(MENAFN- Arab Times) Kuwait's parliament appr-oved the country's budget for FY2015/2016, forecasting a deficit of KD 8.2bn ($27bn), including the transfer of 10 percent of the revenues to the Future Generations Fund. Forty-seven members of parliament (MPs) voted for the budget whereas four members opposed the budget. This deficit, which represents about half of the total spending, is mainly attributed to tumbling of crude oil prices, which highlights the impact of lower export earnings for Kuwait.
This forecasted deficit is significantly higher than Kuwait's provisional budget deficit for FY2014/2015 which stood at KD 2.3bn, after contributions to the country's Future Generations Fund.
Budget Details:
The Kuwait lawmakers approved a budget allocation, comprising KD 19.1bn in expenditure and revenues of KD 12.1bn. Revenues and expenditure were projected at KD 20.1bn and KD 23.2bn, respectively in the previous year.
Notably, Kuwait has projected budget deficit every year, while it ended up with budget surplus due to its conservative oil price estimates. Hence, higher crude price (we expect average crude price would remain at a range of $60-65/bbl throughout the year) would narrow down the actual deficit, and might end up with marginal surplus, if crude price heads towards north.
Budget based on oil price of $45/barrel, down from $75/barrel
Oil income (normally contributes over 90 percent of total public revenues), is projected to decline sharply by 42.8 percentYoY and to come in at $38.8bn (KD 10.8bn). Oil income has been calculated on the basis of a price of $45/barrel, down from last year's $75/barrel, while the country's average production is projected at 2.7mn barrels per day. Kuwait oil prices currently hover around $59.8/barrel while its production is at 2.65mn barrels per day.
According to Member of Parliament (MP) Adnan Abdul Samad, Kuwait will post a budget deficit as long as oil prices remain below $77/barrel.
Historically it was seen that, the actual Kuwait crude export price always remained higher than the budgeted crude price by the ministry, which adds cushions to the budgeted deficit, and also confirms that there is least possibility to increase budgeted deficit. Furthermore, the deficit would narrow down if the government curtail down its spending plan post mid-year.
Strong financial reserves to provide a cushion
Kuwait's huge financial reserves mean it remains far from any fiscal crisis as sustained surpluses since 2000 have boosted fiscal reserves of its sovereign wealth fund. According to estimates of the Sovereign Wealth Fund Institute, Kuwait's sovereign wealth fund holds $548bn of assets.
Focus on diversification key to insulate from impact of lower oil prices
According to Finance Minister Anas Al Saleh, Kuwait is facing a very difficult financial situation and must control the growth in spending and diversify its sources of income so as not to remain entirely dependent on oil. Moreover, the Finance Minister also stated that it has become essential to embark on financial reforms and also rationalize public spending.
After falling below the levels of $50/barrel, Brent Crude has recovered and is currently trading above $60/barrel. Thus, the actual deficit at the end of year would most likely be lower than expected. According to Finance Minster, the deficit will be about KD 4.5bn if oil stays in the mid-$60/barrel.
Moreover, Kuwait in the past has often underspent its budget due to bureaucratic red tape and also issues between the cabinet and parliament that have slowed economic projects. This could also limit the deficit at the end of the year.
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