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Kuwait
Economic Reconstruction
Despite the devastation of the Kuwaiti economy during the invasion
and occupation, recovery has proceeded with surprising speed.
This was partly because some damage, particularly of the infrastructure,
was not as serious as first feared and partly because the government,
anxious to restore the population's weakened confidence in its
ability to administer, has given reconstruction and recovery of
basic services a high priority.
The oil industry, which was badly damaged, has been a top priority
because it is the source of revenues to sustain other government
spending programs. The most dramatic economic reconstruction effort
went toward capping the more than 700 oil wells set afire by retreating
Iraqi forces. In addition to an estimated 2 percent of the country's
100 billion barrels of reserves lost in the oil fires, Kuwait
had to pay for putting out fires and repairing damaged refineries,
pipelines, and other oil infrastructure. By January 1992, oil
output had risen to 550,000 bpd. By June 1992, it was back to
nearly 1 million bpd. Nineteen new wells were drilled to replace
those damaged by the occupation.
The government hoped to raise production to 2 million bpd by
the end of 1993. During the invasion, Iraq destroyed or incapacitated
Kuwait's entire 700,000 bpd refining capacity at its three refineries.
But by April 1992, production levels rose to 300,000 bpd. Nonetheless,
there was concern that the rapid return to production might have
damaged Kuwait's oil reservoirs beyond the damage done by retreating
Iraqi forces, lowering its total future reserves. Accordingly,
KOC contracted with several international companies to assess
reservoir damage. However, the government also has been under
tremendous pressure to increase oil production quickly to pay
for war and postwar expenses. In the mid-1980s, overseas investments
outstripped oil as the primary source of revenues. The expenses
of war, postwar reconstruction, and investment irregularities
that were being uncovered in late 1992 have forced the government
to use substantial portions of its investment principal, and in
the 1990s oil is again expected to be the major revenue source.
Restoring oil operations was expensive. In January 1992, the
minister of oil announced Kuwait had already spent US$1.5 billion
for putting out fires and planned to spend another US$8 to US$10
billion to repair further damage. A National Bank of Kuwait report
in mid-1992 estimated that reconstruction expenses in the oil
sector for the 1992-95 period would reach US$6.5 billion.
The rest of the economy also suffered, although the effects were
not as severe as the oil-well fires. The banking sector, suffering
the shock waves of the Suq al Manakh stock market crash in 1982,
recovered slowly from the combined effects of that crash and the
invasion. The agenda of the returned government included bank
reform. In December 1991, the government announced a comprehensive
settlement plan for bad debts, the outstanding issue of the Suq
al Manakh crash. The plan involved government purchase of the
entire domestic loan portfolio of the country's local banking
system. The government agreed to buy US$20 billion of domestic
debt from eleven commercial banks and investment companies in
exchange for bonds. This plan removed the concerns of Kuwaitis,
who would be obliged to repay debts, if at all, on more modest
terms, and of banks, concerned about nonperforming loans. Although
Shaykh Salim al Abd al Aziz Al Sabah, governor of the Central
Bank of Kuwait, said the plan is needed to prevent the collapse
of banks, it clearly also is intended as part of a series of government
payments to Kuwaiti nationals and businesses aimed at restoring
confidence in the government prior to the October election. The
plan, announced but as yet incomplete, left the entire banking
system in a state of limbo in late 1992.
Banks have suffered less from the physical damage of the war
and more from the sudden reduction in the number of employees,
many of whom in the prewar period were foreigners. Some banks
reported postwar staff levels at half that before the invasion.
Although there has been speculation that postwar reform will include
mergers involving state-controlled banks (notably the Kuwait Investment
Company, the Kuwait International Investment Company, and the
Kuwait Foreign Trading, Contracting, and Investment Company, known
together as the three Ks) and privatesector banks, no formal action
had been taken as of late 1992. The bank that survived the invasion
in the best shape was the largest commercial bank, the National
Bank of Kuwait. It handled the exiled government's finances during
the crisis.
According to a National Bank of Kuwait report issued in mid-1992,
several additional factors hurt the private sector's recovery.
The first was the government's decision to restrict the number
of nonnationals, which hampered efforts to import skilled and
unskilled labor and left Kuwait with a smaller market. The second
was the lower level of government investment in industry as a
result of reduced government income and the government decision
to invest more in defense and focus in the short run on restoring
basic services. The non-oil manufacturing sector, although small,
was hurt by the looting and damage done by Iraqi troops. The government
has been in no position to subsidize industries at the level it
had in the past. Infrastructure projects incomplete before the
invasion have not been resumed or have been delayed.
The only sector of the economy to prosper in the immediate postwar
period is trade because of the need to replace inventory emptied
during the occupation. Returning Kuwaitis and the government have
created a small boom for investors. By mid-1992, however, the
return demand largely had been met, and many goods, notably automobiles
and consumer durables, were available in excess supply. In an
effort to boost the private sector, the government approved an
offset program in July 1992 requiring foreign companies to reinvest
part of their government-awarded contracts locally. Companies
with contracts valued at more than US$17 million have been obliged
to reinvest 30 percent of the contract sum.
Despite some speculation that the government would turn more
functions over to the private sector following its return, widespread
privatization has not occurred. In February 1992, the government
announced plans to start privatizing the public telecommunications
network, a move that was expected to generate US$1 billion for
the government. In May the government announced it would privatize
seventy-seven local gas stations. There have been, however, no
indications of more substantial denationalizations.
Reconstruction costs, which some foreign observers initially
put as high as US$100 billion, appear to be more modest, perhaps
in the range of US$20 to US$25 billion. The largest postwar expense
the government faces is not reconstruction, but the debt it incurred
to coalition allies to help pay for Operation Desert Storm, an
amount that came to at least US$20 billion, and continuing high
defense expenditures (see table 12, Appendix). Reconstruction
costs have been met largely from Kuwait's reduced investments
(the Financial Times estimated in February 1992 that
Kuwait had lost as much as US$30 billion of its prewar investment
portfolio); from returning oil revenues, which for fiscal year
1992 were only expected to generate US$2.4 billion; and from borrowing
on international money markets. In October 1991, the government
announced plans to borrow US$5 billion for the first phase of
a five-year loan program. The loan would be the largest in history.
In mid-1992 one study indicated that as much as 30 percent of
1993 revenue will be needed to pay interest on various government
debts, which were expected to exceed US$37 billion by the end
of 1992.
Despite the apparently dire economic situation, the government
has felt politically obliged to sustain insofar as possible the
prewar standard of living. Some of the largest domestic postwar
government expenditures have gone directly to Kuwaiti households.
The banking debt buyout was but one of a series of measures taken
by the government to help nationals hurt by the invasion. The
government decided to pay all government employees (the majority
of working nationals) their wages for the period of the occupation.
In March 1992, the government raised state salaries. The government
also agreed to write off about US$1.2 billion in consumer loans,
a measure benefiting more than 120,000 Kuwaitis. It wrote off
US$3.4 billion worth of property and housing loans made before
the invasion. Each Kuwaiti family that stayed in Kuwait through
the occupation received US$1,750. In July 1992, the government
exempted Kuwaitis from charges for public services due as a result
of the occupation, such as bills for electricity, utilities, and
telephone service and for rents on housing.
Data as of January 1993
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