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