Kuwait

After experiencing robust post-pandemic growth, Kuwait’s economic expansion has stalled since 2022. In 2024, overall growth is projected at -1.8%, while oil sector GDP is forecasted to contract again by -4.3%. The negative post-pandemic trend has been amplified by a self-imposed oil production cap. Kuwait's oil production reached the lowest levels since the pandemic during the first half of 2024. The production quota, agreed upon by OPEC+ members to stabilize global oil output at a relatively high price, reduced Kuwait output by more than 10% and it is anticipated to start easing by October 2024.

Inflation declined gradually in the first half of 2024, reaching 2.8% y/y at the half-year mark. However, inflation risks persist as there are signs of it picking up again. Kuwait imports 96% of its food consumption, making it highly vulnerable to global price volatility. The Emirate’s government plays a crucial role in maintaining price stability by subsidizing food and construction imports valued at 1% of the country’s GDP.

As global oil prices have normalized at a lower level, highly oil-dependent countries such as Kuwait and Saudi Arabia have been experiencing a 24-month downturn. In this context, Kuwait has been among the worst performers in terms of diversifying its extractive sector. In response, the government has established several priorities under the 2035 State Vision to offset oil dependence. Key priorities include large infrastructure projects and boosting the domestic labor market by passing laws to prioritize local hires. Additionally, the 2035 Vision incorporates gas production as a new economic driver to increase state revenue and finance the rest of the 2035 Vision. This includes the development of the controversial Durra gas, which is expected to increase Kuwait’s production capacity from 2.9 mn barrels per day (mbd) in 2024 to 3.65mbd by 2035. If such plan should move ahead, state revenue would see a USD11bn boast over the next five years. While this shift would allow the government to increase spending, it also carries the risk of replacing one non-renewable source with another.

In May 2024, the new Emir Meshal al-Ahmad al-Sabah dissolved and suspended the National Assembly for up to four years, just a few days after a new round of elections had taken place. This decision came after years of political instability and tensions between the Royal family and an opposition-led Parliament. This move consolidated power in a smaller group of leaders, which could bring short-term stability, but defers addressing the nation's divides among different societal groups. Since taking office, the new leadership has proposed a set of measures that would address gaps according to OECD standards in trade and investment sectors, including the introduction of a 15% business tax to all business – until now only due for non-GCC companies – an excise duty and new rules on transparency, all with the aim of reducing reliance on oil revenue. However, the new rules would not significantly expand government revenues. All major reforms to do so, including a VAT and a new debt law that would allow the country to raise money in money markets, providing new sources of funding ahead of oil prices, have been ruled out.

Iraq’s invasion of Kuwait in the 1990s left a lasting impact on the country's parliamentary system and foreign relations are now under scrutiny. Kuwait hosts the largest number of US troops in the region, while having strong economic ties with China and Iran. Yet, recently, Kuwait agreed to start extracting gas from Durra gas field together with Saudi Arabia. This field is located between the Iran-Saudi Arabia-Kuwait maritime border and Iran claims its sovereignty. Kuwait’s flexibility in managing its foreign relations has allowed it to benefit from being under the US security umbrella while receiving increased Chinese investments, as well as retaining strong ties with its Sunni and Shia neighbors.

Kuwait’s biggest threats are dictated by its geography, rising temperatures due to climate change and a difficult regional environment. Climate events in Kuwait will continue to be more extreme. As seen in the UAE, extreme rains could become the norm during specific periods. Rising temperatures will also take an increasing toll on Kuwaitis and foreign labor: it is estimated that more than 10% of deaths will be due to extreme heat and above 15% of foreign workers are exposed to long hours of heat. The regional context of war in the Middle East could also play an important role in the country’s future. Relations with Iraq remain tense as it considers a UN-approved international border at the Khor Abdullah canal unconstitutional and keeps pressuring Kuwait to redraw the borders to control the entire canal. Finally, Kuwait is highly dependent on the open maritime borders of the Strait of Hormuz. More than 60% of Kuwait’s oil exports cross the strait by boat and the growing LNG economy is also expected to use the same route. Given current geopolitical instabilities, Kuwait’s economy could be collateral damage from a potential closure of the strait.