Engineering Economics Assignment

Engineering Economics Assignment

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Engineering Economics Assignment

Kuwait’s economy is mainly anchored on oil revenues. Revenues emanating from non-oil activities contribute a small amount of the country’s gross revenue. All companies involved in the production of petrochemicals, natural gas and oil, are owned by the state. The status of Kuwait’s economy represents paternal capitalism and exhibits five key features. Primarily, Kuwait’s economy exhibits limited opportunities for domestic investment and mostly relies on imports to cater for the demand of goods and services. Like many other countries, Kuwait’s economy was hit hard by the economic crisis that occurred in 2008 and 2009 (al-Hamid, 2010). However, the country was able to recover from this crisis and regain its foothold.

Since the onset of the economic crisis, the conversion of mineral wealth into disposable funds became Kuwait’s major economic activity. The production of crude oil, refined products, and gas account for almost half of the country’s Gross Domestic Product. Additionally, this accounts for about ninety percent of its exports. Kuwait boasts substantial overseas investments that are public or state owned (al-Hamid, 2010). This economic status has been influenced by various factors including inflation, unemployment rate, GDP per capita growth, fiscal policy, monetary policy among others

Inflation

According to the National Bank of Kuwait, the latest figures on consumer price figures suggest that the country’s inflation is gradually slowing since the economic crisis. Since 2009, inflation has dropped from 2.9 percent to 1.6 percent. This drop is mainly credited to deflation in prices of commodities such as food and petroleum. NBK states that this rate of inflation should remain the same or even reduce. Most of the reduction in Kuwait’s general inflation is attributed to a downward force on food prices. Nonetheless, NBK stated that the inflation started decelerating in recent times from its 12.3 percent peak in November 2009 (Khouja and Sadler, 2013).

A less potent reduction in inflation is manifested in the services segment and household goods. Other exceptions include the communication and transport segment. With the country being a leading oil exporter, departments that rely on petroleum for energy were not hard hit by the economic crisis. The country saw it fit to plough back oil products into its own market to reduce high prices (Khouja and Sadler, 2013). The housing department, mainly composed of rent, also exhibits minor but significant drops in inflation. Currently, this department is experiencing minor rates of inflation. However, even though the rate of housing inflation has reduced since the recession, it recently increased from 2.3 percent in February to 2.5 percent in March 2013. As the first quarter of 2013 ended, general inflation in Kuwait registered a significant reduction and is expected to maintain this trend for the rest of the year. However, considering monthly dynamics, CBK does not rule out the inflation rising as the year progresses. This is because the current percentage is at a critical low point.

Unemployment Rate

In Kuwait, the rate of unemployment measures the number of people actively searching for a job over the entire work force. The Statistical Economic and Social Research and Training Center for Islamic Countries (SESRIC) body is responsible for reporting the rate of unemployment in Kuwait. According to SESRIC, the rate if unemployment between 2010 and 2013 in the country remains unchanged at 2.82 percent. However, this unemployment rate is significantly higher than when the economic crisis struck. Between 2008 and 2010, the rate of unemployment in Kuwait was between 1.64 and 1.71 percent. Ultimately, the recession rendered many people jobless and limited employment opportunities (al-Hamid, 2010). This is mainly a result of lay-offs as many companies looked to cutback on salary expenses to address the crisis.

Nevertheless, Kuwait has been able to recover from this problem as it continues to excel in the oil industry. With the oil reserves estimated at 95 million barrels, employment in this industry is expected to offer a lifeline for many people. However, compared to other countries, Kuwait is limited in employment opportunities, particularly in technology and agriculture. Even though it is a leading manufacturer of plant fertilizers, Kuwait is unable to major in agriculture due to the limited arable land.

Real GDP per Capita Growth

Buoyed by increased oil production and oil prices, real GDP in Kuwait has grown significantly according to estimates by International Monetary Fund. In 2008, Nominal GDP was expected to rise by 30 percent. However, the global recession in that year hampered these expectations. Development plans had to be postponed, and capital expenditures fell below budgeted figures (Al-Sabah, 2013). Consequently, activities not related to oil underwent limited progress and subdued economic diversification. However, after the recession, Kuwait’s real GDP exhibited a growth of 4.5 percent in 2012.

By 2012, the rates of inflation fell as pressure from commodity prices and international food subsided. Data from CBK states that the nominal GDP rose by 17 percent in 2010 after it declined by 23 percent the previous year. Ultimately, this decline was a consequence of the recession. The growth in Nominal GDP was heightened by the increase in oil revenues as average prices rose by 26 percent during the recession. Countries with no oil sources were hard hit by this factor. However, oil rich countries such as Kuwait and Iraq benefited largely from this increase in price.

