KUWAIT PLANS 10 PERCENT BUDGET CUT

UNCLAS SECTION 01 OF 02 KUWAIT 000130 SENSITIVE SIPDIS TREASURY FOR MENA E.O. 12958: N/A TAGS: EINV ECON EFIN KU SUBJECT: KUWAIT PLANS 10 PERCENT BUDGET CUT REF: A. KUWAIT 111 ¶B. KUWAIT 79 ¶1. (SBU) Summary: The GoK is proposing a FY 2010 budget of USD 40.8 billion, off 10.4 percent (on a recurring basis) compared to the prior fiscal year. The Government proposes cutting spending in almost all major sectors, except for public sector salaries, which will increase by 7.8 percent. Expenditure on construction projects will be slashed 26.5 percent, compounding Kuwait's perennial inability to proceed with new, large-scale infrastructure programs. End Summary. ¶2. (U) Adnan Abdulsamad, head of Parliament's budget committee, presented the Gok's proposed budget for the fiscal year ending March 31, 2010. The proposed FY 2010 budget calls for cuts in most sectors, with an aggregate decline in GoK expenditure of KD 6.9 billion (USD 23.3 billion),a 36.3 percent reduction. However, the GoK's FY 2009 budget includes a one-time, non-recurring expenditure of KD 5.5 billion (USD 18.6 billion) relating to a recapitalization of the Public Institution for Social Security (PIFSS). Excluding this FY 2009 one-time expenditure, the GoK recurring budget will be cut 10.7 percent. The table below shows the FY 2009 and FY 2010 budgets (excluding the one-time PIFSS recapitalization expenditure, which was included in the FY 2008 "miscellaneous" budget line): Percent GOK BUDGET (USD billions)* FY2009 FY2010 Change -------------- -------------- Salaries 10.9 11.7 7.8 Commodities 10.4 7.9 -24.3 Transportation/equipment 0.6 1.0 70.4 Construction projects 5.6 4.1 -26.5 Miscellaneous 18.1** 16.1 -11.1 Total 45.6 40.9 -10.4 -------------- -------------- * KD 1.00 = USD 3.39417 as of 02/09/2009. ** Excludes one-time recap. payment to PIFSS of USD 18.6 billion. It is important to note that the above expenditures do NOT include the 10 percent of total Government revenues that are always allocated to the Reserve Fund for Future Generations (RFFG) each year. The RFFG is managed by the Kuwait Investment Authority (KIA),Kuwait's sovereign wealth fund. Also, these expenditure figures do not include possible costs associated with the GoK's recently proposed bailout/stimulus package (reftel A). ¶3. (U) Abdulsamad also said that the GoK's projected revenues for FY 2010 are KD 7.8 billion (USD 26.5 billion),producing a projected budget shortfall of KD 4.2 (USD 14.4 billion). This figure comprises KD 6.7 billion (USD 22.7 billion) in earnings from oil exports and KD 1.1 billion (USD 3.7 billion) in non-oil revenues. The GoK tentatively projects an average price per barrel of (Kuwait Export Crude) oil of USD 35.00. In recent years, the GoK has routinely predicted a budget deficit by using a fairly conservative estimate of the average price per barrel of oil. (For example, the GoK predicted a FY 2008 budget deficit of USD 14.5 billion and instead posted a surplus of USD 26.3 billion; similarly, the GoK predicted a FY 2009 budget deficit of USD 26.9 billion, yet is on track for a sizeable surplus, having exceeded annual revenue projections within the first nine months of the fiscal year, i.e. April 2008 through December 2008). ¶4. (U) In line with predictions for most of the world's economies, analysts predict sharply lower Kuwaiti economic growth for the coming fiscal year, if not an actual contraction. Reduced oil revenues -- stemming from lower prices and lower global demand -- form the basis of such predictions for the Kuwaiti economy. The Economist Intelligence Unit (EIU) forecasts real GDP growth declining from approximately 8.5 percent in FY 2009 to approximately 3.7 percent in FY 2010. National Bank of Kuwait's research director forecasts a decline in real GDP of approximately 4.0 percent for FY 2010, a result of lower oil revenues, reduced consumer spending and slowing real estate sales. ¶5. (U) A number of MPs continue to agitate for debt relief for Kuwaiti citizens (reftel B). On February 11, six KUWAIT 00000130 002 OF 002 National Assembly members announced that they would introduce an economic rescue plan to rival the USD 5.4 billion package recently approved by the Council of Ministers (reftel A). These six MPs are proposing a KD 3.5 billion (USD 11.9 billion) plan that would either waive or suspend interest payments on citizens' loans and would require the KIA to bolster banks' balance sheets in order to encourage consumer lending. Parliament's deliberations on the GOK's economic stimulus are expected to continue into next week. ¶6. (SBU) Comment: The projected FY 2010 budget deficit partially reflects the GoK's tendency to use a conservative oil price when preparing the national budget, though current oil price fluctuations and diminishing global demand may render the target price of USD 35 as realistic rather than conservative. Also, sources tell Post that the Government tends towards predicting budgets deficits so as to discourage MPs from demanding new social programs and other "pork." The GoK's tentative FY 2010 budget contains cuts in most major sectors, amounting to a 10.4 percent decline in expenditures (excluding the one-time payment to PIFSS in FY 2009). Unsurprisingly, the GoK is increasing public sector salaries and benefits, so as to maintain the practice of providing jobs for almost all Kuwaiti adults (approximately 90 percent of the Kuwaiti workforce is employed by the state). The GoK's modest budget for construction projects is facing a 26.5 percent cut, compounding the nation's seeming inability to embark on large-scale infrastructure programs; in the past three months, the GoK has announced the postponement of the USD 15 billion Al Zour ("Fourth Refinery") project and the USD 2.4 billion Subiya power station project. On 8 February, the outspoken CEO of Kuwait's largest bank, National Bank of Kuwait, Ibrahim Dabdoub, publicly urged the GoK to consider investments in infrastructure projects as a way of stimulating the faltering economy. However, there is no sign, as of yet, that the GoK is willing to follow the U.S. and other OECD nations in embarking on large-scale infrastructure projects as a means of stimulating the economy. End Comment. ********************************************* ********* For more reporting from Embassy Kuwait, visit: visit Kuwait's Classified Website at: http://www.intelink.sgov.gov/wiki/Portal:Kuwa it ********************************************* ********* JONES