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STATE OF KUWAIT

Economic Overview

Kuwait has a geographically small, rich, relatively open and oil-dominated economy with official proven crude oil reserves of about 102 billion barrels – almost 7.4% of the world and 21.6% of the GCC crude oil reserves – the second largest among the GCC countries after Saudi Arabia. At the current level of production of about 2.263 million barrels a day, the reserves are expected to last for almost 123 years. Petroleum accounts for 50% of GDP, 95% of export earnings and 80% of government revenue. Kuwait’s climate limits agricultural development. Consequently, with the exception of fish, it depends almost wholly on food imports. Almost 75% of potable water must be distilled or imported. However, Kuwait’s economy has moved forward strongly by achieving strength, building budget and trade surpluses, and foreign reserves on the back of robust global oil demand during 2003 to late 2008. Kuwaiti economy declined in 2009 due to global financial and economic crisis. Kuwait survived the economic crisis on the strength of budget surpluses generated by high oil prices, posting its 11th consecutive budget surplus in 2009. The government passed an economic development plan in 2009 that pledges to spend up to $140 billion in five years to diversify the economy away from oil, attract more investment, and boost private sector participation in the economy. The global economic recovery is having a positive impact on the Kuwaiti economy.

Macroeconomic Overview

Growth

The year 2008 witnessed the highest ever growth of 41.5% in nominal GDP to US$158.2 billion compared to US$111.8 billion in 2007, supported by strong oil prices and volume of oil exports, coupled with increased foreign investment in the country until late 2008. The nominal GDP declined sharply by (-29.6%) to $111.3 billion in 2009 due to the global crisis and the world oil market slump. Nominal GDP is likely to rebound and surge by 21.3% and 8.3% to $135.1 billion and $146.3 billion in 2010 and 2011, respectively. Real GDP grew at the rate of 6.4% in 2008 compared to 2.5% growth in 2007 but declined at the rate of (-2.7%) in 2009 due to the global financial and economic crisis. Real growth is likely to rebound and grow by 3.1% and 4.8% in 2010 and 2011, respectively due to the global economic recovery.

Inflation

Kuwait's economy has a proven track of low inflation, which was maintained in the range of 0.8% to 1.8% during the years 2000 to 2004. The consumer price inflation for 2004 stood at 1.8% compared to 1% in 2003 and is expected at 1.8% in 2005. With the US Dollar weakening against other major currencies, the Kuwaiti Dinar being pegged to a US Dollar denominated currency basket has also depreciated accordingly.

Fiscal Position

Strong oil prices during the past six years have resulted in huge budget surpluses. The fiscal surplus stood at 30.3% of GDP in 2008 compared to a surplus of 26.6% of GDP in 2007 on the back of global oil boom. Due to global crisis, the surplus declined to (10.9% of GDP) in 2009. Fiscal surplus is likely to expand to 20.6% and 17.7% of GDP in 2010 and 2011, respectively, on the back of the global economic recovery. By law 10% of all income of Kuwait is deposited in a special reserve fund to provide for the future when oil revenues are exhausted.

Currency

The Kuwaiti Dinar (KD) was pegged to the US Dollar denominated currency basket at the exchange rate of around KD: US$ 3.448 in 2006. The fluctuations in the US Dollar against other major currencies, particularly the Euro, the Japanese Yen and the British Pound Sterling had strong negative impact on the purchasing power of the KD and inflation in the country through increases in import prices. Kuwait had followed an exchange rate policy of pegging the Kuwaiti Dinar KD to a weighted currency basket during 18th March 1975 to 31st December 2002. From 5th January 2003 to 19th May 2007, KD remained pegged to the USD at the exchange rate of around KD: 3.4626 USD. From 20th May 2007 KD was de-pegged to the USD and was pegged to an undisclosed weighted basket of international currencies of Kuwait’s major trade and financial partner countries. The state foreign assets and foreign reserves are adequate enough to defend the currency if necessary. Total foreign reserves minus gold stood at US$16.5 billion at the end of 2008 compared to US$16.7 billion at the end of 2007, which decreased marginally to US$16 billion in 2009. Foreign reserves are expected at $15.5 billion each by the end of 2010 and 2011.

External Accounts

Kuwait’s external balances remained in surplus during 2001 to 2008 on the back of sharp increases in oil prices, production and export earnings. Consequently, the economy earned high trade and current account surpluses during this period. The current account surplus stood at US$64.5 billion (40.8% of GDP) in 2008 compared to $50 billion (44.7% of GDP) in 2007. The current account surplus shrank to $28.7 billion (25.8% of GDP) in 2009 due to the global crisis and the slump in the world oil market. The current account surpluses are expected to expand to US$ 42.7 billion (31.6% of GDP) and $47.7 billion (32.6% of GDP) in 2010 and 2011, respectively.
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