The year 2003 was a year of fundamental change for Kuwait. The second half of the year in particular has shown elements pushing the economy forward. The country reinforced its economic stability and investor confidence has increased manifold as the opportunities in the region and the neighboring GCC nations have opened up. The high oil prices are helping in implementing the new government's plans and initiatives aimed at reforming and invigorating the Kuwaiti economy. An additional sign of health and vitality is the fact that the Kuwaiti investments abroad regained a good deal of their formerly substantial strength over the last few years.

Economic performance

The government has placed priority in privatization, northern oilfield development (Project Kuwait) and foreign investment issues. As far as privatization is concerned, the BOT method has become the favored strategy to promote the private sector to play a more active role in the national economy. Mega-projects, following the model of the Sulaibya Water Treatment Plant, are expected to sprout up. The development of the relatively barren Failaka and Boubyan islands as well as the development in the Abdali border region, are just to name a few.
The government is also making an effort to diversify its revenue base through the implementation of an income tax on capital and commercial activities. Two laws were introduced which would place a tax on income from commercial, industrial, real estate and certain other non-commercial activities regardless of the nationality of the owner.
The topic of foreign direct investment has come into the spotlight due to the realization of its important role in strengthening the domestic economy. A law was passed, witnessing a positive step forward, which would implement the foreign direct investment law, originally passed in 2001. The law stipulates that foreigners will be allowed to take a 100% ownership stake in Kuwaiti companies.

Most economic sectors, with the exception of oil exploration and production, water, power, telecommunications and sewage treatment, will be open to foreigners. The position of Kuwait as a main gateway to Iraq convinced international companies to seek some presence in Kuwait.
The government is taking steps as well to wave red-tape. A major measure would be to reduce the 55% income tax on foreign firms to a maximum of 25%. Other incentives for investors include tax holidays for up to 10 years and exemption from customs and charges on raw materials.
The performance of the banking sector has seen substantial improvement in recent years. Banks have been able to restructure their balance sheets to offset lower income resulting from weak interest rates. The real estate and investment sectors now rank among the best performers and the improved state of the capital market has helped investment companies achieve record profits. High levels of liquidity, lower interest rates and limited investment channels have driven the real estate market to record levels too. The capital market has also seen important gains since 2003 and the local and regional changes have favorably influenced the Kuwait Stock Exchange, one of the largest in the Middle East.

Future prospects

While striving to achieve the highest possible economic growth, the government's long term strategy seeks to diversify the Kuwaiti economy, and free it from the near-total dependence on oil revenues. To achieve that, the government is working in close coordination with the private sector with a view to enabling this sector to play a major role in the national economy. Plans are also drawn to convert Kuwait into a financial commercial and services center to serve the northern Gulf area and beyond.
Kuwait has furthermore been identified as a priority market for the oil and gas sector as a result of the investments needed for both sectors to maintain the high level of production. "Project Kuwait" also takes into account the potential to develop the gas sector, to increase the capacity of the country's refineries and enhance the petrochemical sector with higher value exports. Large reserves of both oil and gas ensure that this market represents a long-term business opportunities.
Kuwait has opened some of its existing fields to foreign companies' involvement in the form of technical assistance contracts. The Kuwait Petroleum Corporation (KPC) plans to increase production capacity to 3,5 million barrels per day by the end of 2005 at a projected cost of US$ 13 billion. Production in the northern sector is planned to increase by a total of 360,000 barrels per day with comparable increase planned at two fields in the western sector, totaling 330,000 b/d.
In addition, Kuwaiti officials have expressed interest in accelerating development of the country's relatively small petrochemical industry. This would accomplish several goals: boosting the value of the country's crude oil reserves, helping to protect revenues during period of low crude prices, and boosting the country's revenues while adhering to OPEC crude oil quota limitations. In the past, Kuwait's Petrochemical Industries Company has mainly manufactured low value added products such as urea, ammonia and fertilizers. The company is now moving up the market to produce higher-value added products.

The first challenge in the petrochemical industry is represented by the limitation of the natural gas reserves: gas is mainly associated with the oil fields and production is limited due to OPEC ceilings. The second challenge is to develop a clear pricing policy for natural gas and the third challenge is the limited scope in the local market for petrochemical products, compared with the country's neighbours which have larger markets.
Since mid-2003, foreign investors have been pouring into the region with the prospect of utilizing the vast oil and gas reserves. Kuwait is among the leading countries in hydrocarbon assets and is looking to harness the oil majors' technical and financial resources to boost its own capacity.

Project Kuwait, a plan to utilize foreign investment to double production capacity to 900,000 barrels per day at five northern oil fields, has been on the drawing board since 1998. But since the end of the Iraq conflict, there has been a surge of activity. Three consortia of international oil companies, led by Chevron Texaco, BP and Exxon Mobil, submitted developments plans by the end of 2003, while Kuwait Petroleum Company invited bids for the realization of the project. The international oil companies will work under 20 year operating service agreements, which would permit them to develop and produce oil but not to own reserves.

Basic Economic and Financial Indicators, 1999-2003

Sources.: Kuwaiti authorities and International Monetary Fund.

Source.: Central Bank of Kuwait