Kuwait

Kuwait’s economy continues to improve, thanks to strong oil prices, and inflation is under control. Increases in local and foreign demand helped boost non-oil GDP growth to +4% in 2022. As a result of this and an uptick in oil production, real GDP growth in 2022 jumped to +8.2%. Growth in non-oil GDP is expected to remain robust, driven by domestic demand, and steady over the medium term. In contrast, growth in oil GDP is likely to fall owing to production cuts, with a current level of 2.5mn barrels per day (mbd) on average, compared to a previous average of around 3mbd. We expect overall GDP growth to remain below the historical average of +2.8% in 2024 after an estimated stagnation or mild recession in 2023, confirming the volatile nature of Kuwait’s GDP.

Inflation is kept in check with the support of monetary policy tightening and the peg to a basket of currencies, resulting in a stable level of KWD0.3 per USD throughout the past eight years. Subsidies for staples such as rice and sugar, as well as controls on domestic fuel prices, have also helped counterbalance volatility in international prices. Core inflation (excluding food and transportation) has been falling since Q2 of 2022. We project an average inflation rate of 3% for 2024.

Both the external and internal balances have improved, and external buffers are growing. In 2022–2023 (April–March), the government reached a surplus of +23.4% of GDP, thanks mostly to high oil income but also to expenditure discipline, which should have allowed it to transfer the equivalent of more than 10% of GDP to the sovereign wealth fund. The size of the sovereign wealth fund is more than five times that of GDP. The current account surplus surpassed 30% of GDP in 2022, thanks in large part to rising oil revenues, and is estimated to have remained high in 2023. The country’s official reserves alone amounted to around USD50bn as of the end of 2023, equal to ten months of projected imports. Financial institutions have ample capital and liquidity, and provisioning ratios for non-performing loans are stable.

The opposition-dominated single-chamber parliament approved the 2023–2024 (April–March) budget in August after continuous negotiations. Overall spending is expected to increase by +15% to about USD85bn, yet only 9.5% of the budget is allocated to capital spending, despite the need for long-delayed infrastructure upgrades and development projects. The fiscal breakeven has been conservatively set at an oil price of USD70 per barrel.

Short-term foreign policy objectives for Kuwait include keeping up strong bilateral ties with the US, the country’s traditional security guarantee. The continued usage of Ali Al Salem Air Base by the US gives credence to the belief that ties between the two countries will remain strong through the next presidential term (2024-2028). Kuwait is one of the Gulf Arab countries most opposed to regional normalization, as this may imply the US reducing its Middle Eastern footprint to focus on security threats in Europe and Asia. At the same time, Kuwait is unlikely to seek ties with Israel in 2024–28, while Kuwaiti-Iranian ties may improve in the medium term.

In this context, talks between Kuwait and Iran to define their maritime border have restarted. A resolution to the long-running dispute would ease tensions with Saudi Arabia over plans to develop the Dorra gas field in the offshore portion of the Partitioned Neutral Zone (comprising acreage shared by Kuwait and Saudi Arabia), which Iran claims to be within its territorial waters to the north. Since the Iraqi federal supreme court declared a 2012 bilateral agreement on navigation rights unconstitutional, efforts to resolve demarcation issues with Iraq in the shared Khor Abdullah canal have stalled. Kuwait’s plans to expand the Northern Economic Zone logistics hub in the north of the country are at risk due to legislative resistance in Iraq and the possibility of rising nationalist sentiment in Kuwait.

Given their common interests, primarily in the oil industry, Kuwait is poised to increase its bilateral connections with Asian economies, especially China, to catalyze the development of essential infrastructure within the framework of the Belt and Road Initiative. Several agreements were signed at a meeting between the then-crown prince and Chinese President Xi Jinping in late September