the 20/15-year threshold. Payments max
out at 95 percent of final salary for those who continue
working for thirty years. Of course, a number of Kuwaitis
"retire" after as a little as 20 years of working for the
government or private sector and then go on to take another
private sector job while they continue to receive social
security payments. Additionally, as the various government
ministries occasionally need to reduce or refresh their
staffing, they offer generous social security supplements to
those employees who volunteer to retire early. In some
exceptional circumstances, as was recently the case in a
policy designed to encourage senior civil servants at the
under secretary-level to retire, total social security
payments (including supplements and bonuses) actually
exceeded the employees' final working salaries.

No taxes
--------------


6. (U) Kuwaitis pay no personal income tax, sales tax,
capital gains tax, or corporate tax. Foreign companies pay a
flat tax of fifteen percent on income. The government
derives virtually all of its revenue from hydrocarbons and
investment income.

Government-sponsored housing
--------------


7. (SBU) Each Kuwaiti household is entitled to a free 400
square meter plot and a 70,000 KD (USD 260,000) home loan to
be repaid over fifty years at zero interest. According to
officials at the Public Authority for Housing, fraud is
rampant, and many Kuwaiti households are effectively able to
register for more than one such home loan. Due to delays in
building new housing complexes, the current wait-time for a
new home averages about twelve years; in the meantime, the
government subsidizes monthly rent payments.

Marriage bonus
--------------


8. (U) Kuwaiti couples receive a KD 2000 (USD 7500) grant and
an additional KD 2000 (USD 7500) zero-interest loan when they
marry. This applies only when the groom is a Kuwaiti
citizen, regardless of whether he marries a Kuwaiti or
non-Kuwaiti woman. Kuwaiti women who marry non-Kuwaiti men
are not eligible.

Free primary, secondary, and tertiary education
-------------- --


9. (U) Many urban Kuwaitis opt to pay to send their children
to private schools, especially international schools; but
public elementary, high school, and university education are
free up to the Bachelors Degree level. University students
also receive a monthly stipend of KD 100 (USD 375). For
Kuwaitis enrolled in universities abroad, the GOK pays all
educational expenses plus the monthly stipend.

Free health care
--------------


10. (SBU) Kuwaitis receive free treatment and prescriptions
in public hospitals, clinics, and pharmacies which are
staffed mostly by foreign doctors. The quality of medical
treatment available in Kuwait is generally good, but for
cases that a government medical panel decides cannot be
adequately treated in Kuwait, Kuwaitis are also entitled to
foreign medical treatment. For these cases, which are
generally sent to Europe or the U.S., the government pays all
medical costs, all travel costs for the patient and

KUWAIT 00000613 003 OF 005


accompanying relatives, and per diem. Predictably, this
system is riddled with fraud and corruption, and the Health
Ministry perennially claims to be reforming and/or downsizing
it.

Subsidized electricity and water
--------------


11. (SBU) Although Kuwaitis are charged a nominal fee for
utilities, the government is prohibited by law from shutting
off water or electricity to any residence owned by a Kuwaiti
citizen. Bills are thus ignored with impunity (except by
expatriates, who, according to a recent edict can, at least
in theory, be prevented from leaving the country if their
accounts are not fully paid up).

Subsidized fuel
--------------


12. (U) Customers currently pay 85 cents per gallon for
gasoline at the pump. This subsidy is universal and applies
to all residents of Kuwait.

Food subsidies
--------------


13. (U) The government heavily subsidizes the prices of
staples such as rice, sugar, flour, bread, powdered milk,
cooking oils and lentils. Every Kuwaiti family is issued a
government ration card that enables them to receive a monthly
ration of subsidized staples from designated distribution
centers or cooperatives. Prices of staples at these
cooperatives are around 25 percent of market value.

Occasional Amiri grants
--------------


14. (U) These are one-off transfer payments. From time to
time, when government surpluses are especially high, the Amir
announces that he will distribute a lump-sum payment
(analogous to a dividend) to every Kuwaiti citizen. The last
of these, which provided KD 200 (USD 750) to every adult
citizen, was in 2007.

Investment in the rapidly inflating stock exchange
-------------- --------------


15. (SBU) Trading on the Kuwait Stock Exchange (KSE) was
initially open only to Kuwaiti citizens but has now been
extended to all residents. The KSE, along with the local
real estate market, has been one of the main beneficiaries of
the abundant liquidity generated by high oil revenues in
recent years. It is the second most active stock exchange in
the region with 191 companies listed. However, since the
government has yet to appoint a strong and independent
Capital Markets Authority to regulate the KSE, insider
trading is rampant, transparency and accounting standards are
lacking, and a number of listed companies exist only on paper
and hold no real assets. The upshot is that insiders are
able to generate extraordinary returns. Average Kuwaitis
with relatively limited means will also soon be able to
benefit as, in a couple of pending public offerings, the
government will issue free shares in newly established and
privatized companies to any Kuwaiti citizen who applies.
Comprised almost exclusively of local companies, the KSE has
been largely insulated from the effects of the subprime
crisis. As of the beginning of May, the skyrocketing KSE
index was already up twenty percent from its 2007 close, but
little of this rise seems to be supported by market
fundamentals.