Debt/GDP ratio

According to reports by the IMF, Kuwait registered a debt to GDP ratio of six percent in 2012. Prior to the onset of the recession, Kuwait registered a debt to GDP ratio of 10.5 percent in 2007. After the recession, the government debt to GDP ratio rose to 12.05 percent. This rise was a reflection of increased government expenditures between 2009 and 2010. The rise in government spending represented the unbudgeted expenses due to the high inflation rates brought by the recession. The government mostly incurred expenses by granting various subsidies to Kuwaiti citizens. The ministry of finance incurred the most expenses in this period as it incurred huge debts to alleviate pressure from the crisis.

Khouja and Sadler (2013) state that Kuwait’s economy has surpassed planned figures because of conservative assumptions by the government (Al-Sabah, 2013). The government implements a budget depending on forecasted cash requirements for a given year. The global recession was sudden and as such, many governments had to spend more than they had budgeted for in that period. However, the Kuwait government worked to limit its borrowing of funds from ally nations. This is because; a high debt to GDP ratio ruins country ties and discourages investors from doing business with that particular country.

Interest Rates

Normally, interest rates in Kuwait follow the United States interest rates as stipulated by the Federal Reserve. The Central Bank of Kuwait oversees the control of money supply by controlling how interest rates move. Additionally, it also issues treasury bonds and bills as alternative methods of controlling money supply. Because of the high value of the US dollar, the KIBOR assumes similar trends to the United States interest rates. Kuwaiti interest rates are bound to stay the same until the policy is tightened by the Federal Reserve in early 2014. February 2010 was the last time The Central Bank cut its discount rate by 2.5 percent to 50 basis points.

However, Central Bank lowered the discount rate to 2.5 percent from 5.75 percent and made six cuts on the discount rate between 2008 and 2010. The Central Bank also reduced interest rates over deposit repurchase from 5.75 percent to 2.5 percent. This was in adherence to a number of cuts applied by the US Federal Reserve. Similarly, the inter-bank rate also underwent a reduction of 1.8 percent in 2009 but went up by 3.7 percent the same year. The lending rates also declined in 2011 and continued this trend to reach 2.15 percent at the end of that year. Monetary policies continue to be expansionary since the crisis started (Al-Sabah, 2013).

Fiscal Policy

With Kuwait’s parliament approving an ambitious development plan in 2010, the country was bound to experience change in its economy. Estimated at 125 billion US dollars, the plan was intended to change Kuwait into a financial hub and a regional trade center. The announcement of this policy had the fiscal policy in line with the monetary policy. This strategy has been adopted by many countries as they try to apply expansionary policies together with loose monetary policies after the global recession in 2008. This is intended to alleviate pressures from the recession.

On the monetary policy, the discount rate plays the role of a pivot to which financial system units and interest rates from lending transactions are linked. Thus with a view of enforcing economic diversification, supporting domestic liquidity, supporting non-oil activities and economic activities, the Kuwait Central Bank cuts its discount rate in December 2008, May 2009, and February 2010. The goal of this reduction is intended to establish an appropriate atmosphere for the re-enforcement of non-oil activities in Kuwait’s economy. Facts also suggest that both lending and deposit rates have reduced. As M3 growth offered sufficient funds to anchor Kuwait’s overall growth, the fiscal policy intended to increase domestic liquidity in December 2009 and March 2011.

Monetary Policy

According to al-Hamid, (2010), Kuwait exhibits a small economy that depends mainly on oil exports to earn revenue and is dependent on other countries for the supply of goods and services. Thus, this economy is vulnerable to exogenous pressures such as the 2008 recession and their effects are reflected in the monetary sector. However, the economic crisis in 2008 was isolated from the balance of payments because a surplus of these payments reflects the oil revenue, and this is kept in the government foreign reserve outside the country. On the other hand, socio-economic and political factors determine the government’s expenditure.

In 2009, the credit growth and spending in Kuwait slowed down, helping to reduce inflation pressure. The asset portfolios of the country’s banks went down thus discouraging their intent to spend. Kuwait’s Central Bank cut key rates a number of times between 2008 and 2010 to encourage growth. This was facilitated by low rent and commodity prices that helped reduce inflation.

Reference

al-Hamid, A. Y. (2010). The Kuwait economy: A characterization. Kuwait: Kuwait Fund for Arab Economic Development.

Al-Sabah, Y. S. F. (2013). The oil economy of Kuwait. London: Kegan Paul International.

Khouja, M. W., & Sadler, P. G. (2013). The economy of Kuwait: Development and role in international finance. London: Macmillan.