The economic activity directly through consumption, cost of

Topic: EconomicsConsumer Science
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Last updated: August 31, 2019

The fall in the oil price since mid-2014 has caused steep declines in petroleum export revenue and,subsequently, fiscal deficits among Gulf Cooperation Council (GCC) states, making subsidy reforms anurgent priority. The impact in Kuwait was particularly severe due to the economy’s dependence onhydrocarbons, which in 2014 generated 92% of the government’s revenue and 55% of its GDP. Afterthe oil price collapse from US $103/barrel (bl) in January 2014 to US $30/bl in January 2016, thegovernment said revenues fell an estimated 75%. Despite a history of strong fiscal surpluses andsubstantial foreign asset accumulation in its sovereign wealth funds (SWFs), by the end of the 2015-2016 fiscal year, Kuwait recorded a US $15.

3 billion budget deficit, its first in over 16 years. Officialfigures anticipate a total budget deficit of US $73 billion over 2016-2019. Generally, reliance on aninherently volatile commodity renders any petro-dependent economy susceptible to boom and bustcycles. These cycles cause significant fiscal and real exchange rate volatility and impact economicactivity directly through consumption, cost of living, and production, and indirectly throughintermediates. Yet the impact on Kuwait’s economy has been exacerbated by its very large fiscalcommitments, rigid expenditures, and high subsidies.

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These subsidies are applied widely on variousgoods and services (including water and food). In the case of energy and hydrocarbons, the subsidieshave an opportunity cost as they maintain the local price lower than the international shadow price, butthey are also real expenditures as the subsidised local price is lower than production costs. Yetimplementing fiscal and energy pricing reforms has proven particularly challenging. While policydebates on the need for energy pricing reform have been settled in many oil exporting countries, suchdebates still continue in Kuwait, obscuring the important debate on the mechanism of energy pricereform. The latter is the subject of this paper, which quantifies the economic impacts of subsidy reformin a low petroleum price environment using an economy-wide modelling approach.There are few studies of this type in the context of Kuwait and the GCC.


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