Kuwait at a Glance: 2001-02

COUNTRY REPORT

Kuwait Kuwait at a glance: 2001-02

OVERVIEW The political scene will continue to be marked by persistent wrangling among the different elements of the country’s political structures, despite the recent cabinet changes. Differences between the leading branches of the ruling family over issues of power sharing and the succession are likely to persist. The lack of consensus and deep divisions within the National Assembly will continue to delay the passage of legislation needed to implement political and economic reforms, although limited fiscal reform is in prospect. Comfortable trade surpluses and investment income will ensure current-account surpluses of US$8.9bn in both 2001 and 2002. This will be despite an anticipated drop in oil prices, since oil production will rise slightly in 2002. Growth will slow to 2.1% in 2001 from its 2000 level of 4%, but will pick up to 2.5% in 2002. Key changes from last month Political outlook • Relations between the executive and legislature will remain fraught, although a few reform initiatives will be carried through. Kuwaiti concessions to Iraq will be linked to the issue of prisoners of war. Economic policy outlook • Ministerial members have been appointed to a committee to oversee economic reform, but the process will continue to be slow and constrained by political wrangling. Job creation will remain a primary objective of policy, slowing privatisation efforts and driving attempts to attract foreign investment. A new law allowing foreigners to invest in Kuwait without a local sponsor or partner has been passed. Economic forecast • As oil prices are forecast to gradually decline in 2001 and 2002, growth will slow from 4% in 2000 to 2.1% in 2001, but will pick up to 2.5% in 2002 as government spending and oil production rise in that year. Fiscal and current-account surpluses will prevail over the forecast period.

June 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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ISSN 0269-5715

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK Kuwait 1

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2001-02 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

16 Economic policy

19 The domestic economy 19 Economic trends 21 Oil and gas 25 Infrastructure and services

27 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 20 Money supply 22 Trends in spot quotations for selected crudes 23 Crude production and quotas 23 World oil supply and demand: IEA estimates and forecasts 26 Results for selected commercial banks 27 Net foreign assets of local banks 28 Current account

List of figures

12 Gross domestic product 12 Kuwaiti dinar real exchange rates 22 Oil prices

EIU Country Report June 2001 © The Economist Intelligence Unit Limited 2001 . Kuwait 3

Summary

June 2001

Outlook for 2001-02 Relations between the executive and legislature will remain fraught, although a few reform initiatives will be carried through. Kuwaiti concessions to Iraq will be linked to the issue of prisoners of war. Job creation will remain a primary objective of economic policy, slowing down privatisation efforts and driving attempts to attract foreign expertise. Healthy oil revenue will produce fiscal surpluses in both 2001 and 2002. The EIU expects that GDP growth will slow to an average annual rate of around 2.3% per year over the forecast period, down from 4% in 2000. Continued healthy trade surpluses will result in current-account surpluses in both 2001 and 2002.

The political scene A senior woman media figure has been assassinated in public. The Con- stitutional Court has again upheld the ban on women’s political participation. MPs have said they will pursue fraud allegations against a former minister and have continued to resist foreign involvement in the upstream oil sector. Differences with Iraq were not resolved at the Arab summit in Amman.

Economic policy Ministerial members have been appointed to a committee to oversee economic reform. A new law was passed that will allow foreigners to invest in Kuwait without a local sponsor or partner. It aims to attract know-how as well as foreign investment, and local commentators have highlighted the volume of Kuwaiti funds that still remain abroad. MPs have complained of a lack of information about “Project Kuwait”. The Kuwait Investment Authority plans to sell half of its share in the Mobile Telecommunications Company.

The domestic economy Since oil prices are forecast to decline only gradually over the next two years, real GDP growth should average 2.3% per year over the forecast period, and the budget surplus will narrow. The Kuwait Stock Exchange gained 17% in the year to mid-June 2001. Kuwait has largely complied with its reduced OPEC output quota. Renewal of the Japanese concession in the Neutral Zone has been discussed. The oil minister has offered to prequalify more oil companies for Project Kuwait. Tourism facilities are planned for Failaka and Bubiyan islands. The first non-Kuwaiti purchase of a Kuwaiti bank has been announced. Gulf International Bank's ownership change could prepare it for privatisation.

Foreign trade and The current-account surplus nearly trebled to an estimated US$14.1bn in 2000. payments Steps towards an Arab free-trade agreement will include an economic summit in November. Talks on free trade between the EU and Gulf Co-operation Council countries have made little progress.

Editors: Merli Baroudi (editor); Hania Farhan (consulting editor) Editorial closing date: June 20th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report June 2001 © The Economist Intelligence Unit Limited 2001 4 Kuwait

Political structure

Official name State of Kuwait

Form of state Emirate

Head of state The emir, chosen from the Al Sabah family. Currently Sheikh Jabr al-Ahmed al-Jabr al-Sabah, who acceded in 1977

Legal system Based on the constitution of 1962, as amended or suspended by emiri decree

Legislature Unicameral National Assembly of 50 elected members plus appointed cabinet ministers. The assembly has been dissolved three times by emiri decree, in 1976, 1986 and 1999

National elections July 1999; next election scheduled for October 2003

Political groupings No political parties are allowed, though informal groupings exist. The main ones are two Sunni Islamist groupings (the Islamic Constitutional Movement and the Islamic Popular Grouping, also known as the salafi), and the Shia Islamists of the National Islamic Alliance. The Kuwait Democratic Forum is a secular political group with liberal and Arab nationalist tendencies; the National Democratic Grouping is a newer liberal group. Most deputies sit as independents, and many are primarily loyal to their tribal interests

Executive Power is exercised by the emir through a Council of Ministers (last appointed on February 14th 2001), headed by a prime minister who is chosen by the emir

Council of Ministers Crown prince & prime minister Sheikh Saad Abdullah al-Salem al-Sabah First deputy prime minister & minister of foreign affairs Sheikh Sabah al-Ahmed al-Jabr al-Sabah Deputy prime minister & minister of defence Sheikh Jabr al-Mubarak al-Hamad al-Sabah Deputy prime minister & minister of state for cabinet affairs & National Assembly affairs Mohammed Daifallah al-Sharar Deputy prime minister & minister of interior Sheikh Mohammed al-Khaled al-Hamad al-Sabah Communications Sheikh Ahmed al-Abdullah al-Ahmed al-Sabah Education & higher education Musaad Rashid al-Haroun Electricity and water & labour and social affairs Talal Mubarak al-Ayyar Finance, planning & minister of state for administrative development affairs Youssef Hamad al-Ibrahim Health Mohammed Ahmed al-Jarallah Information Sheikh Ahmed al-Fahd al-Ahmed al-Sabah Justice, Awqaf & Islamic affairs Ahmed Yaaqoub Baqr Minister of state for foreign affairs Sheikh Mohammed al-Salem al-Sabah Oil Adel Khaled al-Subaih Public works & minister of state for housing Fahd Dheisan al-Miya Trade & industry Salah Abdel-Rida Khourshid

National Assembly speaker Jassem al-Khorafi Central bank governor Sheikh Salem Abdel-Aziz Saud al-Sabah

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Economic structure

Annual indicators

1996 1997 1998 1999 2000a GDP at market prices (KD bn) 9.3 9.1 7.7 9.1 11.6 GDP (US$ bn) 31.1 29.9 25.4 29.8 37.8 Real GDP growth (%) –3.3a 2.3a 2.0a –2.4a 4.0 Consumer price inflation (av; %) 3.6 0.6 0.2 3.0 3.0 Population (m) 1.9 2.0 2.0 2.1 2.2 Exports of goods fob (US$ m) 14,946.0 14,281.0 9,618.0 12,276.0 22,690.9 Imports of goods fob (US$ m) 7,949.0 7,747.0 7,714.0 6,705.0 7,633.9 Current-account balance (US$ m) 7,107.0 7,935.0 2,215.0 5,062.0 14,091.7 Foreign-exchange reserves excl gold (US$ m) 3,515.1 3,451.8 3,947.1 4,823.7 7,082.4b Total external debt (US$ bn) 7.5 9.4 9.4 8.9a 6.9 Debt-service ratio, paid (%) 13.8 6.1 5.3a 4.2 a 3.3 Exchange rate (av) KD:US$ 0.299 0.303 0.305 0.304 0.307b

.June 15th 2001 KD0.307:US$1

Origins of gross domestic product 1999 Components of gross domestic product 1999 (current market prices) % of total (current market prices) % of total Agriculture 0.4 Private consumption 50.1 Industry 51.4 Government consumption 27.3 Oil & mining 37.1 Gross fixed investment 12.6 Services & others 48.2 Exports of goods & services 46.9 GDP at factor cost 100.0 Imports of goods & services –36.9 GDP at market prices 100.0

Principal exports fob 1999 US$ m Principal imports cif 1999 US$ m Crude oil 11,026 Consumer goods 3,199 Total incl others 12,217c Intermediate goods 2,666 Capital goods 1,599 Total incl others 7,616

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total Japan 22.8 US 15.4 US 11.5 Japan 10.2 Singapore 8.2 Germany 7.3 Netherlands 7.3 UK 7.1 Pakistan 3.6 France 2.9 UK 1.6 Australia 2.7 France 1.3 Netherlands 2.0 China 0.9 China 1.5 a EIU estimates. b Actual. c Customs basis.