Investment in local real estate market
--------------


16. (SBU) Like the KSE, Kuwait's real estate market has
soaked up much of the liquidity produced by high oil prices;
and like the growth in asset values on the KSE, this probably
represents a bubble. According to Tandeem real estate,
prices for commercial land in downtown Kuwait are reaching
USD 60,000 per square meter, and residential land values are
reaching USD 1 million for a 500 square meter plot. Rental
prices have increased by fifty percent over the past two to
three years as the overall population has grown at an annual
rate over six percent. Although the government owns over
ninety percent of land in Kuwait, most of the land in high
demand in the densely populated, developed area around Kuwait
City and along the coast is privately-owned. Many of these
prime plots remain undeveloped as a significant proportion of

KUWAIT 00000613 004 OF 005


investors hold them for purely speculative purposes. This
includes the previous site of the U.S. Embassy, which is
owned by Bahraini interests.

Agency for foreign companies
--------------


17. (SBU) Although new laws passed in recent years have
established that foreign companies are no longer legally
required to have a local agent in many sectors, the reality
is that without an influential Kuwaiti agent, foreign
companies have a difficult time achieving success in Kuwait's
relatively closed and complex business environment. Agents
are thus able to demand exorbitant fees and commissions
depending on the extent of their connections to the business
and government elite.

Public sector contracts
--------------


18. (C) Much of the government's windfall oil revenue
trickles down to private citizens through public contracting,
which institutionally favors Kuwaiti contractors over foreign
companies. The sclerotic and corruption-ridden government
contracting system ensures that the juiciest contracts are
awarded to those with the most political and financial
influence, usually companies owned by elite merchant families
with close connections to Members of Parliament. There are
frequent allegations of corruption in the awarding of public
contracts to private companies as influential developers,
contractors, and commercial agents use bribery and wasta
(connections) either to win contracts for themselves or to
persuade the State Audit Bureau or Central Tenders Committee
to prevent contracts from being awarded to their commercial
and political rivals.

Possible forgiveness of consumer debt
--------------


19. (SBU) An additional indirect source of income for many
Kuwaitis would be the passage of proposed legislation for the
forgiveness of private Kuwaiti consumer debt. This proposal,
which understandably enjoys strong and widespread public
support, has been the hottest issue of debate among Members
of Parliament over the past year. The government has
consistently rejected the proposal, but the enthusiasm for
such legislation shown by many opposition MPs shows no signs
of diminishing. Proponents have clothed this extremely
expensive initiative in nationalist rhetoric, citing a
precedent in GOK coverage of citizens' personal expenses
during the 1990-91 Iraqi occupation, and insisting that debt
forgiveness for Kuwaitis must precede any move to reschedule
or forgive Saddam-era Iraqi debt to the GOK.

Income from sponsoring expats
--------------


20. (C) Expatriates are required to have a local sponsor to
obtain a work visa in Kuwait. As the local economy has
exploded in recent years, attracting a greater number of
immigrant workers (8.6% growth in 2007),it has become more
and more common for Kuwaitis with means to establish "paper
companies" that do not actually employ any laborers but
generate revenue for their owners by collecting exorbitant
fees from would-be immigrant laborers to sponsor them for
visas and keep them listed on the company payroll. These
immigrants generally end up doing domestic labor or working
off-the-books for local construction companies and other
employers. This illicit activity constitutes a local
technique for trafficking in persons.

Selling votes
--------------


21. (C) This last source of income is available to any
Kuwaiti who registers to vote, regardless of his or her level
of wasta. In Kuwait's May 17 general elections, some Kuwaiti
parliamentary candidates were reportedly paying voters over
KD 1000 (USD 3750) per individual vote. Vote buying is
rumored to be widespread. With each voter able to choose
four candidates and most households consisting of multiple
registered voters, this amounted to a significant source of
income for an unknown, but probably large number of Kuwaiti
families this year.

Note on income distribution
--------------


KUWAIT 00000613 005 OF 005



22. (SBU) The lack of any tax collection from Kuwaiti
citizens and companies means that the government has no
reliable data on income distribution. However local
economists put the Gini coefficient, which measures income
disparity, in the upper 40s - equivalent to Mexico, China, or
Malaysia. Though no Kuwaiti citizens are particularly poor
in absolute terms, income and wealth are still highly
concentrated among the major merchant families and the ruling
Al Sabah family.

Comment
--------------


23. (C) The illicit economic activities listed above are
obviously problematic, but even the legitimate,
government-sanctioned benefits have the undesirable effect of
obstructing important economic reforms. Many of our contacts
in the highest echelons of government, academia, the private
sector, and the oil sector decry the welfare state's
stultifying effects on worker productivity and sustainable
economic growth. They lament that as long as the majority of
Kuwaitis short-sightedly enjoy living off the fat of the
country's bloated and talent-agnostic public sector, and
powerful and politically influential commercial elites have a
strong vested interest in maintaining the status quo in
Kuwait's commercial and public contracting landscape, reforms
are unlikely to succeed. The inability to implement such
reforms will continue to frustrate the government's stated
goals of building a dynamic and entrepreneurial private
sector; diversifying the economy away from slowly dwindling
hydrocarbon resources; promoting investment in human capital;
and opening Kuwait's markets and industries to foreign
investment.

********************************************* *
For more reporting from Embassy Kuwait, visit:
http://www.state.sgov.gov/p/nea/kuwait/?cable s

Visit Kuwait's Classified Website:
http://www.state.sgov.gov/p/nea/kuwait/
********************************************* *
JONES