How Can Kuwait Adapt to the Reality of Low Oil Prices?

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Table of Contents

Support of entrepreneurs
Launching fund to support small and mid-scale business
Raising services prices
Cutting expenses
Privatize governmental sectors
Privatize the co-op sector
Works Cited

Support of entrepreneurs

The government of Kuwait has predicted that by March 31, 2016, its budget will have a deficit of $23 billion. That is due to a significant drop in the price of crude oil, the major source of income that constitutes 94% of Kuwait’s revenue (Backus 12). The drop in the revenue from oil sales has compelled the country to use different strategies to align its economy with its income. Among the short and long term strategies that the government of Kuwait should adopt to enable it to adapt to the reality of low oil prices includes creating an entrepreneurial environment or ecosystem that provides the foundation for self-employment.

The entrepreneurial ecosystem is about formulating and implementing appropriate policies that stimulate economic growth by investing in research and development and technology transfer. A paradigm shift that factors entrepreneurial activity as a government priority by stimulating natural growth, the growth of low, mid, and high technology companies, and provides leadership could develop and enhance a business environment that favours and drives entrepreneurial growth.

An active and well defined entrepreneurial environment that is characterized by low bureaucratic obstacles fosters government policies that support the needs of the entrepreneur. In addition, it is necessary to change the cultural bias towards starters of new business by sharing information among stakeholders and fostering new business ventures. It is also imperative for the government to create interconnected business clusters to stimulate innovation and entrepreneurship by reinforce existing business structures.

The entire process and environment should support capacity building, new and existing business ventures, and address the risks that arise when stating new businesses in order to enable the entrepreneurs make sustainable profits. Besides, the government should create programs to train aspiring entrepreneurs on how to exploit new and existing opportunities. That is in addition to developing the ability of identify business opportunities, write business plans, innovate, and take risks.

Launching fund to support small and mid-scale business

According to Kilian and Murphy, the duty of the government is to support entrepreneurs by providing them with venture capital or seed funds at low interest rates or without interest (5). That is besides supporting a bootstrapping environment to help businesses from seeking external funds. Besides, the government should put in place structures to support people who delay in making loan repayments, implement entrepreneurial growth strategies, train talented people, and enable good organizational designs to flourish. Moran notes that the government should invest in Credit Guarantee Fund Scheme to offer collateral-free credit and other type of loans to support small and medium size businesses (10). Besides, the government should provide a working capital facility for new businesses..

Raising services prices

Due to the shortage and declining funds from the poor oil prices, another strategy that the government should adopt is to reduce the cost of subsidised services and welfare programs. It is evident that the government in its current budget has allocated $7 billion in the 2015/2016 budget to subsidize payments for water and electricity (Moran 32). Welfare programs such as the provision of education (which consumes 13 per cent of the total government expenditure, which is 5% of the GDP) and health (which is offered for free to both nationals and expatriates) should be offered at a fee and act as a source of revenue to the government.

Besides, the government should consider the option of increasing water and electricity tariffs by shifting away from providing people with free water. A reduction of electricity subsidies that currently stand between 55% and 90% for residential buildings to lower levels could results in a decrease of the funds that the government subsidizes in the provision of welfare services. It is worth noting that the current water tariffs are subsidized at 79 per cent to 100 per cent.

Cutting expenses

Other measures that have been proposed include implementing cost cutting measures on all government expenditures. That could reduce the costs incurred by the government by 30% so as to meet the $64.6 billion draft budget by reducing it by 17.8 per cent from the previously planned spending, narrowing the KD8.23 billion budget deficit.

Privatize governmental sectors

Privatization could save large amounts of money. Colgan argues that the approach includes revamping the commercial laws of the country, appropriate control and enabling of the Kuwait Investment Authority (KIA) to implement lease agreements, enhancing cooperation with the government, effectively manage contracts, and enable sale of government shares in various institutions (12). That is addition to the privatization of water, telecommunication, and electricity supply to reduce government expenditure and increase revenue from an efficient ptivate sector.

Privatize the co-op sector

Another proposed strategy is to reduce government expenditure and the financial burden on the government through the privatization of cooperate sectors. The entities targeted for privatization include public institutions such as banking, telecommunications, water, energy supply, and insurance through the Supreme Privatization Council. That is besides increasing shareholder value to attract an increase in cash flow, efficient management of resources, and implement policies to increase share-price stability.

Works Cited

Backus, David K., and M. J. Crucini. “Oil prices and the terms of trade.” Journal of international Economics 50.1 (2000): 185-213.Print.

Colgan, Jeff D. “The emperor has no clothes: The limits of OPEC in the global oil market.” International Organization 68.03 (2014): 599-632.Print.

Kilian, Lutz, and D. P. Murphy. “The role of inventories and speculative trading in the global market for crude oil.” Journal of Applied Econometrics 29.3 (2014): 454- 478.Print.

Moran, Theodore H. Oil Prices and the Future of OPEC: The Political Economy of Tension and Stability in the Organization of Petroleum Exporting Countries, Routledge: New York, 2015.Print.

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