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Quarterly indicators

1999 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Government finance (KD m) Revenue 854 1,005 1,289 1,468 1,463 1,702 1,802 1,438 Oil 736 907 1,184 1,382 1,321 1,590 1,701 1,238 Expenditure 941 680 821 921 887 657 913 906 Balance –87 325 468 547 576 1,045 888 532 Prices Consumer prices (1995=100) 106.4 107.7 109.8 108.8 109.5 109.7 n/a n/a % change, year on year 2.9 3.6 3.4 2.4 2.9 1.9 n/a n/a Wholesale prices (1995=100) 99.4 101.2 102.1 101.1 99.2 101.6 103.3 n/a Crude oil prices (US$/barrel; spot) Kuwait blend 14.6 19.2 23.0 24.5 25.1 27.2 26.1 n/a OPEC basket 15.4 20.0 23.4 26.1 26.3 29.2 28.6 24.4 Brent 15.5 20.6 24.1 26.9 26.7 30.2 29.6 25.8 Financial indicators Exchange rate KD:US$ (av) 0.306 0.305 0.304 0.306 0.307 0.308 0.307 0.306 KD:US$ (end-period) 0.307 0.303 0.304 0.306 0.306 0.307 0.305 0.308 Interest rates (%) Deposit (av) 5.75 5.54 5.69 5.81 5.87 5.97 5.92 5.28 Discount (end-period) 6.75 6.75 6.75 6.75 7.25 7.25 7.25 5.75 Lending (av) 8.63 8.40 8.50 8.63 8.76 9.01 9.07 8.75 Money market (av) 6.08 5.93 6.61 6.73 6.72 7.05 6.77 5.67 M1 (end-period; KD m) 1,310.2 1,172.6 1,371.4 1,377.7 1,440.1 1,343.5 1,467.7 1,579.1 % change, year on year 4.7 0.2 19.9 13.0 9.9 14.6 7.0 14.6 M2 (end-period; KD m) 7,805.1 7,586.2 7,678.0 7,888.1 7,936.6 7,765.7 8,163.2 8,863.6 % change, year on year 3.4 1.3 1.6 2.5 1.7 2.4 6.3 12.4 KSE general index (end-period; Dec 29th 1993=1,000) 1,570 1,490 1,442 1,378 1,417 1,444 1,348 1,454 Sectoral trends Crude oil productiona (m barrels/day) 1.82 1.87 1.90 1.93 2.05 2.17 2.22 2.16 % change, year on year –13.3 –7.4 –4.0 –4.0 12.6 16.0 16.8 11.9 Foreign trade (KD m) Exports fob 791 1,033 1,247 1,403 1,413 1,540 1,639 n/a Oil 707 943 1,139 1,295 1,304 1,439 1,534 n/a Imports cif –588 –531 –609 –584 –580 –551 –622 n/a Trade balance 203 503 639 818 833 989 1,017 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 4,140.5 4,143.3 4,823.7 5,364.2 5,706.4 6,348.4 7,082.4 8,221.3 a Excluding partly refined petroleum. Including half-share of Neutral Zone production.

Sources: International Energy Agency, Monthly Oil Market Report; OPEC bulletin; Central Bank of Kuwait, Quarterly Statistics Bulletin; IMF, International Financial Statistics.

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Outlook for 2001-02

Political outlook

Domestic politics Relations between the government and the National Assembly (parliament) will remain uncomfortable in the coming months and a feeling of policy paralysis will persist, despite some acknowledgement on both sides of what needs to change for the country to break out of its political impasse. Although a few reform initiatives are likely to emerge, continuing splits within and among the main political forces—the ruling Al Sabah, the cabinet and the National Assembly—will make consensus on Kuwait's numerous policy dilemmas elusive this year and next.

The central issues polarising opinions will be the balance of power between the executive and the legislature, and the tussle between the country's divergent liberal and Islamist political trends. Even members of the ruling family differ on these questions, as demonstrated by the difficulty experienced in appointing a new government in February. The elderly crown prince and prime minister, Sheikh Saad Abdullah al-Salem al-Sabah, retained the premiership, despite his ill-health and calls from MPs for the posts of crown prince and prime minister to be separated. At the same time, the more active and reform- minded first deputy prime minister, Sheikh Sabah al-Ahmed al-Jabr al-Sabah, apparently gained more room for manoeuvre in the appointment of ministers, and as head of a committee recently formed to oversee an economic reform programme. At a time of uncertainty over who will succeed the emir, Sheikh Jabr al-Ahmed al-Jabr al-Sabah, the fact that Sheikh Saad and Sheikh Sabah represent different branches of the al-Sabah family will make the succession question harder to resolve.

Members of the National Assembly, meanwhile, are not likely to give up their campaign to hold the executive to account. MPs see “Project Kuwait”, designed by ministers to involve foreign companies in developing the northern oilfields, as evidence of the ruling family's readiness to side-step the legislature and compromise Kuwaiti sovereignty. With ruling family members still holding seven cabinet portfolios, and four ministerial posts being held by elected politicians, MPs are likely to become even more interested in government accountability. Yet some MPs are themselves linked to the ruling family through ties of patronage, prompting local suggestions that the time has come for Kuwait to have organised political parties with clear manifestos and a wider franchise in which women, as well as men, can vote. Women's lack of political rights will become an increasingly urgent and divisive issue as the 2003 general election approaches. Promises of political liberalisation for both sexes in Bahrain and Qatar will exacerbate women's sense of grievance in Kuwait.

International relations An attempt in March by the Arab summit meeting in Amman to normalise relations between Kuwait and Iraq failed. Kuwait is prepared to endorse the lifting of UN sanctions on the Iraqi people, but will continue to insist on the return of 620 Kuwaiti prisoners of war held in Iraq. Even if a compromise were eventually to be reached, Kuwaiti foreign policy would remain focused on

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reinforcing the physical security of the northern border with Iraq, and regular diplomatic contacts with key global players inside and outside the UN Security Council. Kuwait will continue to spend heavily on its own defence forces, as well as on co-ordinated defence arrangements with other Gulf states. In addition, Kuwait will endorse the US military presence in the Gulf despite strong objections to it among some regional political groups. Plans to attract oil companies from a strategic mix of countries to the northern oilfields and to develop the islands of Bubiyan and Failaka also appear to have a security dimension. Improved relations with near neighbours, such as Iran and Qatar, embodied in plans for long-term supplies of water and gas, will also bolster Kuwait's position vis-à-vis Iraq.

Economic policy outlook

Policy trends Having achieved large fiscal and current-account surpluses in 2000, Kuwait is flush with funds. Strong oil revenue, while boosting business confidence and providing a cushion against this year’s deepening global economic slowdown, risk masking the urgent need for fundamental economic reform. This involves diversifying the economy away from oil and speeding up the disengagement of the state from the economy, allowing for the development and growth of the private sector. Nearly three decades after the first oil boom, Kuwait still relies on oil for 48% of its GDP, 83% of its state budget revenue, and over 90% of its merchandise export earnings. This is problematic not only because of the country’s exposure to the volatile world market for crude, but also because the oil sector alone cannot meet the rising domestic demand for jobs. At present around 94% of working Kuwaitis are employed in the public sector, reflecting the state’s traditional role as provider of comfortable, well-paid jobs for the estimated 10,000 nationals who enter the labour market annually. Public-sector salaries place a growing strain on public spending, but the structural changes needed to shift the employment burden onto the private sector are politically contentious and will be slow, since they involve privatisation and liberalisation.

As a result, the government hopes to boost job creation by launching major oilfield development work, while also pursuing gradual privatisation. MPs are concerned that privileged individuals will benefit financially from efforts on both these fronts. The government will also be careful to not overload the market with public offerings of shares in state-owned enterprises. However, with the Kuwait Stock Exchange performing reasonably well this year, and with public opinion generally in favour of moves towards economic reform, the climate could be right for the privatisation process to advance. The recent passage of a law liberalising foreign investment flow is seen as a breakthrough because of the expertise and competition that foreign companies will bring.

Fiscal policy The fiscal surplus recorded for 2000 was the highest for 20 years and, given relatively stable oil prices, further surpluses are in prospect for 2001 and 2002. A central issue, however, is the balance between oil and non-oil revenue. Oil revenue accounts for over 80% of the total. A very important step towards the diversification of budgetary revenue away from oil will eventually come with the introduction of income tax, although the relevant bill has yet to be

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presented to parliament and its passage is not expected inside the current forecast period. In the meantime, the next two to three years may well see some progress towards reducing state subsidies—especially for water—and increasing the money collected through health, education and other charges. Major savings could be made, for example, if the large-scale Sulaibiya wastewater treatment plant, undertaken by private contractors, can operate profit- ably while delivering water at below the current heavily subsidised charge.

