The background to start with – it’s 1982. The merchant families of Kuwait maintain a stronghold on the equities market and don’t allow new and relatively small investors in (does it remind you of certain listed companies in the UAE?). The aspiring Kuwaitis, living up to their entrepreneurs of the GCC reputation, decide to invest in a parallel stock market that isn’t officially sanctioned and is based on little more than oral promises. There was talk of key money for prime property, inflated valuations per square foot and lots of free “things can only get better” sentiments being distributed that bring to mind a sister emirate currently experiencing an impressive boom. The result was a stock market bubble that wiped off over US$ 90 billion and guaranteed its place on the Who’s Who of equity crashes list for decades to come.
The government, which was prudent enough to establish two funds, the Kuwait General Reserve Fund (Kuwait Investment Authority to you and me) and the Kuwait Fund for Future Generations, used its accumulated wealth from record oil prices of the 1970s to bail these literally poor unfortunate souls out of trouble. Like wild mushrooms springing up in forests, bailout funds were established to alleviate the pain (e.g. the Difficult Debts Program and the Minor Investors Fund). And, like wild mushrooms indeed, things aren’t always what they seem.
It took several years for the economy to recover and, as soon as it had done so, August 2, 1990 happened. Again, after the liberation of the country, the government felt obligated to assist its citizens in recovering financially and went so far as to write off 100 per cent of all consumer debts. The government’s generosity extends to various other elements of life in the state, including but not limited to retirement income, marriage grants, housing loans, free medical services and education at all levels.
In addition to that, the state employs 95 per cent of its citizens (the private sectors employ an impressive three per cent), with over 20,000 Kuwaitis on its waiting list as of January 2008. In late December 2007, the government promised to enhance its already generous foods subsidy scheme; it then announced a 20 per cent wage increase to state employees a year after the KWD 200 one-off grant it offered them.
Oddly, the country literally sent contradictory messages throughout 2007, first by announcing that income tax would soon be levied and then by texting mobile phones of citizens last summer to warn them to turn the AC down. One would think, why not start by removing utility subsidies or making them selective to lower income level citizens?
Recently, in a heated parliamentary session that hundreds of citizens attended, the government had to battle the demands of MPs to buy back consumer loans of a staggering US$ 14.65 billion, claiming that the oil wealth belongs to all Kuwaitis. After a heated discussion, the government finally caved in and agreed to set up a US$ 1.1 billion fund to pay citizens debts. The government then announced that banks should shoulder a part of the bailout package by waiving some interest payments that could set a bad precedent making banks more wary of lending money in the future.
In truth, that outcome was inevitable. After decades of cradle to the grave financial support, it has become a sort of natural right to expect the government to bail out anyone who is unable to plan his or her financial life. Although this article tackles Kuwait only, other GCC countries have similar subsidy schemes that warrant a second look. Excessive subsidies lead to reckless investments, high risk taking, an apathetic workforce and environmental waste, as well as general unrealistic expectations on the part of nationals of these countries that come to see the government as a divine entity. The dreams of constantly receiving financial aid will one day turn out to be a nightmare that these states and their future generations cannot recover from.
This article originally appeared in the February 2008 issue of MONEYworks.