Austerity means Swiss watches on credit
By William Maclean
KUWAIT (Reuter): Five years after Iraqis invaded, rich Kuwaitis still buy US$10,000 Swiss watches for their teenage children but pay more often on credit than with cash.
"The years of surplus are over," said economist Jassem al- Saadoun. "To preserve the old expenditure patterns, there has been recourse to borrowing at the expense of the future. This has led to the present crisis."
The oil-rich and sparsely-populated Gulf Arab state still ranks among the world's richest nations. A 1994 World Bank study ranked Kuwait tenth in Gross National Product (GNP) per capita -- right after Germany -- at $23,350 annually.
Luxury American and European cars still cruise the palm-lined Gulf boulevard, but increasingly have to vie for space with Japanese economy hatchbacks.
Lavish birthday presents like luxury Swiss watches are commonplace among the rich, and planes still ferry fresh flowers nightly from Europe for vast wedding parties at top hotels, but a painful restructuring of the economy lies ahead.
Kuwait dug deep into then-bulging coffers to help pay for the multinational Gulf War campaign to oust Iraq, which invaded and occupied Kuwait on August 2, 1990.
After the Iraqis were driven out by a U.S.-led coalition in the 1991 Gulf War, the government showered Kuwaitis, who make up 40 percent of the 1.9 million population, with handouts. It shoveled yet more riches at its oil industry for repairs. It borrowed $5.5 billion, then the largest loan ever taken out by a government, to help fund reconstruction.
The steps wiped out more than half Kuwait's pre-war $100 billion nest-egg of foreign reserves. But equally damaging, the moves reinforced a debilitating culture of entitlement among Kuwaitis used to being bailed out by the state in times of trouble.
"In short, when they rebuilt the economy, they rebuilt the bad along with the good," said one diplomat. "An opportunity to teach Kuwaitis to learn to live on less was missed."
"Reform will come, but it will be a case of less rather than more, later rather than sooner," a Western economist said.
"It will be a B-minus performance at best. But given Kuwait's resources, they should come through okay."
The state-orchestrated economy is struggling with low prices for its single main export, oil, budget deficits running at over $4 billion a year and there are lingering worries about Iraq.
Kuwait also has huge private sector bad debt equivalent to 90 percent of gross domestic product, commercial losses caused by Iraqi occupation and a fall in population since the Gulf War.
On the plus side, the oil industry, custodian of a tenth of the planet's oil reserves, has recovered pre-war capacity and a petrochemicals industry is being built with private involvement.
National wealth in 1994 of 7.214 billion dinars ($24 billion) as measured by gross domestic product at current prices regained 1989 levels for the first time since the war.
And the stock market is booming -- albeit mainly because of moves to settle long-standing private sector bad debt.
The government has pledged to balance its books by the year 2000 and start rebuilding the foreign reserves that will help the country get by when oil runs out some time next century.
But reaching a consensus on what reforms are needed to turn the economy around is proving difficult.
Debate centers on how to restructure the economy to enable a small private sector to provide jobs for a growing workforce, and how to curb the cost of an extensive welfare state.
The government suggests privatizing to boost the private sector's share of the economy, reducing the size of the public sector, trade liberalization and re-pricing public services.
The parliamentary opposition would prefer to cut waste in the government, and specifically a defense procurement program they see as extravagant and corrupt, before any attempt is made to raise revenue from higher utility charges or new taxes.
They seek moves to prevent leading families taking what they allege are virtually monopolies in many areas of business.
They also want to stop a move by wealthy borrowers to soften repayment terms laid down by a 1993 law aimed at settling $20 billion in bad debt owed by some of the wealthiest in society.
The government wants to instill self-reliance and initiative and shrink a vast and slothful civil service, but cuts in perhaps the world's most lavish welfare state will entail political risks for a traditionally generous administration.
Kuwait would like to ease the double dependency it shares with its Gulf neighbors -- on oil and on foreign workers who make up over half the 1.8 million population -- but these remain only very long-term goals, diplomats say.
"What is required is to adjust living standards," said Elias Barroudi, chief economist at National Bank of Kuwait, a commercial bank.
"It's a slow process of change and education but it will ultimately happen. The level of public debate on this issue that we have seen in the past two years indicates that Kuwaitis are generally getting used to