Pending further progress in economic restructuring, the government will have a strong incentive to maximise revenue from oil. This means collaborating with other OPEC members to defend oil prices through production controls, while also attempting to keep prices from rising too much. The budget for fiscal year 2001/02 ( April-March) assumes conservatively that the export price of Kuwaiti crude will average just US$15/barrel. However, based on the EIU's forecast for Dated Brent, the actual price of Kuwaiti crude is expected to exceed US$20/b in both 2001 and 2002. As a result, government revenue will exceed the levels set out in the budget, while spending is likely to remain close to budget, since the main anchor, the currency peg, will remain in place.

Monetary policy No significant change to monetary policy is expected over the forecast period. The Kuwaiti dinar is pegged against a dollar-denominated basket of currencies which closely follows the US dollar. Although the dinar has never been subject to any serious speculative attack, state foreign assets and foreign reserves are clearly adequate to defend the currency if necessary. Total reserves, minus gold, had risen to US$8.2bn at the end of March. Interest rates will continue to track US interest rates in 2001-02 while offering a slight positive differential. Given the series of interest rate cuts declared by the US Federal Reserve (central bank) during the first half of 2001, the Central Bank of Kuwait has followed suit and further domestic interest rate cuts are likely before the downward trend is reversed in 2002.

Economic forecast

International assumptions Growing signs of the severity of the global downturn have led us to reduce our forecast for world economic growth in 2001 to 2.9% (at purchasing power parity exchange rates), down from 4.9% last year. With the US economy experiencing a hard landing and the Japanese economy expected to weaken still further, almost every region in the emerging world will be hit by a slowdown in the OECD. A slowdown in world energy demand will exert downward pressure on oil prices, which is likely to prompt OPEC to try to defend prices by reining in production. Substantial monetary easing by the US Federal Reserve should allow US growth to accelerate again from early 2002, boosting other regions and pushing world growth to 3.7% in 2002. This will ease the pressure on OPEC to maintain production restraint. As a result, we forecast the average price of Dated Brent at US$24.22/b this year, slipping slightly to US$23.98/b in 2002.

A series of interest rate cuts will bring three-month interest rates in the US down to an average of around 4.1% in 2001, which should encourage Kuwaiti

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investors with funds abroad to seek investment opportunities closer to home. However, interest rates will trend upwards again in 2002. At the same time, average international prices for manufactures and non-oil commodities are expected to rise in 2001 and 2002 by 4.5% and 10.5% respectively. These forecast price rises will generate overall inflationary pressures.

International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.6 4.9 2.9 3.7 OECD 3.1 4.0 1.7 2.5 EU 2.5 3.3 2.4 2.6 Exchange rates (av) ¥:US$ 113.9 107.8 122.8 123.0 US$:¤ 1.07 0.92 0.95 1.08 SDR:US$ 0.731 0.758 0.770 0.735 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.18 0.10 US$ 3-month commercial paper rate 5.18 6.32 4.09 4.75 Commodity prices Oil (Brent; US$/b) 17.9 28.4 24.2 24.0 Oil (Dubai; US$/b) 17.2 26.2 22.4 22.2 Total non-oil commodities (% change in US$ terms) –13.6 1.7 4.5 10.5 Industrial raw materials (% change in US$ terms) –4.6 13.4 0.1 4.7 Note. Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates. Economic growth Oil industry data show that Kuwait has been more compliant than other OPEC members in implementing the production cuts agreed since February under the OPEC quota system. Its quota fell back below 2m barrels/day (b/d) from the beginning of April and actual production that month was almost on target. However, with quota compliance much less in evidence in other OPEC states, early agreement on further cuts in quotas seems unlikely. We therefore forecast average Kuwaiti oil production at 2m b/d in 2001, representing a 4.1% decline in volume compared with 2000 levels. The resultant negative effect on GDP growth will be offset by higher government spending, fuelled by the large fiscal surplus enjoyed in 2000, which will be channelled largely into construction and service contracts for local firms. A more favourable global economic climate in 2002 will allow some relaxation of production restraint at a time when the much-delayed capacity expansion work undertaken by Chinese firms over the past few years finally bears fruit. Crude output could therefore increase in 2002 to 2.02m b/d, while a possible legislative breakthrough on Project Kuwait could also trigger major investment. Taking these trends into account, we forecast that real GDP growth will slow from the estimated 4% for 2000 to 2.1% in 2001, before picking up slightly to 2.5% in 2002.

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Forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth –2.4b 4.0 2.1 2.5 Oil production ('000 b/d) 1,945 2,085 1,999 2,020 Crude oil exports (US$ bn) 11,026.2 20,875.7 17,036.3 17,162.4 Consumer price inflation Average 3.0 3.0 3.5 3.9 Year-end 3.8 3.8 3.6 3.9 Short-term interbank rate 6.3 6.8 a 5.8a 6.2a Government balance (% of GDP)d 11.9b 11.2 2.2 1.7 Exports of goods fob (US$ bn) 12.3 22.7 18.7 19.1 Imports of goods fob (US$ bn) 6.7 7.6 8.2 9.1 Current-account balance (US$ bn) 5.1 14.1 8.9 8.9 % of GDP 17.0 37.3 18.6 17.5 External debt (year-end; US$ bn) 8.9b 6.9 6.9 6.6 Exchange rates KD:US$ (av) 0.304 0.307a 0.305 0.303 KD:¥100 (av) 0.267 0.285 0.245 0.246 KD:¤ (year-end) 0.306 0.287 0.319 0.325 KD:SDR (year-end) 0.417 0.398 0.408 0.412

a Actual. b EIU estimates. c EIU forecasts. d IFS 1980–1987; series break in 1987; Central Bank of Kuwait 1988 onwards in fiscal years. Break in series for fiscal year 2000/01 (2000) figure is calculated over nine-month period (July to March).

Inflation With the US dollar weakening against other major currencies, and little improvement expected before the end of the forecast period, the Kuwaiti dinar, being pegged to a dollar-dominated currency basket, will also depreciate. This, and rising import prices of industrial and non-oil commodities, as well as the planned expansionary fiscal policy of 2001 and 2002, will push up costs and feed through into high consumer prices. The IMF estimates average consumer price inflation at 3% in 2000. We expect this to rise to 3.5% in 2001, with a further rise to 3.9% in 2002.

Exchange rates The Kuwaiti dinar will maintain its peg against a trade-weighted basket of currencies. The composition of the basket is not disclosed, but, with the bulk of Kuwait’s exports and a large proportion of its imports denominated in US dollars, the US currency clearly dominates. The Kuwaiti dinar-US dollar exchange rate should therefore remain relatively stable over the forecast period. We expect the rate to average KD0.305:US$1 in 2001 and KD0.303:US$1 in 2002, moving in line with the US dollar.

External sector Oil earnings will remain the determining factor in Kuwait’s external accounts. Preliminary official data for 2000 indicate that oil exports generated income of US$20.9bn, out of total merchandise exports of US$22.7bn. Under our oil price and production assumptions, oil income will fall to US$17.04bn in 2001, and US$17.16bn in 2002. The value of non-oil exports, led by petrochemicals, will be buoyed by relatively stable prices for crude oil feedstock. Meanwhile, rising import prices and an investment-related increase in capital goods imports will

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push the import bill up from an estimated US$7.6bn in 2000 to US$8.2bn in 2001 and US$9.1bn in 2002.

The trade surplus in 2001-02 will be sufficiently large to ensure significant current-account surpluses in both years of some US$8.9bn. Services debits will remain high, as a result of overseas travel and tourism outflows, as well as rising services payments linked to imports. Inflows on the income account are expected to decline in 2001, in line with the global economic slowdown and declining interest rates in the US, but should rise again in 2000 as US rates increase in that year. Overall, we expect the current-account surplus to decline from US$14.1bn (37.3% of GDP) in 2000, to US$8.9bn in 2001 (18.6% of GDP) and to remain at US$8.9bn in 2002 (17.5% of GDP), despite the expected slight decline in oil prices, as we are assuming a small increase in oil production in that year.

The political scene

A woman publisher is Hidaya Sultan al-Salem, editor-in-chief and owner of the weekly newspaper Al- assassinated Majaless, was shot dead on March 20th, in an attack that appeared to be linked to the editorial content of her publication. Ms Salem, aged in her sixties and a relative of the Kuwaiti ruling family, was shot six times while in her distinctive Rolls Royce near her home in Damascus Street in the Al-Surra suburb of Kuwait City. A writer and journalist since the 1960s, and an active campaigner for Kuwaiti women’s right to vote, Ms Salem was on her way to a conference on "Women and Culture" when she was killed. The head of the Ministry of Information, Sheikh Ahmed al-Fahd al-Ahmed al-Sabah, immediately condemned the assassination, which was carried out in front of witnesses by a gunman who stepped out of his vehicle to fire the shots. Four suspects were arrested, including a Kuwaiti police officer, Khaled Diab al-Azmi, who reportedly confessed under interrogation, saying he had murdered his victim because she had insulted his tribe. In court, however, Mr Azmi pleaded innocent, saying he did not know why he had been accused.

