Oil wealth and the General Reserve Fund
Kuwait traces its oil back to 1933, forming the Kuwait Oil Company with inaugural exports of the commodity in 1946 (Tétreault, 1995). Oil wealth plays a commanding role in Kuwait’s economic society and governing system, not to mention the state budget. In turn, HH Sheikh Abdullah Al-Salem Al-Sabah, founded the Kuwait Investment Board in 1953, today known as the Kuwait Investment Authority (KIA). The KIA was established with the purpose of managing oil revenue “to promote the sustainable development and welfare of the Kuwaiti people for generations to come” (KIA, 2009). In order to carry out this vision, the KIA set up the first Sovereign Wealth Fund (SWF) known as the General Reserve Fund (GRF) acting as an economic stabilisation fund.
Institutional organisation of public finances
Almost 70 years later, the KIA is responsible for the management and administration of the Kuwait SWF, which today consists of two funds, the GRF and the Future Generations Fund (FGF). Primarily, the GRF acts as the treasury account for the state budget as depicted in Chart 1. More specifically, the GRF allocates oil and non-oil revenues (minus investment income) to the state budget for current and capital expenditures. In cases where revenues exceed expenses, surpluses are transferred to the fund. On the other hand, the GRF also transfers funds to cover budget deficits.
The FGF, by an Amiri decree in 1976, was formed as a savings fund to ensure intergenerational equity. The decree states that “a minimum of 10% of all state revenues and 10% of the net income of the GRF are [to be] transferred to the FGF” (KIA, 2009) while no funds are to be withdrawn from the FGF.[1] With savings hinging on total revenues, transfers to the FGF fluctuate and do not follow a cumulative transfer scheme. In a 2020 report by the IMF, researchers estimate that the FGF is not accumulating enough savings for future generations. It is interesting to note that, over the last ten years, average transfers to the FGF amount to 2bn dinars year-on-year. Meanwhile, average non-oil revenues since 2010 come to approximately 2.9bn dinars. Therefore, if we were to apply the same metric of savings to a scenario with which Kuwait relies solely on non-oil revenues, average yearly savings, at 10% of revenue, would amount to 290mn, or a 90% loss in savings capacity.
Another key component of Kuwait’s public finances, the state budget, is set each fiscal year and covers expected oil and non-oil revenues as well as current and capital expenditure.[2] The majority of the capital inflow to the state budget are oil rents which account for 90% of total revenues in FY 2018/19. Funds from the state budget are allocated to State and Ministries’ Departments (SMDs). Meanwhile, capital outflow from the budget occurs in the form of current and capital expenditure. In relation to the budget balance, the GRF receives any budget surpluses or covers budget deficits. Transfers between the GRF and state budget are not governed by fiscal rules. The sole applicable rule involves transfers between the budget and the FGF. Nonetheless, cases such as the SOFAZ in Azerbaijan, shed light on risks of unregulated transfers from the SWF to the state budget which may “threaten fiscal sustainability” (Aslanli, 2015). Although the magnitude of the transfer is not regulated, the state budget is governed by a three phase process led by the Ministry of Finance (MoF).
Budget governance
The governance structure, by which the annual state budget is set, has been passed according to Amiri decree 32 in 1978, shown in Chart 2. This visual representation of the process highlights three stages, with the Minister of Finance playing a key role in drafting, approving and passing the budget as a Budget Law.
As per the outlined process, the Minister of Finance must determine and justify any increase or decrease, from the previous year, in the annual budget. All SMDs are required to propose their expected revenues and expenses to the Ministry of Finance to pass on for technical study. According to this structure, the Civil Service Commission (CSC) and Ministry of Planning (MoP) play a vital role in both drafting the framework for the budget as well as studying the technical feasibility of budget estimates. Therefore, it is the responsibility of the CSC and MoP to assure the MoF of the efficiency and feasibility of expected expenditure and revenue estimates. Nonetheless, particulars of the studies carried out and the individual responsibilities are not apparent between both parties and not made public. In addition, the framework by which the feasibility study is measured is not made available.
On top of the above mentioned responsibilities, the Minister of Finance also holds a board-level position on the KIA, which governs the GRF. Therefore, he/she partakes in both ends of the budget transfer mechanism from the SWF to State budget. In sum, it is critical that the purpose of the process, the aim of the funds, and the role of the key actors, in particular, the KIA and the Minister of Finance, are well-defined to ensure the efficiency and fairness of the institutional organisation of public finances.
[1] It is worth noting, that during the Iraq invasion of Kuwait in 1990-91, the government resorted to withdrawing funds from the FGF.
[2] Fiscal year starting from April to March of the following year.
[3] Submitted two months prior to the end of the fiscal year.