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1996 Country Reports On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1997.

	1994	1995	1996 1/
Income, Production and Employment
Nominal GDP 2/	25.0	26.6	28.0
Real GDP Growth (pct) 3/	3.5	7.3	2.6
GDP by Sector:
Manufacturing	2.6	2.9	3.0
Services	3.0	3.0	3.1
Government	6.1	6.4	6.5
Petroleum	9.5	10.5	11.1
Per Capita GDP	16,697	15,474	15,872
Labor Force (000s)	990	1,047	1,100
Unemployment Rate (pct)	0.7	1.4	1.4
Money and Prices (annual percentage growth)
Money Supply Growth (M2)	5.4	9.4	­4.5
Consumer Price Inflation	2.5	0.8	2.5
Exchange Rate (KD/US$ ­ annual average)
Official	0.294	0.299	0.299
Balance of Payments and Trade
Total Exports FOB	11.4	12.8	13.9
Exports to U.S. 4/	1.5	1.3	1.6
Total Imports CIF	6.8	7.8	7.9
Imports from U.S. 4/	1.2	1.4	1.9
Trade Balance	4.6	5.0	5.9
Balance with U.S. 4/	0.3	­0.1	­0.3
Current Account Surplus/GDP	10.1	15.8	19.1
External Public Debt 5/	6.2	3.9	2.4
Debt Service Payments/GDP (pct)	7.2	8.8	10.8
Fiscal Deficit/GDP (pct) 6/	13.1	7.3	15.4
Gold and Foreign Exchange Reserves	3.8	3.6	3.7
Aid from U.S.	0	0	0
Aid from All Other Sources	0	0	0

1/ 1996 figures are projections based on data through September 1996.
2/ GDP at factor cost
3/ Percentage changes calculated in local currency
4/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1996 figures are estimates based on data available through November 1996.
5/ Based on Kuwait government figures as of June 30, 1996
6/ This is a Ministry of Finance projection; U.S. Embassy projects a near zero deficit for FY 1996/97.

1. General Policy Framework

Kuwait is a politically stable state where rule of law prevails. The press is largely free and commercial advertising is available. Arabic is the official language but English is widely spoken. Kuwait has a small and relatively open, oil­rich economy which has created an affluent citizenry who benefit from a generous welfare state.

Kuwait still faces structural problems in its budget, primarily excessive dependence on oil revenue, and growing government expenditures due to the need for continued high defense spending and to growing social expenditures resulting from high levels of government employment and provision of heavily subsidized social services and utilities. Primarily because of stronger oil revenues, Kuwait's budget may be in balance for the FY 1996/97 if oil prices remain strong. A draft five­year plan to reduce government employment, reduce subsidies and encourage privatization of services is expected to be presented to Parliament in the current fiscal year, but is expected to meet resistance.

Domestic investment is encouraged by provision of low cost land, subsidized utilities and waivers of duties and fees. These are offset by lengthy bureaucratic procedures, and for foreigners, high tax rates and complex procedures to secure work visas. The Kuwait Central Bank uses interest rates as its primary means to control money supply. This is accomplished through adjustments to the discount rate and through market operations of government securities. A lower budget deficit and repayment of government obligations to domestic banks resulted in a reduction of money supply in 1995.

2. Exchange Rate Policy

There are no restrictions on current or capital account transactions in Kuwait, beyond a requirement that all foreign exchange purchases be made through a bank or licensed foreign exchange dealer. Equity, loan capital, interest, dividends, profits, royalties, fees and personal savings can all be transferred in or out of Kuwait without hindrance.

The Kuwaiti dinar itself is freely convertible at an exchange rate calculated daily on the basis of a basket of currencies which is weighted to reflect Kuwait's trade and capital flows. Since the dollar makes up over half of the basket, the Kuwaiti dinar has closely followed the exchange rate fluctuations of the U.S. dollar over the past year.

3. Structural Policies

Kuwait's government plays a dominant role in the local economy, which may diminish if moves toward privatization and rationalization of the economy are implemented. Kuwait's economy is heavily regulated, which restricts participation and competition in a number of sectors and strictly controls the roles of foreign capital and expatriate labor. Policies favor Kuwaiti citizens and Kuwaiti­owned companies. Income taxes, for instance, are only levied on foreign corporations and foreign interests in Kuwaiti corporations, at maximum rates of 55 percent of taxable income. Individuals are not subject to income taxes, but the Kuwait government is considering possible changes to its current income tax structure.

Foreign investment is welcome in Kuwait for minority partnership in select sectors. Foreign nationals are prohibited from having majority ownership in virtually every business other than certain small service oriented businesses and may not own property (excepting some other GCC citizens). Non­GCC nationals are forbidden to trade in Kuwait stocks on the Kuwait stock exchange except through the medium of unit trusts (mutual funds).

Government procurement policies specify local products, when available, and prescribe a 10 percent price advantage for local companies on government tenders. There is also a blanket agency requirement for all foreign companies trading in Kuwait to either engage a Kuwaiti agent or establish a Kuwaiti company with majority Kuwaiti ownership and management.