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The killer’s motives and Indications as to whether the authorities are considering other possible identity are unclear motives or other suspects have yet to emerge. The article in Al-Majaless that was said to have caused offence was not particularly recent, having been published last year. Moreover, an apology for it had been printed. Defence lawyers said eyewitnesses to the shooting had watched the gunman step out of a black jeep, whereas Mr Azmi was using a red jeep on the day of the incident. Ms Salem herself had been aware that she was under threat for having highlighted corruption and criticising the police. In the edition of Al-Majaless that appeared before her death, she had addressed an open letter to the emir, Sheikh Jabr al-Ahmed al-Jabr al-Sabah, asking for protection and complaining that her two publications, Al-Majaless and the sports magazine Al-Riyadi al- Arabi, had been sabotaged. A motive linked to her role in the campaign for political reform has not been ruled out.

Votes for women are Two activists for women’s political rights, Luluwa al-Mullah and Hind al- rejected yet again Shalfan, failed in April in their attempt to challenge the ban that prevents women in Kuwait from voting or standing in elections to the National Assembly (parliament). The two had presented their case to the Administrative Court in January, from where it had been referred to the Constitutional Court. The latter dismissed it on procedural grounds, saying that the plaintiffs had not properly authorised their lawyer to represent them. This was not the first time the Constitutional Court has relied on technicalities to reject legal challenges aimed at securing voting rights for women. These rejections have come despite the government’s own professed support for women’s political rights, demonstrated in 1999 when Sheikh Jabr gave the vote to women by decree. The National Assembly overturned the decree in November 1999 and, in a second vote on the same issue, turned down votes for women by a majority of just two. Further attempts are under way to ensure that women are allowed to vote and run for office in the general election scheduled for 2003. These attempts include further legal cases to be pursued through the courts and another draft bill to come before parliament.

A new press bill could Another contentious issue awaiting parliamentary scrutiny is the new draft herald other reforms press and publications law. Under the existing law, prison sentences can be imposed for publication offences and the Ministry of Information is authorised to suspend publication of newspapers and magazines. The new bill contains 38 articles, drafted in consultation with the Kuwait Journalists Association (KJA), aimed at reducing censorship and, in the words of KJA members, adding a "new dimension" to the democratic process.

The feeling that Kuwait has reached a crossroads in terms of its political development was expressed by Mohammed al-Rumaihi, one of the country’s leading political commentators. In an article in the Saudi-owned daily, Al- Hayat, in early May he discussed the option of crystallising the country’s existing political blocs into organised political parties so as to offer the electorate clear policy choices. In this regard, Mr Rumaihi noted that opinion was divided as to whether such a move would ease the transition to wider political participation, or whether it would have the opposite effect of exacerbating existing splits in society along tribal and confessional lines. As a

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way of modernising the electoral system to avoid such divisions, he proposed three things: reorganising electoral districts; reducing the minimum age for voting from 21 to 18; and allowing women to vote and run for political office. He also drew attention to a clause in the constitution providing for possible increases in the number of elected members of parliament in line with population growth.

Politically sensitive fraud When the last government resigned in January this year, it did so amid calls case debated by Assembly from MPs for greater resolve and transparency with regard to a series of fraud cases raised against public officials (March 2001, page 16). Among these was a case, dating from 1993, against a former oil and finance minister, Sheikh Ali Khalifa al-Sabah, in connection with alleged irregularities involving the Kuwait Oil Tanker Company and US$130m worth of funds. In May this issue was firmly back on the agenda when a judgement dismissing the case against Sheikh Ali was followed by two parliamentary debates. A ministerial court, convened to hear the case because of Sheikh Ali’s former ministerial status, ruled on May 16th that the case was unsound and incomplete. On May 21st MPs gave the government a deadline of June 2nd to refile the case or send serving ministers to explain themselves to the National Assembly. The next day MPs debated amendments to the 1995 law governing the way ministers and former ministers are tried. Sheikh Ali’s lawyers then raised the stakes with the announcement in late May that they would sue the National Assembly and the oil minister, Adel Khaled al-Subaih, for indicting their client when they were aware the case has no foundation and is being pursued for political motives.

MPs hold out against Government ministers have not yet overcome political opposition to long-term foreign investment in oil foreign investment in developing northern oilfields. The National Assembly's Finance and Economy Committee has been studying government proposals for the development, known as Project Kuwait, since January, with a view to submitting a report on May 20th, to be followed by a full parliamentary debate on May 30th. However, while the report was drawn up on schedule and was ready to be presented to parliament, there was no quorum for the session as 30 deputies were reported to be overseas.

In the process of studying foreign investment in the oilfields, the Committee has investigated approaches to oilfield development in other contexts, including Norway, Saudi Arabia, Iran and the UAE. Local merchants, academics and economic consultants were invited to share their views with the Committee at a meeting on May 7th. Afterwards, however, the Committee indicated that it needed more time to consult with the Kuwait Petroleum Corporation (KPC), which has overall responsibility for oil investment at home and abroad. As a result the preliminary report is incomplete (see Economic policy and The Domestic economy: Oil and gas).

In the meantime, MPs have begun to question what has long been seen as a major political incentive for attracting Western oil companies into northern Kuwait. The idea has been that the presence of foreign oil investments near the border with Iraq would provide a rationale for strengthening Western support to Kuwait in defending the border. Abdullah al-Nibari, a liberal member of the Finance and Economy Committee, wrote a memorandum on the issue in

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March in which he doubted whether this expectation was realistic. Highlighting disparities in the value of oilfield investments and the costs, in terms of lives and weaponry, of defending Kuwait, Mr Nibari suggested that Western governments had other reasons for their military presence in the Gulf and would not be swayed by oil company profits.

Military exercise kills six A US F-18 fighter plane accidentally bombed a military vehicle in north-west soldiers Kuwait on March 12th, killing five American soliders and another from New Zealand who were standing next to it. Seven others were injured in the incident, including two Kuwaitis and five Americans. The aircraft that dropped the bomb was carrying out joint air manoeuvres with British and Kuwaiti aircraft in an exercise named "Intrinsic Action".

US and UK patrols The accidental bombing took place less than 50 km from the border with Iraq, highlight sovereignty issue drawing attention once again to the fact that US and British warplanes police the airspace over parts of Iraq from bases inside Kuwait. The Iraqi government tried hard, in preparations for the Arab summit meeting in Amman at the end of March, to ensure that the summit would condemn the no-fly zones over northern and southern Iraq while also calling for an end to the UN sanctions that have been imposed on Iraq since it invaded Kuwait in August 1990. Kuwait, for its part, approached the summit with the requirement that Iraq should apologise for the invasion and guarantee to respect Kuwaiti sovereignty in future. For the Iraqi side, however, the fact that US and British air strikes on Iraq are conducted from Kuwait represents a Kuwaiti infringement of Iraqi sovereignty. In theory, the Iraqi stance is that Baghdad has already recognised Kuwaiti sovereignty by meeting its obligations under UN Security Council Resolution 833. In practice, Iraqi resistance to upholding Kuwaiti territorial sovereignty is demonstrated at regular intervals in the Iraqi media. In one recent example, the newspaper Babil, owned by Saddam Hussein’s son Udai, referred to Kuwait as "Kazimah", the name Iraq gave Kuwait when it invaded.

Summit underscores Not surprisingly, the Amman summit, the first ordinary Arab summit meeting differences with Iraq for over a decade, failed to re-establish relations between Iraq and Kuwait. Nevertheless, a great deal of effort went in to hammering out a common position on Iraq, leading to a widespread perception, when the summit closed, that the Iraqi government, by refusing all compromise, had passed up an important opportunity to achieve normalisation. Kuwaiti representatives suggested that the Iraqi leadership had revealed a tell-tale lack of enthusiasm for getting sanctions lifted. The Iraqi delegation countered by saying that Kuwait had been obstructive. One sticking point was whether Arab leaders supported the lifting of sanctions from Iraq, or from the Iraqi people. Iraqi government representatives insisted on the first of these formulations; the Kuwaiti government on the second. Sheikh Sabah al-Ahmed al-Jabr al-Sabah, Kuwait’s first deputy prime minister and minister of foreign affairs, said two weeks before the summit that he was not at all opposed to lifting the sanctions on the Iraqi people, whom he did not wish to see subjected to suffering and starvation. Kuwait, however, seeks the return of 620 Kuwaiti prisoners of war said to be held in Iraq, whereas Iraq refuses to acknowledge the existence of Kuwaiti "prisoners" and will speak only of "missing persons".

