Given the negative consequences resulting from the precautionary measures taken during the coronavirus pandemic, Kuwait’s private sector awaited a generous economic package, with relatively high expectations similar to those offered by the United States, Saudi Arabia, Britain, and other countries. But the package came below those expectations.
The Central Bank of Kuwait’s announcement of the package was accompanied — in one way or another — by dissatisfaction among owners of medium and small enterprises in particular, and the private sector as a whole in general. The reason was the difference between the type of economic package offered and the packages introduced by other countries, as it came below the expected ceiling.
Perhaps the most important parts of this package for the private sector are items six and seven. Item six concerns lending to medium and small enterprises through banks and the National Fund for the Care and Development of Small and Medium Enterprises, under soft terms for two to three years, including a one-year grace period for installment payments, with interest not exceeding 2.5% annually. The state’s general budget would bear the interest and returns for the first and second years, while the third year would be shared equally with the borrower. Item seven concerns lending to affected companies and clients through banks only, under the same conditions and interest rates as item six, with the state’s general budget bearing the interest and returns for the first year only, the second year shared equally with the borrower, and the borrower bearing the interest and returns of the third year.
Is this type of package sufficient to care for the Kuwaiti economy and its private sector? The simple answer is yes. This package will achieve its purpose for the Kuwaiti economy as one whole, but at the same time it will not serve the private sector in the way packages in other countries serve their private sectors. This leads us to the core defect in the methodology of the Kuwaiti economy. How can an economic package serve the economy as one whole while not directly serving the private sector?
From here, we commend the Central Bank of Kuwait’s study of the Kuwaiti economic model and its mechanisms for distributing wealth. At the same time, we commend the study’s awareness of the type of purpose required from the economic package as a “concept.” The objective behind the “concept” of the economic package today is not an ordinary one; it differs in its pattern, causes, and outcomes. The Central Bank of Kuwait understands that the world is passing through a health crisis that produced precautionary decisions which paralyzed operations across all fields, leading to an imbalance in supply and demand and causing an economic crisis. Accordingly, the study affirms that the treatment will not be complete from an economic perspective alone, but must proceed alongside the health perspective that produced the obstacles to the movement of the economy.
As for Kuwait’s private sector, it has a special nature in terms of size, weight, and role within the state’s economy as one whole compared with its counterparts in other countries. This takes us to the mechanism by which national wealth is distributed from outside the country into the interior. In Kuwait, without stripping the mechanism down entirely, the state’s general budget receives oil revenues that constitute nearly 90% of total revenues. These are then spent in the form of salaries for government-sector employees, who represent more than 85% of citizens, and in the form of subsidies, tenders, and practices recorded as revenues for the first part of the private sector, which feeds its employees through monthly salaries. Here, the salaries of government-sector employees and the salaries of employees in the first part of the private sector move to the second part of the private sector in a consumer form. As for the third part of the private sector, it is a very small sector that is financially self-standing because it depends on export output. From this, we conclude that the Kuwaiti economy, in both its government and private sectors, is based primarily on oil revenues. Its wealth-distribution mechanism is “pyramidal” in form: wealth enters from one side at the top of the pyramid, then is distributed on different bases until it reaches the bottom of the pyramid. This confirms that the Kuwaiti economy is not built on the private sector — or, more precisely, it is not “actually” affected by the collapse of the private sector, but rather the reverse.
The evidence is clear and visible through examining the weights of the factors in the GDP equation, as follows:
Gross Domestic Product = Government Expenditure + Consumption + Investment + (Exports — Imports)
In Kuwait, according to readings of statistics from recent years, “government expenditure” constitutes nearly 50% of GDP. Based on the explanation above, the largest part of that expenditure goes toward consumption, under a conservative assumption that exports generating state budget revenues are equal to imports used for consumption. Accordingly, GDP is almost based on government expenditure and consumption. In the United States, according to readings of statistics from recent years, “government expenditure” represents closer to 21% of GDP. If all government expenditure were directed toward the consumption factor, the total would be 42% of GDP. Here comes the role, weight, and size of the private sector, which contributes closer to 58% of GDP through investment, export output, and especially consumption.
The matter is tied to the difference in the mechanism of wealth distribution in the United States. It is not pyramidal, because the source of wealth in the country is not limited to the government sector alone. Rather, it is represented by private-sector channels to a degree greater than the government sector, and through this, wealth enters the interior from every direction.
In this way, we have pointed to the reasons for the difference in relative generosity between the economic packages of the United States and Kuwait. The collapse of the private sector in the United States, even in consumer fields that do not support the economy, means more unemployment and a citizen’s inability to meet basic living requirements during this crisis. In Kuwait, by contrast, the collapse of the private sector may mean little compared with the economic consequences of the crisis, such as the collapse in oil prices causing what may be the largest fiscal deficit the state’s general budget has ever faced. A Kuwaiti citizen in the private sector, by receiving all benefits provided by the government sector — such as “national labor support,” “rent allowance,” and “spouse and children allowance” — is relatively capable of meeting the living requirements of himself and his children without shortfall.
Therefore, in appreciation of these efforts, it is necessary to commend a package that was concerned with avoiding placing the burden of financing those soft loans on the state’s general budget, limiting the burden to their interest only. It carries an implicit message of belief and support directed toward those who trust that their private-sector projects are capable of continuing, and who are prepared to bear the risk of continuity without negatively affecting the public interest or the macroeconomy as one whole.
Thank you, Central Bank of Kuwait.