Thursday, June 13, 2013
Kuwait Turns a Critical Eye to Expats
It looks like the move by Kuwait to reduce the number of expats is heating up. Thousands have been deported so far and the goal is to reduce the number of expat visas by 100,000 a year for the next 10 years -- not a small number given the total population of the country (expats and citizens) is around 3 million:
And Kuwait’s new policy of Kuwati-only mornings at hospitals has been rolled-out at one hospital where it will be tested for six months before possibly being expanding to the entire country, further seen as a sign that Kuwait is discouraging expats:
So what’s been driving these measures? Well if you read the news most people point to a large number of illegal workers in the country, a lack of employment opportunities for Kuwaitis as expats are taking most of the good jobs, and crowding at hospitals and other facilities because of all the expats.
As for the number of illegals I have one Kuwaiti friend who did tell me once that illegals are a problem there, some Kuwatis run visa-schemes where people from South Asia pay a sum of money to a Kuwaiti and in return he sponsors them to come to Kuwait, telling the Government about fake jobs that they will supposedly be working, at which point they arrive and roam around doing whatever work they can, likely in the underground economy, to earn money. A recent article in Arabian Business stated the Indian Embassy estimates there are likely 20,000 illegal Indians in Kuwait. There’s probably a similar number of illegal Pakistanis. I’m not sure if that is the only problem, there may be a lot of people from other troubled countries in the region like Iraq, Syria, or Egypt who had made their way into Kuwait as well.
As for the employment I think the Government is starting to get concerned. The country has a large youth population that will be looking for work soon, so the Government is taking measures to try to ensure job opportunities go to citizens.
But I suspect there is another driver, finances. Take a look at these two paragraphs from a recent IMF report on Kuwait:
16. Nonetheless, rising public sector wage and pension costs and rapid population growth are expected to exert pressures on public finances. The average real and nominal growth rate of the public sector wage bill has more than doubled in the last six years (2006/07–2011/12), to 8 percent and 13 percent, respectively (Figure 8). The continuation of such a trend could put significant pressures on government finances—via higher wage payments, government pension contributions, and an increase in the unfunded liabilities of the pension system—and would be difficult to reverse if oil prices were to decline significantly in the future. The cost to the pension system is onerous for Kuwait, particularly given its low retirement age (see Annex 1) and generous benefits.18 Finally, rapid population and labor force growth—about 60 percent of the Kuwaiti population is under 24 years—is likely to put increasing pressures on public sector employment and the provision of public services going forward.
17. Fiscal consolidation is therefore needed in the medium term if current spending trends continue. The mission estimates that government expenditure will exhaust all oil revenues by 2017, which means that the government will not be able to save any portion of these revenues for future generations (Figure 9). In this context, medium-term benchmarks for government expenditure can help the government determine its fiscal envelope in order to target intergenerational equity in the distribution of oil resources. Kuwait’s nonoil primary deficit is already above the estimated baseline benchmarks (based on the permanent income hypothesis), and some fiscal consolidation would be needed in the medium to long term (Figure 10, upper panel). In this context, an adjustment of at least 12 percentage points of the nonoil primary deficit to GDP (or KD 7 billion against a projected expenditure of around KD 25 billion in 2017) would be needed by 2017 to ensure long-term fiscal sustainability. The need for fiscal consolidation is larger and more urgent in a scenario of lower oil prices.
Paragraph 17 is pretty shocking -- despite all of their oil wealth the IMF estimates that, if oil prices remain relatively stable, the Kuwaiti Government’s spending will still exceed the revenue earned from oil by 2017. If oil prices drop this could happen even sooner.
Kuwait appears to be under pressure to either earn more revenue or start spending less. Since so many things are subsidized (medical, water, power etc.) one way to save some money is to reduce the population, thus reducing amount of money spent subsidizing many services. Combine that with concerns about upcoming youth employment (60% of Kuwaitis are 24 and younger!), and on the face of it reducing the number of expats looks like a "two birds with one stone" kind of solution. I also suspect it could help reduce inflation, especially with rental prices, driving down real estate prices as the overall population shrinks. This will reduce pressure on the Government to have to increase housing allowances and other subsidies to keep up with spiraling rents.
Is raising revenue also possible? You’ll see further along that they’ve already been increasing oil output over the last number of years so I don’t think the solution lies there. Taxation? I saw it mentioned in the health article but that is the first time I've heard of the issue being discussed so I'm not sure if Kuwait is seriously thinking about that route. Large-scale tax regimes can be costly to implement so in a country of 3 million one would have to weigh the costs with the revenue that would be collected.
There’s also the question of how much oil Kuwait has left. British Petroleum does a great report every year on world energy reserves:
Proven oil reserves by country are listed on page 6. One problem with OPEC producers is the only source of information you have is what the individual countries themselves disclose. So what kind of reserves does Kuwait have?
1991: 96.5 billion barrels
2001: 96.5 billion barrels
2010: 101.5 billion barrels
2011: 101.5 billion barrels
Kuwait’s oil reserves have not decreased from the 1991 figure. In fact that 96.5b figure was established in 1985! There's not been any decrease to their reserves for the oil they have produced and sold, nor for the Iraqi invasion (when the Iraqis lit many of the wells as they were leaving, causing an estimated loss of 1 to 1.5 billion barrels). The official figure can’t be correct.
Page 8 of the report lists the production, in thousands of barrels per day. I’ll give the last 5 years in terms of barrels per year:
2007: 966m barrels
2008: 1,007m barrels
2009: 904m barrels
2010: 919m barrels
2011: 1,046m barrels
Now production is higher than it has been in the past but if we assume an average production of 850m barrels a year since 1985 it equals production of 24.2 billion barrels since the “96.5b” figure was originally created.
If the 96.5b figure was correct then Kuwait has around 72b left (around 65-70 years of production) but that’s only if those “proven reserves” were actually proven. There are some doubts. For example if you google around there is some mention of a leaked memo purported to be from Kuwait’s Ministry of Oil from 2001 which noted that the real reserves were far lower. Unfortunately there was no way to verify whether the memo was authentic, and if it was, then Kuwait could have as little as 15-20 years at current rates of production.
While I think the current stated reserves are overinflated I also suspect that unless that leaked memo can be verified as authentic I don't think 15-20 years is likely either or the Kuwaiti Government would have been acting far sooner to reduce expenses. I think it's something in between, possibly 25-30 years. In the meantime Kuwait is also facing potentially having to spend more than it makes on oil just to maintain its current system. The Kuwaiti Government may have realized that it needs to start doing something or else 25 to 30 years down the road it will find itself financially in a very bad position. Given that, I can't see the situation for expats changing there.