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In the event, two documents emerged from the summit: the final communiqué and the Amman Declaration. The communiqué made no reference to sanctions on Iraq, although a final clause, added at the last minute, entrusted King Abdullah of Jordan with pursuing contacts aimed at resolving what the summit referred to as the Iraq-Kuwait "situation" in the interests of Arab solidarity. In contrast, the Amman Declaration, issued on March 28th, called explicitly for an end to the sanctions on Iraq and for efforts to deal with the "humanitarian issues" of both prisoners and missing persons.

Some MPs criticise For some Kuwaiti MPs and their constituents, the Amman summit's outcome “concessions” to Iraq represented a capitulation to Iraq. Two Islamist MPs, Adnan Abdel-Samad and Walid Tabatabai, questioned the government's handling of foreign policy, complaining that Iraq had won everything it wanted while Kuwait had given in to its demands. They particularly criticised the government's agreement in principle to the lifting of sanctions on Iraq and to the implication in the Amman Declaration that there could be missing Iraqis in Kuwait. They also resented the support they believed Iraq had received from countries that had received financial assistance from Kuwait.

Collaborator gets a life In March the Court of Cassation pronounced a sentence of life imprisonment sentence on Ala Hussein Ali al-Muayyan, who briefly headed the government installed by Iraq during its occupation of Kuwait. Mr Hussein returned to Kuwait from Norway in January 2000, apparently expecting to avoid the death penalty imposed on him in absentia in 1993. However, the sentence was upheld by an appeal court and by the Court of Cassation, but commuted to life imprisonment.

Economic policy

Sheikh Sabah heads reform Following up a previous announcement that it planned to appoint a special committee committee to oversee urgent economic reform, the government confirmed the committee’s membership on April 6th. Named the Higher Committee for Development and Economic Reforms, the body’s mandate is to set out a long- term strategy for economic restructuring. It is chaired by the first deputy premier and foreign minister, Sheikh Sabah al-Ahmed al-Jabr al-Sabah, and includes four other ministers from outside the ruling family, two of whom are also elected MPs. One of the four is Youssef Hamad al-Ibrahim, a former education minister and economics professor, who was appointed to the new cabinet formed in February this year as minister of finance and planning and minister of state for administrative development. He is joined by the oil minister, Adel Khaled al-Subaih, who also took up his present portfolio in February, having previously been minister of electricity, water and housing and a co-member with Sheikh Sabah of the Supreme Petroleum Council for the past eight years.

The business community is The two other ministerial members are MPs who were given their first also represented ministerial portfolios in February. They are Talal Mubarak al-Ayyar, minister of

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electricity and water and labour and social affairs, and Salah Abdel-Rida Khourshid, minister of trade and industry. The five ministerial appointees to the committee are to be balanced by five officials from outside the cabinet, including one to be nominated by the Chamber of Commerce and Industry. Ruling family members may fill one or more of these posts. Announcing the decision, Mr al-Ibrahim said the current economic climate was conducive to reform, the aim of which was to stimulate the economy and not to increase the financial burden on Kuwaiti citizens. Plans to forge an economic reform strategy were revealed last November, after the Ministry of Finance released a report exposing the same entrenched structural distortions that an IMF team had noted a few months earlier.

Ministers make their As if to demonstrate his determination to push forward with reform, Mr presence felt Ayyar’s ministries announced various measures in mid-May. The Ministry of Labour and Social Affairs let it be known that private companies would be required by law to pay salaries directly into their employees’ personal bank accounts and to send a copy of the transfer documents to the ministry. Inspectors would be appointed to monitor compliance and failure to abide by the new regulations would result in fines of KD100 per employee. At the same time, the Ministry of Electricity and Water said it would be starting to collect six months’ worth of outstanding water and electricity charges from customers. Past laxity over collecting payments for these services has boosted government outlays on subsidies and undermined any efforts to curb increases in consumption.

Foreign investment law is The 50-seat National Assembly passed the foreign investment bill by a vote of not seen as a panacea 34 to seven on March 27th, two weeks after the bill passed its first reading. The 22-clause law, which is certain to gain the approval of the emir, Sheikh Jabr al- Ahmad al-Jabr al-Sabah, and therefore to reach the statute book, breaks with precedent by allowing foreign investors to establish companies in Kuwait without a local sponsor or partner. It offers foreign companies tax holidays of up to ten years, along with exemption from customs duties and other charges, and guarantees against nationalisation. Commenting on the new legislation, some MPs were sceptical about its power to attract the investment needed to revitalise the economy. Mohammed al-Saqr pointed out that private Kuwaiti investments outside the country are estimated at between US$50bn and US$150bn. He said private Kuwaiti investors needed to be encouraged to repatriate their funds.

Others cited local bureaucracy and corruption as factors deterring foreign investors. It was also noted, however, that the law aims at attracting technical and managerial know-how as well as money, since Kuwait needs to improve its competitiveness, as well as attracting the capital itself. After the bill passed its first reading, the local Al-Shall economic consulting firm highlighted the need for fresh expertise if Kuwait is to meet its international obligations as a member of the World Trade Organisation (WTO).

Natural resources are As has happened with the introduction of new foreign investment legislation in barred to foreign investors Saudi Arabia, the law allows the Kuwaiti government to bar some sectors of the

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economy to foreign investment. For example, under Article 152 of the constitution, natural resources and public utilities remain potentially off limits to investment by non-Kuwaitis. Any commitment in these fields requires new legislation and must be subject to specified time limits. These restrictions have already obstructed government attempts to attract foreign involvement in the US$7bn scheme to develop the northern oilfields, known as Project Kuwait. Under the draft law submitted to parliament by the government last year, the Supreme Petroleum Council would have the sole authority to award contracts to the foreign oil companies of their choice and extend any agreement already in place. While MPs are divided over whether this bill should be amended or rejected in its entirety, a clear majority are opposed to tampering with the relevant article of the constitution in a way that they see as limiting Kuwait’s sovereignty.

Project Kuwait’s economics It was this opposition that led 36 of the National Assembly’s 50 elected MPs to questioned by MPs pass a resolution on March 14th declaring all steps already taken on Project Kuwait to be null and void, and requiring every future contract signed with a foreign oil company to be submitted separately for parliamentary approval. The resolution also stipulated that each oil development contract should contain a clause allowing it to be revoked unilaterally if the foreign contractor employed a local agent, representative or "other beneficiary, direct or indirect". This requirement, which would necessitate cancelling existing legislation obliging foreign companies to hire a local agent, is seen as a means of ensuring that privileged individuals, including members of the ruling family, do not make personal financial gains from contracts awarded under Project Kuwait. MPs also insisted that the government should provide more financial and economic, as distinct from technical, information to clarify the advantages of involving foreign oil companies on a long-term basis. The government said to do this could result in sensitive inside information reaching the oil companies with which it intended to negotiate. Instead, Mr Subaih met the National Assembly’s Finance and Economy Committee on April 30th to try to allay its members’ concerns.

Sale of state assets triggers Government attempts to sell off around half the state’s 49.2% share in the local concern Mobile Telecommunications Company (MTC) met with a hostile reaction from MPs at the end of March but eventually, on April 23rd, parliament approved the sale. The state-owned share in the semi-private MTC is held by the Kuwait Investment Authority (KIA), which started moves in 1994 to divest some of its holdings in around 19 companies listed on the Kuwait Stock Exchange (KSE). The moves were suspended when the stockmarket fell from its 1997 peak. With the stockmarket enjoying a new boost this year (see The domestic economy: Economic trends), and MTC shares reaching a high point of KD1.96 (US$6.4) on March 10th, the government announced on March 28th that it would proceed with the sell-off, offering 113m shares during the first half of April at KD1.453 per share, equivalent to a discount of around 25%. With a total of 447,436,000 subscribed shares, MTC is one of the largest firms in terms of capitalisation on the KSE. Its net profit increased last year by 16% to KD69.63m (US$227m) and its total assets at the end of the year were KD268m. MTC is the oldest of two cellular operators in Kuwait, both of which are partly state-owned.

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MTC shares will be offered MPs who were unhappy about the sale said they suspected it would profit a few to the public individuals rather than the country as a whole. They were also concerned that the discounted price of shares would reduce income from the sale. Although the share price dropped by just over 5% after the government made its announcement on March 28th, the discount was still calculated to cut more than KD50m from the proceeds of the sale. Thirty-six MPs consequently urged the government to delay the sale and to rethink the offer price. After heated exchanges, however, they finally withdrew their opposition and approved the sale, although no new date was set. It is understood that shares will be offered only to Kuwaiti citizens, even though foreigners are allowed to trade on the KSE.

