Kuwait’s Fiscal Gap to Widen Amid Oil Price Pressures and Spending Rigidities

Kuwait’s fiscal deficit is projected to average 8.9% of GDP between 2025 and 2028, a significant increase from the estimated 2% in 2024, according to S&P Global Ratings. This deterioration is attributed to subdued oil prices and persistently high government expenditures, particularly on wages and subsidies, which together account for approximately 70% of total spending.

S&P anticipates Brent crude oil prices to average $65 per barrel in 2025 and $70 per barrel from 2026 to 2028. These projections are lower than previous estimates, reflecting ongoing global supply-demand imbalances and geopolitical uncertainties. HSBC has also revised its forecasts, lowering the 2025 Brent price to $68.5 per barrel from an earlier estimate of $73. Similarly, BMI projects Brent prices at $68 per barrel in 2025, with a slight increase to $71 in 2026.

The Kuwaiti government’s expenditure profile remains heavily skewed towards recurrent spending. In the fiscal year ending March 31, 2025, wages and subsidies are expected to constitute 79.5% of total spending, with capital expenditures comprising just 9.1%. This allocation leaves limited fiscal space for developmental projects and economic diversification initiatives.

Efforts to rationalize spending have yielded minimal results. The 2025/26 budget indicates a marginal 0.1% decrease in total expenditures compared to the previous year. While employee compensation is set to rise by 1.6%, allocations for subsidies, other expenses, and capital expenditures are projected to decline by 2.2%, 3.7%, and 1.7%, respectively.

Kuwait’s reliance on oil revenues continues to pose challenges to fiscal sustainability. In 2023/24, total public expenditure represented 50% of GDP, significantly higher than the global average of 37% and the high-income countries’ average of 41%. Moreover, 92.6% of the budget was consumed by current expenditures, primarily on employee compensation and the purchase of goods and services, leaving limited resources for investment in development projects.

Despite these challenges, Kuwait maintains a strong credit profile. S&P has affirmed the country’s ‘A+’ rating with a stable outlook, citing its substantial sovereign wealth fund assets, which provide a buffer against fiscal shocks. However, the agency warns that without structural reforms to diversify the economy and reduce expenditure rigidities, fiscal pressures are likely to persist.

In response to the widening fiscal gap, Kuwait is considering borrowing for the first time in nearly a decade. A new public debt law has been passed, aiming to finance significant projects such as a new port and airport terminal. These initiatives are part of broader efforts to reduce reliance on oil revenues and stimulate economic diversification.