Kuwait posted a budget surplus of KD3.5 billion ($11.5 billion) for the fiscal year 2014/15 (FY14/15), marking a drop of an estimated 7.5 per cent of GDP, compared to an average of 24 per cent of GDP during the previous five years, a report said.

The surplus before the transfer to the Reserve Fund for Future Generations (RFFG) was 73 per cent lower than last year’s due largely to lower oil prices, explained the latest Economic Update from the National Bank of Kuwait (NBK).

The budget surplus turns into a deficit of KD 2.7 billion after the deduction for the RFFG, amounting exceptionally to 25 per cent of total revenues (usually 10 per cent).

The government saw revenues decline by 22 per cent in FY14/15 to settle at KD 24.9 billion, down from KD 31.8 billion in FY13/14. As oil prices tumbled throughout the second half of 2014 and 1Q15, revenues dropped by 23 per cent to KD 22.5 billion, or 48 per cent of GDP which is the lowest in a decade. Oil prices averaged $84/bbl versus $75/bbl assumed in the FY14/15 budget. Meanwhile, non-oil revenues rose by 4 per cent but remained a small share of total revenues. Income tax revenues, encompassing tax on nonoil foreign companies and corporate income tax, grew by 15 per cent y/y each, though they still represented no more than 5 per cent of nonoil revenues.

Despite the lower oil price environment that prevailed for almost half of the fiscal year, expenditure growth remained strong at 13.3 per cent, with spending rising to KD 21.4 billion in FY14/15. Current expenditures represented 91 per cent of total spending and provided most of the boost in spending growth.

Growth came primarily from a 26 per cent increase in “miscellaneous & transfers” (chapter 5) which, among other things, is comprised of military salaries, transfers to the social security fund, fuel subsidies and transfers abroad. Domestic transfers increased by KD 1.4 billion or 20 per cent, primarily due to a doubling in general subsidies which reached KD 1.5 billion in FY14/15.

As per the budget figures for FY14/15, more than 50 per cent of subsidies were allocated to funding fuel for power generation plants and refined hydrocarbon products. Another 10 per cent was for supporting national labour working in the private sector. Meanwhile, subsidies for reducing the cost of living do not represent more than 4 per cent of the total subsidies. Transfers abroad witnessed a similar hike as well, of 133 per cent, reaching KD1.4 billion, KD1 billion of which was for humanitarian aid.

Civilian wages and salaries rose by 5.3 per cent, reaching KD 5.3 billion. The current wage bill for the FY14/15 is almost threefold the bill of FY04/05. The increases in wages and salaries during the last two years were relatively small compared to the double-digit growth posted in FY08/09, FY11/12 and FY12/13. In these years, growth in the wage bill averaged 20 per cent per annum and led to efforts to restrain that growth.

Capital spending rose by a 6.9 per cent on the back of healthy growth in spending on projects, maintenance and land purchases which rose by 8.6 per cent y/y to KD 1.7 billion. This was a welcome outcome given the decline seen in this item the year before and the importance of capital spending in the government’s economic development plan. In fact, capital spending reached 81 per cent of the full year budget, the highest in five years. On the other hand, there was a decline in spending on transportation and equipment, a much smaller category, by 6 per cent y/y.

In FY15/16, the government expects a budget deficit of KD 7 billion, or 18 per cent of GDP. We think the deficit will be closer to 5.5 per cent of GDP, mostly on a higher oil price. Projected expenditures, at KD 19.2 billion, were reduced by 17 per cent from the prior year’s budget though by only 9 per cent from actual spending in FY14/15. The largest cut was due to an accounting decline in the cost of subsidies; since the current year’s budget is based on an oil price of $45 per barrel, 40 per cent lower than last year, this led to a similar drop in the projected cost of subsidies.

Meanwhile, investment spending was increased in the budget (FY15/16) and authorities will continue to prioritize capital spending, NBK said in the Update.

This is despite the prevailing low price environment and concerns that oil prices will remain low in the short term. Indeed, budgeted expenditures on projects, maintenance and land purchases are up 3 per cent to KD 2.1 billion. Given Kuwait’s comfortable fiscal buffers, we think authorities can and will, as officially stated, maintain the current pace of project implementation despite the projected fiscal deficit. – TradeArabia News Service