Economic collaboration Kuwait categorically rejected an invitation it received in April to join an with Israel is ruled out Egyptian-Israel refinery venture on the Mediterranean. Mr Subaih revealed at the end of April that Egypt had proposed to Kuwait that it participate in the Egyptian-Israel Middle East Oil Refinery (Midor), which has already started operating. His reply was that Kuwait was not interested in entering into a project involving direct or indirect Israeli participation, regardless of its profitability. One advantage to Egypt of attracting Kuwaiti involvement would have been the prospect of supplying the refinery with Kuwaiti crude. Although Gulf crude supplies, reaching the Mediterranean via the Sumed pipeline from the Gulf of Suez, formed part of the original rationale for the project, deteriorating relations with Israel since the mid-1990s have led to Gulf suppliers steering clear of Midor altogether.

The domestic economy

Economic trends

GDP figures underline GDP rose by just under 28% in nominal terms in 2000, according to figures dependence on oil released by the Ministry of Planning in early April. This compares with an increase of 17% in 1999 and, according to the IMF in its World Economic Outlook 2001, translates into real GDP growth for the year of 3.6%, compared with negative real growth of 2.4% in 1999. From KD9.075bn (US$29.6bn) in 1999, nominal GDP reached KD11.59bn in 2000. The oil sector’s central role in this performance is evident from the fact that it increased by 66.4%, from KD3.35bn in 1999 to KD5.58bn in 2000. This was the result of a rise in oil production, from 1.95m barrels/day (b/d) in 1999 to 2.09m b/d in 2000, and in average prices for Kuwaiti crude, which increased from US$16.7/barrel to US$25.7/b. With the sector accounting for 48.2% of GDP in 2000, compared with 37% in 1999, the economy was effectively more dependent on oil.

Budget surplus hits 20-year The exceptional nine-month budget for fiscal year 2000/01 (April-March) came high to a close at the end of March with the National Bank of Kuwait (NBK) projecting a budget surplus, before adjustments, of KD1.7bn. This compares with a budgeted deficit of KD1.29bn (US$4.21bn) for the July-March period and would be Kuwait’s biggest budget surplus in 20 years. The surplus envisaged by NBK was based on projected total revenue of around KD5bn, of

which KD4.15bn would be from oil. Significantly, the NBK report predicted an increase of 37% in non-oil revenue, resulting from higher income from import duties, telephone services and charges introduced by the ministries of health, education and justice. Government spending, meanwhile, is believed to have shown only limited growth, of around 3.4%.

KSE gains nearly 17% in six The Kuwait Stock Exchange (KSE) bucked the general trend of stockmarkets months around the world to make sustained gains from March through to May. Having lost around 8% in 2000, the KSE index gained more than 3% in a single week in mid-March to rebound to 1,426.1, representing an increase of 5.8% since the start of the year. Over the ensuing 12 weeks the trend has been of a continued climb and by June 19th the KSE index had reached 1,683.1, equivalent to a rise of 16.7% over the year to date.

The market’s performance was attributed to several domestic and international factors. Local liquidity has received regular boosts since the UN Compensation Commission agreed last year that Kuwait should receive US$15.9bn worth of compensation from Iraq for oil losses resulting from the Iraqi invasion and occupation in 1990-91. The compensation payments, diverted from Iraq’s UN- supervised oil earnings, are distributed in instalments to Kuwaiti companies and individuals. At the same time, the new government formed in February has taken various small steps to demonstrate its seriousness about economic reform, while declining interest rates and signs of economic downturn in other parts of the world have encouraged investors to focus their attention closer to home.

M2 rises 12% in the 12 Money supply, including currency in circulation, demand deposits and quasi- months to March money, increased by 12.4% in the 12 months to March 2001, according to figures from the IMF’s International Financial Statistics. According to the Central Bank of Kuwait, cash with local banks increased from KD48m (US$157m) to KD88m over the 12-month period to February 2001, while currency in circulation rose from KD371m to KD402m in the 12 months to February. Together with demand deposits, this pushed M1 up by 14.4% to KD1.53bn from February 2000 to February 2001.

Money supply (KD m; end-period) 2000 2001 2 Qtr 3 Qtr 4 Qtr Feb Mar Apr Currency in circulation & demand deposits 381.1 357.4 416.6 401.8 388.4 439.1 Quasi-money 6,496.4 6,422.3 6,695.6 7,106.3 7,284.5 n/a Money supply (M2) 7,936.5 7,765.7 8,163.2 8,631.7 8,863.6 n/a Source: Central Bank of Kuwait.

Oil and gas

Mixed signals beset world The price of the Brent marker crude fell from an average of US$28.37/barrel in oil market 2000 to US$25.76/b in the first quarter of 2001 as signs of a deepening global economic slowdown and slower growth in energy demand were only partially

offset by the prospect of OPEC production cuts and periodic reports of low gasoline stocks in the US. As the second quarter of 2001 got under way, further downward pressure on prices seemed to be building, resulting partly from higher than planned output from OPEC countries and rising US crude oil stocks, as well as seasonal factors such as higher refinery runs following the end of annual maintenance work. However, to many analysts’ surprise, prices rebounded in May as a number of downstream problems, particularly pressure on US gasoline prices, helped to keep the market tight.

The strength of oil prices has been supported by OPEC’s overall efforts to manage supply. Ali bin Ibrahim al-Nuaimi, the Saudi oil minister, repeated yet again in late April that OPEC's aim was to keep the market well supplied with oil at an average price of US$25/b for the OPEC basket. It was in pursuit of this target price that OPEC oil ministers, meeting in Vienna in mid-March, decided to take pre- emptive action by implementing a second round of production cuts in as many months. Since oil prices were within the US$22-28/b price band at the time of their decision, the cut they agreed could not be said to fall within the terms of the price stabilisation mechanism agreed informally in April 2000. Instead, it came in a long line of output adjustments over the past two years, prompting OPEC's president, the Algerian oil minister, Chakib Khelil, to deny that the organisation was trying to "micro-manage the market". Although the cut was criticised by officials in the US and EU, the US president, George W Bush, later conceded that the OPEC cutback was in line with falling demand for oil on world markets and that OPEC did not want its basket price to exceed US$28/b.

OPEC manages supply On June 5th OPEC met once again to consider production adjustments, with the expectation that with prices comfortably within OPEC’s target range, no action would be required and existing quotas would be rolled over. However, only one day ahead of the meeting, Iraq, in protest at the prospect that the UN oil-for-food sanctions regime would be replaced by so-called smart sanctions, decided to withdraw 2.1m b/d of Iraqi crude from the market. As a result, the OPEC meeting focused on what action OPEC would take to make up for the shortfall should Iraq persist in withholding its oil from the market. It appeared a consensus was formed for OPEC, mainly Saudi Arabia and other Gulf producers, to step in to fill the gap with around 2m b/d. However, because of Iraq’s past behaviour of withdrawing its oil from the markets only to bring it back on shortly thereafter, no final decision was taken. Instead, OPEC ministers agreed to meet on July 3rd to review the market situation. While it was not mentioned in the final communiqué, the hope was that the Iraqis would restore their oil to the market to avoid that eventuality.

Trends in spot quotations for selected crudes (US$/b) 1999 2000 2001 Year 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr Apr May Arab Light (33° API) 17.45 25.81 28.21 27.74 26.81 23.53 24.24 25.77 OPEC reference basketa 17.47 26.38 29.17 28.73 27.60 24.36 24.38 26.25 Brent 17.91 26.74 30.48 29.63 28.44 25.76 25.37 28.35 West Texas Intermediate 19.30 28.83 31.70 32.09 30.37 28.78 27.37 28.60 a Includes Saharan Blend, Minas, Bonny Light, Arab Light, Dubai, TJ Light and Isthmus. Source: Middle East Economic Survey (MEES).

Kuwait’s oil quota back The overall 1m b/d quota reduction agreed at the OPEC meeting in mid-March below 2m b/d represented the halfway mark between a larger reduction sought by Venezuela, Indonesia and others, and a smaller one preferred by Saudi Arabia and most other Gulf states. For Kuwait, the agreement meant a reduction of 80,000 b/d, taking its quota back below 2 m b/d for the first time since July 2000, although actual Kuwaiti production was at or above 2m b/d from April 2000 to May 2001. With effect from April 1st 2001, Kuwait’s official quota stood at 1,941,000 b/d, the sixth highest out of the ten OPEC members participating in the quota programme. Industry data emerging in April and May indicated that Kuwait, along with Saudi Arabia and Qatar, was in a minority of OPEC states actually reining in production as agreed. Although it implemented only 88% of the 120,000 b/d it accepted for February and March, Petroleum Intelligence Weekly (PIW) reported an actual reduction of 83,000 b/d in April, taking Kuwaiti quota compliance to 94% over the three-month period to end-April. According to PIW estimates, this was the most disciplined performance of any of the OPEC-10 and compared with compliance levels for February-April of just 34-38% for the UAE, Iran, Libya, Algeria and Nigeria.

