IBDE

Kuwait is the fourth-biggest oil exporter in the world. It has a small but rich, relatively open and oil-dominated economy - the second largest among the GCC countries after Saudi Arabia. However, the latest unrest in the Arab countries has led to regional markets decline and as a consequence Kuwait has been affected the most obviously. The unrest led to Kuwait's index falling by 2.5 per cent to its lowest finish since July 6 and biggest drop since May 25 2010. Real estate and industry shares in particular suffered losses as a result of the ongoing civil unrest and political uncertainty in Bahrain, Yemen and Libya. The predictions for the recent crisis and the unrest in the Arab world indicate to a short term economic loss in Kuwait. The earlier forecasts indicating a brighter future in 2011 with the country’s economy to grow by 4.5% have been challenged by the latest social unrest in the country showing a gloomier picture since the tourism and foreign direct investments will go down as a consequence.

Furthermore, although from the economic prospective Kuwait is an attractive place to foreign investors one of the biggest challenges the country face is its political instability. In this context, the Kuwaiti government should take seriously the political situation within the country in order to ensure foreign investors and hence attract more foreign direct investment. Its past history of political and socio-economic uncertainty and the presence of political instability could push away potential foreign investors who may lack the confidence and the understanding of the functioning of the economic policies of emerging markets such as Kuwait. Corruption is also perceived as a significant problem although Kuwait has done some positive progress in this regard. The Transparency International’s Corruption Perceptions Index for 2010 ranked Kuwait 54th out of 180 countries. In 2009 Kuwait was ranked the 66th and scored 4.1, whereas in 2010 it scored 4.5. In business terms as is the case with most countries across the world corruption disrupts the economic development process and seriously damages the credibility of calls for economic reform.

Macroeconomic Stability

In business terms Kuwait remains an attractive country to do business. In average, until the financial crisis struck, Kuwait had one of the fastest growing economies in the region. Its economy is based on petroleum (which counts 50% of the GDP), petrochemicals, cement, shipbuilding, water desalination, food processing and construction materials. Kuwait’s economy has moved forward strongly by building budget and trade surpluses, and foreign reserves on the back of robust global oil demand during 2003 to late 2008. But compared with other GCC countries Kuwait’s economy has not improved in the same pace as the economies of Saudi Arabia and Bahrain, for instance. In order to enhance the competitiveness of the country in the region, Kuwait has taken steps to improve its regulatory framework but without much success. As it is the case with many international economies, the international financial crisis has had an impact on Kuwaiti’s economy. Its economy declined in 2009 due to this phenomenon. According to Arab Competitiveness Review 2010 Kuwait is the only GCC country to have experienced a contraction of GDP in 2009 amounting to -2.7%, a stark drop in comparison to the 7.7% average annual growth during 2000-2005. According to the ratings agency Moody’s Investors Service the picture for the 2011 looks brighter. They predict that the economy of the Kuwait would grow by 4.5% in 2011.

As regards economic freedom, Kuwait ranks as the 61st freest economy in the world, according to the Index of Economic Freedom 2011 Report. Its score is 2.8 points lower than last year, with declines in five of the 10 economic freedoms, including a large drop in labour freedom. Kuwait is ranked 8th out of 17 countries in the Middle East/North Africa region.

Attractive Tax System

Local Kuwaitis and foreign nationals (including Kuwaiti companies) do not pay taxes on income. However, an income tax is levied on a foreign corporate body conducting commercial activities in Kuwait. Since 2008 the Kuwaiti government has introduced a more competitive corporate tax. In practice, foreign-owned firms and joint ventures are the only businesses that are subject to the corporate income tax, which is now a flat 15 per cent. There is no value-added tax (VAT) or sales tax. Some companies are expected to pay a Zakat (social contributions tax) of 1 per cent on net profits. In the most recent year, overall tax revenue (mainly from duties on international trade and transactions) was 1.5 per cent of GDP. Investors in Kuwait do also benefit from tax exemption for a minimum period of 10 years. Other benefits for investors arise under double taxation treaties, bilateral treaties for the encouragement and protection of investments.

Integrated Judicial System

Kuwait is distinguished, by an integrated judicial system, as an independent body. The Kuwaiti legal system is a blend of the British Public Law, the French Civil Law, the Islamic Legal Principles and the Egyptian Law. The Kuwaiti Constitution (1962) guarantees the independence of the judicial system. The official language of the court is Arabic and other languages may be used. The Judicial Higher Council confirms the constitutional and legal constants that guarantee the independence of the judicial authority and not to intervene in its activities in order to achieve the public interest and boosts justice in the framework of the constitutional and legal legitimacy. But there have been claims from foreign residents that the courts favour Kuwaitis and the trials are lengthy.

Free Trade Agreement

The Cooperation Council for the Arab States of the Gulf (GCC), of which Kuwait is a member, has signed an FTA with Singapore; and also set up an FTA with the European Free Trade Association (Switzerland, Norway, Iceland and Liechtenstein). In 2004 Kuwait signed the Trade and Investment Framework Agreement (TIFA) with the US government which is seen as the culmination of trade links between the two. Kuwait has also signed bilateral agreement with Jordan in 2001.

Infrastructure

What makes Kuwait more attractive is its modern infrastructure which connects the State of Kuwait with the neighbouring countries. The shipping and sea transport sector, including four ports, is very efficiently managed.

Banking Sector

There are 10 banks including 7 commercial banks and 3 specialized banks, namely Al Ahli Bank, Bank of Kuwait and Middle East, Burgan Bank, Commercial Bank of Kuwait, Gulf Bank, National Bank of Kuwait, Bank of Bahrain and Kuwait. The Central Bank of Kuwait is the only governmental institution responsible for controlling the monetary policy and supervising investment companies and banks.

Protection of Investors

The State of Kuwait guarantees protection to foreign investors against expropriation, compulsory disinvestment or nationalization in accordance with the Kuwaiti Constitution Law prohibiting confiscation of rights without fair compensation. The laws and regulations of the State of Kuwait permit the transfer of the investment to another foreign investor or to a national partner. It also permits free transfer of investors’ profits and capital without any restriction. Additionally, foreign investors benefit from Kuwait Foreign Investment Bureau law which gives benefits towards foreign investors such as: tax holidays for up to ten years, total or partial exemption from customs duties, and 100 % full ownership (The Kuwaiti Law normally request 51% to be owned by a Kuwaiti citizen).