Economy of Kuwait

Kuwait is a small, relatively open economy with proved crude oil reserves of about 94 billion barrels - 10% of world reserves. Petroleum accounts for nearly half of GDP, 90% of export revenues, and 75% of government income. Kuwait lacks water and has practically no arable land, thus preventing development of agriculture. With the exception of fish, it depends almost wholly on food imports. About 75% of potable water must be distilled or imported. Higher oil prices reduced the budget deficit from $5.5 billion to $3 billion in 1999, and prices are expected to remain relatively strong throughout 2000. The government is proceeding slowly with reforms. It inaugurated Kuwait's first free-trade zone in 1999 and will continue discussions with foreign oil companies to develop fields in the northern part of the country.

Economy in greater depth

Kuwait is a small country with massive oil reserves, whose economy has been traditionally dominated by the state and its oil industry. During the 1970s, Kuwait benefited from the dramatic rise in oil prices, which Kuwait actively promoted through its membership in the Organization of Petroleum Exporting Countries (OPEC). The economy suffered from the triple shock of a 1982 securities market crash, the mid-1980s drop in oil prices, and the 1990 Iraqi invasion and occupation. The Kuwaiti Government-in-exile depended upon its $100 billion in overseas investments during the Iraqi occupation in order to help pay for the reconstruction. Thus, by 1993, this balance was cut to less than half of its pre-invasion level. The wealth of Kuwait is based primarily on oil and capital reserves, and the Iraqi occupation severely damaged both.

In the closing hours of the Gulf War in February 1991, the Iraqi occupation forces set ablaze or damaged 749 of Kuwait's oil wells. All of these fires were extinguished within a year. Production has been restored, and refineries and facilities have been modernized. Oil exports surpassed their pre-invasion levels in 1993 with production levels only constrained by OPEC quotas.

Oil

In 1934, the ruler of Kuwait granted an oil concession to the Kuwait Oil Co (KOC), jointly owned by the British Petroleum Co. and Gulf Oil Corp In 1976, the Kuwaiti Government nationalized KOC. The following year, Kuwait took over onshore production in the Divided Zone between Kuwait and Saudi Arabia. KOC produces jointly there with Texaco, Inc., which, by its 1984 purchase of Getty Oil Co., acquired the Saudi Arabian onshore concession in the Divided Zone.

Offshore the Divided Zone, the Arabian Oil Co.--80% owned by Japanese interests and 10% each by the Kuwaiti and Saudi Governments--has produced on behalf of both countries since 1961. The original concession agreements will expire in January 2003; negotiations to replace the concession with a technical service agreement should be completed in 2002.

The Kuwait Petroleum Corp. (KPC), an integrated international oil company, is the parent company of the government's operations in the petroleum sector, and includes Kuwait Oil Company, which produced oil and gas; Kuwait National Petroleum Co., refining and domestic sales; Petrochemical Industries Co., producing ammonia and urea; Kuwait Foreign Petroleum Exploration Co., with several concessions in developing countries; Kuwait Oil Tanker Co.; and Santa Fe International Corp. The latter, purchased outright in 1982, gives KPC a worldwide presence in the petroleum industry.

KPC also has purchased from Gulf Oil Co. refineries and associated service stations in the Benelux nations and Scandinavia, as well as storage facilities and a network of service stations in Italy. In 1987, KPC bought a 19% share in British Petroleum, which was later reduced to 10%. KPC markets its products in Europe under the brand Q8 and is interested in the markets of the United States and Japan.

Kuwait has about 94 billion barrels of recoverable oil; Saudi Arabia is the only single country which has larger reserves. Estimated capacity, before the war, was about 2.4 million barrels per day (b/d). During the Iraqi occupation, Kuwait's oil-producing capacity was reduced to practically nothing. However, tremendous recovery and improvements have been made. Oil production was 1.5 million b/d by the end of 1992, and pre-war capacity was restored in 1993. Kuwait's production capacity is estimated to be 2.5 million b/d. Kuwait plans to increase its capacity to 3.5 million b/d by 2005.

Social Benefits

The government has sponsored many social welfare, public works, and development plans financed with oil and investment revenues. Among the benefits for Kuwaiti citizens are retirement income, marriage bonuses, housing loans, virtually guaranteed employment, free medical services, and education at all levels. Foreign nationals residing in Kuwait obtain some, but not all, of the welfare services. The right to own stock in publicly traded companies, real estate, and banks or a majority interest in a business is limited to Kuwaiti citizens and citizens of GCC states under limited circumstances.

Industry and Development

Industry in Kuwait consists of several large export-oriented petrochemical units, oil refineries, and a range of small manufacturers. It also includes large water desalinization, ammonia, desulfurization, fertilizer, brick, block, and cement plants. During the invasion, the Iraqis looted nearly all movable items of worth, especially high-technology items and small machinery. Much of this has been replaced with newer equipment.

Agriculture

Agriculture is limited by the lack of water and arable land. The government has experimented in growing food through hydroponics and carefully managed farms. However, most of the soil which was suitable for farming in south central Kuwait was destroyed when Iraqi troops set fire to oil wells in the area and created vast "oil lakes". Fish and shrimp are plentiful in territorial waters, and largescale commercial fishing has been undertaken locally and in the Indian Ocean.

Shipping

The Kuwait Oil Tankers Co. has 35 crude oil and refined product carriers and is the largest tanker company in an OPEC country. Kuwait also is a member of the United Arab Shipping Company.

Trade, Finance, and Aid

The Kuwaiti dinar is a strong currency pegged to a basket of currencies in which the U.S. dollar has the most weight. Kuwait ordinarily runs a balance-of-payments surplus.

Government revenues are dependent on oil revenues. Kuwait's fiscal surplus in 2000 was some 15% of GDP, while it reversed to a deficit of more that 2% of GDP in 2001 on sliding oil prices.

The government's two reserve funds: the Fund for Future Generations and the General Reserve Fund, which totaled nearly $100 billion prior to the invasion in 1990, were the primary source of capital for the Kuwaiti Government during the war. While these funds were depleted to $40-$50 billion after the war, they currently are estimated around $80 billion. The bulk of this reserve is invested in the United States, Germany, the United Kingdom, France, Japan, and Southeast Asia. In order of importance, foreign assets are believed to be invested in stocks and bonds, fixed yield instruments (mostly short term), and real estate. Kuwait follows a generally conservative investment policy.

Kuwait has been a major source of foreign economic assistance to other states through the Kuwait Fund for Arab Economic Development, an autonomous state institution created in 1961 on the pattern of Western and international development agencies. In 1974, the fund's lending mandate was expanded to include all-not just Arab-developing countries.

Over the years aid was provided to Egypt, Syria, and Jordan, as well as the Palestine Liberation Organization. During the Iran-Iraq war, significant Kuwaiti aid was given to the Iraqis. The Kuwait fund issued loans and technical assistance grants totaling over $520 million during its fiscal year ending June 30, 2000.