Crude production and quotas (’000 b/d) 2000 2001 Quotas Year Jan Feb Mar Apr May Feb 2000 Apr 2001 Kuwaita 2,085 2,200 2,130 2,125 2,005 2,050 2,021 1,941 OPEC (excl Iraq) 26,400 26,800 25,650 25,670 24,790 24,860 25,201 24,201 OPEC (incl Iraq) 27,670 28,500 27,620 28,270 27,640 27,730 n/a n/a a Includes 50% share of Neutral Zone output. Sources: MEES; Petroleum Intelligence Weekly; International Energy Agency.

Forecasts of oil demand The downward trend in forecasts of world oil demand during 2001 has keep on falling continued relentlessly, as economic growth has slowed in the US and stalled in Japan. In the May edition of its Monthly Oil Report, the International Energy Agency (IEA) forecast world oil demand in 2001 at 76.5m b/d, down from a forecast of 77.3m b/d made at the beginning of the year, and one of 77.6m b/d in October 2000. The Organisation of Arab Petroleum Exporting Countries (APEC), based in Kuwait, published a more optimistic forecast of world demand in its April bulletin, in which it projected demand for the year as a whole at 77.5m b/d. The US Energy Information Administration’s April forecast for average demand in 2001 was 77.1m b/d. Under the IEA’s May figures, the implied call on OPEC crude for the year will be 27m b/d. This figure, which includes Iraqi output, compares with actual total OPEC output of over 28m b/d in February and March and 27.85m b/d in April. The consensus view at present is that growth in the major OECD economies will start picking up again in the fourth quarter. If this rebound fails to materialise in the given timeframe, the call on OPEC will be lower still.

World oil supply and demand: IEA estimates and forecasts (m b/d) 2000 2001 Year 1 Qtr 2 Qtr 3 Qtr 4Qtr Year World oil demand 75.5 76.7 74.9 76.5 78.0 76.5 Non-OPEC supplya 48.8 49.3 49.2 49.4 50.0 49.5 Call on OPEC crude 26.7 27.4 25.7 27.1 28.0 27.0

a Including OPEC natural gas liquids (NGLs). Source: IEA, Monthly Oil Market Report, May 2001.

Chinese-built gathering Kuwaiti crude supplies to China are set to rise in 2001 under the terms of two centres run below capacity supply deals agreed by the Kuwait Petroleum Corporation in April. Deliveries to United International Petroleum and Chemicals Company of China will increase from a total of 2.5m barrels in 2000 to 7.3m barrels this year, while deliveries to Chinaoil will start at a rate of 4m barrels per year in 2001. Oil has played an important part in Kuwaiti-Chinese relations in recent years. The Cyprus-based oil newsletter, Middle East Economic Survey, recently reported that, when Kuwait opted to appoint a Chinese company to build two large oil gathering centres in the west of the country in 1995, its choice was politically motivated, since Kuwait was seeking support from China as a permanent member of the UN Security Council. The contract, worth over US$380m and

awarded to the China Petroleum Engineering Construction Company, was aimed at increasing the crude production capacity of Kuwait’s western oilfields, with completion due in 1998. Work has run much behind schedule, however. Both centres, GC-27 and GC-28, have been officially inaugurated but are still operating below their respective capacities of 190,000 b/d and 210,000 b/d.

Refinery repairs continue Shuaiba refinery was closed down for six weeks, from end-April to early June, to allow for the installation’s first major routine repair and maintenance programme since 1996. A gas leak at the refinery in June 2000 killed two people and injured four others, in the sixth incident of its kind at Shuaiba since 1991. Another small fire broke out at the refinery in April but no casualties were reported. Whereas output from Shuaiba was not affected by the recent accidents, the Mina al-Ahmadi refinery, severely damaged by an explosion in June 2000, is undergoing repairs and renovation that could take nearly three years to complete. Fluor Daniel of the US and SK Engineering & Construction of South Korea are main contractors for the work, which has been subdivided into packages worth US$10m to US$200m each. Bidding for these subcontracts is currently under way. The refinery’s current capacity of 285,000 b/d is due to be boosted to its original 450,000 b/d in August 2002.

Project Kuwait discussions Difficulties between the government and National Assembly over legal, have wider ramifications financial and technical aspects of the northern oilfields development scheme, Project Kuwait, are having repercussions on oil exploitation in other parts of Kuwait. A Japanese firm, Arabian Oil Company (AOC), has produced oil from the Khafji and Hout fields in the Neutral Zone since the 1960s under a 40-year concession that is due to end in January 2003. Oil from the Neutral Zone is shared equally between Saudi Arabia and Kuwait, and Saudi Arabia’s approach to the issue could influence AOC’s approach to negotiating a renewal for its agreement with Kuwait. Saudi Arabia refused to renew the AOC concession for the Saudi portion of the Neutral Zone when it expired in February 2000, partly because it felt the Japanese side was not offering enough in the way of investment in non-oil sectors of the economy.

In Kuwait’s case, AOC made it clear at the end of March this year that it was ready to invest in increasing production capacity in the concession area and, in the process, to offer a large number of jobs to Kuwaitis. While the employment aspect is attractive to Kuwaiti negotiators, AOC’s proposed future role in the Neutral Zone is too similar to that envisaged for international oil companies in the northern oilfields for MPs to accept it uncritically. One suggestion is that the AOC concession be made subject to a new law, meaning that it would have to have parliamentary approval before being renewed.

MPs compare oil A delegation of MPs left Kuwait for Norway on May 13th, for a tour that would development to elsewhere take them to Saudi Arabia, the UAE and Iran, in pursuit of information about the modalities of oil development. Led by Abdel-Wahab al-Haroun, the chairman of the National Assembly’s Finance and Economy Committee, the delegation was due back in Kuwait for the major debate on Project Kuwait scheduled for May 30th. Mr Haroun told reporters, after a meeting of the Finance and Economy Committee on May 7th, that MPs were not ruling out

foreign involvement in oilfield development. He said one possible option, in place of the 20-year investment programme envisaged by the government, would be to award service contracts for shorter periods.

Project Kuwait pre- Pending the outcome of parliamentary debates on the issue, Adel al-Subaih, qualification not finalised the oil minister, has said that his ministry will proceed with non-contractual aspects of the Project Kuwait negotiations with oil companies. This refers, among other things, to the requirement that the nine companies prequalified for an operating role in Project Kuwait, and the 15 companies prequalified as non-operators, should form consortia and gain the government’s approval for these groupings before submitting investment proposals. However, the minister has also indicated that the pre-qualification process need not be regarded as final. After several discussions with members of the Finance and Economy Committee, Mr Subaih said that if MPs objected to the procedures used to prequalify companies for Project Kuwait, other companies could be invited to take part.

Gas supply deal with Qatar Discussions on the pipeline that could eventually supply Kuwait with around makes progress 1bn cu ft/day of natural gas from Qatar’s North Field are proceeding, with the focus on issues such as price and the facilities needed on the Kuwaiti side. Kuwait and Qatar signed a Memorandum of Understanding on the project last July and subsequent studies have established that the pipeline, roughly 590 km in length, will go by the sea rather than the land route, provided the governments of Saudi Arabia and Bahrain agree to it traversing their economic interest zones in the Gulf.

Infrastructure and services

Islands to be developed as The islands of Failaka and Bubiyan are to be developed as tourist resorts as part tourist resorts of the plan to link Kuwait City, via a causeway across Kuwait Bay, to a new city in Subiya. Work on the KD200m (US$652m) causeway project is expected to start in 2003 and take around four years (see March 2001, page 28). The schedule for construction work on the islands, including hotels and other holiday accommodation, leisure facilities and new jetties, has yet to be decided. Bubiyan, the larger of the two islands, with an area of about 530 sq km, extends very close to the border with Iraq. Before Iraq invaded Kuwait in 1990, it attempted to gain access to the Kuwaiti islands of Warba and Bubiyan as a means of enhancing its maritime access to the Gulf.

Sulaibiya contractors The construction contract for the Sulaibiya wastewater project, with a treatment promise financial savings capacity of 300,000 cu m/day, was finally signed on May 7th. This will be the first wastewater treatment and reclamation scheme in the region to be carried out on the basis of the build-operate-transfer (BOT) basis. It will be built under a 30-year concession granted to a consortium led by Mohammed Abdulmohsin Kharafi Group, including Ionics and Bechtel of the US and United Utilities of the UK. It is estimated that Sulaibiya could serve up to 60% of the total population of Kuwait. The winning consortium bid for the contract on the basis of a wastewater treatment price equivalent to 47 US cents/cu metre. In March a

representative of the Kharafi Group told a conference, organised by Middle East Economic Digest in Abu Dhabi, that the Kuwaiti Ministry of Electricity and Water currently pays between US$1.45 and US$1.67 for every cubic metre of water produced by desalination. Since the charge for water in the emirate is only 58 US cents/cu metre, the government is effectively subsidising almost two-thirds of the cost. With the cost of treated water from Sulaibiya put at less than the existing water tariff, considerable savings are foreseen, especially since much of Kuwait’s desalinated water currently ends up, after treatment, back in the sea.

Kuwaiti bank stake is sold The first non-Kuwaiti purchase of a stake in a Kuwaiti bank was announced in to a foreign buyer March with the acquisition by Ahli United Bank of Bahrain of a 15% stake in Bank of Kuwait & the Middle East from Kharafi Group. The US$132.8m transaction turned Ahli United Bank, a Bahraini offshore banking unit, into the second biggest shareholder in Bank of Kuwait & the Middle East. This placed it behind the Kuwaiti government, which has a 58% stake, and ahead of the state pension fund, which holds 11%. The remaining 16% is in the hands of private shareholders. Ahli United Bank is believed to have made the move because of its sizeable Kuwaiti shareholder base; it already owns United Bank of Kuwait, which is based in London.

2000 profit growth exceeds National Bank of Kuwait (NBK), the country’s biggest bank in terms of total 7% for NBK and KFH assets and one of the world’s top 250 banks (according to a survey conducted by The Banker magazine), announced net profit of KD27.7m (US$90.4m) for the first quarter of 2001, representing a rise of 13% on profit for the corresponding period of 2000. For 2000 as a whole it achieved a 7.6% increase in net profit and a 7.8% increase in total assets, taking the latter over KD4bn, equivalent to around one-third of the total assets of Kuwaiti commercial banks. In 1999 NBK was pronounced the most profitable Arab bank. Its 2000 performance was nearly matched in terms of relative profit growth by Kuwait Finance House (KFH), which operates on Islamic banking lines. KFH achieved a 7.2% rise in net profit in 2000 and a 14.5% rise in assets. While the Kuwaiti banking sector has recently been opened up to non-Kuwaiti ownership, a comparable opening in the UAE has benefited KFH. National Bank of Sharjah announced in March that it would undergo two major changes: converting itself into an Islamic bank and allowing KFH to purchase a 10% share.

Results for selected commercial banks (KDm) Net profit Total assets 1999 2000 % change 1999 2000 % change National Bank of Kuwait 93.3 100.4 7.6 3,796.9 4,093.2 7.8 Kuwait Finance House 44.4 47.6 7.2 1,769.5 2,025.6 14.5 Burgan Bank 3.3 20.0 509.8 1,148.9 1,136.8 –1.1 Bank of Kuwait and the Middle East 12.0 14.2 18.3 n/a n/a n/a Sources: MEES; MEED

Banks’ net foreign assets The combined net foreign assets of Kuwaiti banks were 78.9% higher in soar February 2001 than they were in February 2000, and 66% higher in March 2001 than in March 2000, according to data released by the Central Bank of

Kuwait. The March rise was achieved partly through a 21% increase in total foreign assets, and partly through a 3.6% decline in total foreign liabilities. Total foreign assets, including gold, held by the Central Bank of Kuwait amounted to KD2.52bn (US$8.2bn) at the end of April 2001, up from KD1.67bn in the year, a 50.8% increase. The rise in net foreign assets of Kuwaiti banks, and of the total foreign assets of the Central Bank of Kuwait, can be traced to strong international oil prices.

Net foreign assets of local banks (KD m; end-period) 1999 2000 2001 Year Feb 1 Qtr 2 Qtr 3 Qtr 4 Qtr Feb Mar Total assets 1,786.7 1,719.2 1 838.5 1,938.9 1,892.0 1,968.4 2,116.7 2226.1 Deposits with foreign banks 501.7 452.5 520.3 645.6 575.5 691.3 712.1 n/a Credit facilities to non-residents 848.4 910.0 960.5 952.2 970.2 959.6 1,060.8 n/a Foreign investments 372.4 317.0 315.0 304.8 310.7 282.9 283.8 n/a Other assets 50.0 39.6 42.7 36.3 35.6 34.6 60.0 n/a Total liabilities 1,207.9 1,199.0 1,187.6 1,319.5 1,371.1 1,952.1 1,186.0 1145.1 Net foreign assets 578.8 520.2 650.9 619.4 520.9 773.2 930.7 1,081 Source: Central Bank of Kuwait.

Gulf governments become The Kuwait-based Gulf Investment Corporation (GIC), jointly owned by the direct owners of GIB governments of the six Gulf Co-operation Council states, announced in May that it intended to pass its 72.5% stake in the Bahrain-based Gulf International Bank (GIB) directly to its shareholders. The move, accompanied by management changes at GIB, was seen as a first step towards the bank’s eventual privatisation. The remaining shares in GIB are currently held by the Saudi Arabian Monetary Agency (SAMA, the Saudi central bank), which acquired a 22.2% stake when GIB merged with Saudi International Bank in 1999, and JP Morgan Chase & Company, which has a 5.3% stake. Banking analysts point out that GIC’s balance sheet will be much reduced by the GIB ownership change, raising questions about GIC’s future strategy. Signals from inside GIC indicate that it intends to scale down its exposure to global equity markets in order to concentrate on direct investment.

Foreign trade and payments

Current-account surplus Kuwait ended 2000 with a current-account surplus of KD4.6bn (US$14.86bn), almost trebles in 2000 according to preliminary figures from the Central Bank of Kuwait. This is nearly three times the KD1.5bn surplus achieved in 1999 and is the result of a combination of factors, including a 66% increase in earnings from oil exports, a 36.5% rise in net income from interest, profits and dividends, as well as a modest 2.8% increase in imports. Oil exports accounted for 92.8% of total merchandise exports in 2000, compared with 90% the previous year. The merchandise trade balance was up to KD3.9bn, while the net balance on goods and services was KD3bn. Remarkably, the current-account surplus was equal to 39.4% of provisional GDP at current prices in 2000. According to comparative EIU country data, this was the highest such ratio in the world.

Current account (KD m) 1999 2000 % change Exports 3,726 6,005 61.2 Oil 3,357 5,572 66.0 Imports –2,042 –2,100 2.8 Trade balance 1,695 3,905 130.4 Services (net) 1,099 888 –19.2 Income (net) 1,555 2,122 36.5 Current account balance 1,541 4,561 196.0 Source: Central Bank of Kuwait.

Arab summit endorses free- Plans for a pan-Arab free-trade agreement were endorsed at the Arab summit trade agreement meeting in Amman at the end of March. The Amman Declaration, issued at the end of the meeting, stated that each Arab country would "take the necessary steps…according to its own circumstances" to speed up work towards the creation of an Arab Free-Trade Area (AFTA). Arab trade and industry ministers had met before the summit to discuss the free-trade proposals, displaying a greater sense of determination than has been the case in the past. Although the idea of an Arab common market has been around for decades, this time it will be carried forward at a specially convened Arab economic summit meeting in Cairo in November. So far, however, beyond the date for the summit, no timetable has been agreed for implementing the various components of a free-trade agreement. The target date attached to the proposals is 2005, the same as for the customs union to be formed by the six member states of the Gulf Co-operation Council (GCC), namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

GCC-EU trade talks make Harmonisation of GCC customs tariffs is likely to attract continuing attention little progress in coming months in the wake of the latest round of GCC talks with the EU, and in the run-up to the next World Trade Organisation (WTO) ministerial meeting due to take place in Doha, the capital of Qatar, in November. GCC leaders agreed in November 1999 to unify their customs tariffs by 2005. In doing so, they believed they had fulfilled one of the major prerequisites set by the EU for progress towards negotiating an EU-GCC free-trade agreement. Such an agreement would benefit GCC exporters of aluminium and petroleum products that are currently subject to EU import duties. However, when GCC foreign ministers met their EU counterparts in Bahrain on April 23rd for the 11th annual session of talks on trade between the two groups, GCC negotiators made no attempt to hide their impatience at the lack of progress over the years. Prince Saud al-Faisal, the Saudi foreign minister, complained that the EU was not treating the GCC in the same way it treated other trading blocs. Pascal Lamy, the EU trade commissioner, countered by saying that world trade had changed since talks on EU-GCC free trade first started and that the EU is more concerned these days with issues such as intellectual property, government procurement and foreign investment in services.

EU has a big surplus of The joint EU-GCC communiqué issued at the end of the Bahrain meeting said trade with the GCC it was important for the EU to finalise its new negotiating directives as soon as

possible to speed up the EU-GCC negotiations. Overall, the talks hit a somewhat sour note. Bahrain’s foreign minister, Sheikh Mohammed bin Mubarak al-Khalifa, pointed out that the EU enjoyed a surplus of some US$11bn in its trade with the GCC in 1999, and that its cumulative surplus since the EU-GCC free-trade talks started in June 1988 had reached US$100bn. He warned that, in the absence of more speedy progress towards finalising a free-trade agreement, the GCC might reconsider its options.