4. Debt Management Policies

Prior to the Gulf War, Kuwait was a significant creditor to the world economy, having amassed a foreign investment portfolio that was variously valued at $80 to $100 billion. Current estimates of the value of Kuwait's foreign assets, concentrated primarily in the future generations fund, range between $35 and $39 billion. Kuwait is scheduled to make the final payment on its $5.5 billion jumbo loan in December 1996. The total debt service payment scheduled for 1997 is $282 million owed primarily to foreign export credit agencies, including the U.S. Eximbank.

5. Significant Barriers to U.S. Exports

There are no customs duties on food, agricultural items and essential consumer goods. Imports of some machinery, most spare parts and all raw materials are exempt from customs duties. Oil companies may apply for tariff exemptions for drilling equipment and certain other machinery, including that for new plants.

On July 1, 1992, Kuwait began collecting a four percent tariff on most imports. This flat rate is applied to the cost, insurance and freight (CIF) value of imported goods. Where imports compete with domestic "infant industries," the Ministry of Commerce and Industry may impose protective tariffs of up to 25 percent. In such cases, tariff reviews and determinations are done on a case by case basis.

Kuwait, like other GCC member states, maintains restrictive standards which impede the marketing of U.S. exports. For example, shelf­­ife requirements for processed foods are often far shorter than necessary to preserve freshness and result in U.S. goods being uncompetitive with products shipped from countries closer to Kuwait. Standards for many electrical products are based on those of the U.K., which restrict access of competitive U.S. products. Standards for medical, telecommunications and computer equipment tend to lag behind technological developments, with the result that Kuwait government tenders often specify the purchase of obsolete, more costly items.

Kuwait government procurement policies specify local products when available and prescribe a 10 percent price advantage for local firms in government tenders.

The Kuwait government views its offset program as a major vehicle for motivating foreign investment in Kuwait. The U.S. government opposes this type of program and has recommended that the government of Kuwait carefully weigh all the potential costs to itself of an offset program. Interested U.S. firms should familiarize themselves with the terms of this program to ensure that the offset program does not become an undue obstacle to their business.

In June 1993, Kuwait announced that it would no longer apply the secondary boycott to firms that do business with Israel and the tertiary boycott with firms that do business with firms subject to the secondary boycott, but would continue to apply the primary boycott to goods and services produced in Israel itself. Kuwait has also taken steps to revise its commercial documentation to eliminate all direct references to the boycott of Israel. U.S. firms still occasionally receive requests for boycott­related information from private Kuwaiti firms or uninformed Kuwaiti public officials. In such cases, U.S. firms should advise the Embassy of the request, report the request as required by law to the U.S. Department of Commerce, and take care to comply with all other requirements of the U.S. antiboycott laws. Kuwait, along with many other Middle East countries, has received two one­year waivers of the 1995 "Brown Amendment" requirements. The current waiver will expire in May, 1997. The "Brown Amendment" prohibits defense sales to those countries that have not eliminated all vestiges of the enforcement of the secondary and tertiary boycott of Israel, unless waived by the President.

For perishable imports arriving via air, land or sea, customs clearance is prompt and takes about three hours. To complete clearance, the importer presents its import license and quality test certificate. Recurring perishable imports can be cleared and taken to the importer's premises after a sample has been submitted to the municipality for quality testing.

Usually, customs assesses duty on imported goods based on commercial invoices. If the customs officials believe the declared value unrealistic, they may make their own assessment.

Importers do not need a separate import license for each product or each shipment. An importer does, however, need an annual import license issued by the ministry of commerce and industry; to be eligible, the company must be registered both in the commercial register at the ministry of commerce and industry, as well as at the Kuwait Chamber of Commerce and Industry. Kuwaiti shareholding in the capital of the company must be at least 51 percent.

A special import license is required to import certain kinds of goods, i.e., firearms, explosives, drugs and wild animals. Some drugs require a special import license from the Ministry of Public Health. Imports of firearms and explosives require a special import license form the Ministry of Interior.

6. Export Subsidies Policies

Kuwait does not directly subsidize any of its exports, which consist almost exclusively of crude oil, petroleum products and fertilizer. Almost 98 percent of Kuwait's food is imported. Small amounts of local vegetables are grown by farmers receiving government subsidies, and small amounts of these vegetables are sold to neighboring countries. However, not enough of these vegetables are grown or sold to make any significant impact on local or foreign agricultural markets. Periodically, Kuwait cracks down on the re­export of subsidized imports such as food and medicine.

7. Protection of U.S. Intellectual Property

Kuwait has made progress toward improved Intellectual Property Rights (IPR) protection; however, the level of protection remains inadequate by international standards. In 1995, the Ministry of Information issued ministerial decrees protecting U.S. and British­origin audio and video products, and the Kuwait Institute for Scientific Research hosted a regional conference of the World Intellectual Property Organization (WIPO) on industrial property.

In April 1996, Kuwait became a member of WIPO. Nevertheless, progress in IPR protection slowed in 1996. Draft legislation for a copyright law, which would extend copyright terms, ease conditionality for protection and provide stiffer penalties for violators, was not submitted to Kuwait's National Assembly as hoped. The most recent draft of their legislation did not meet all U.S. guidelines for future World Trade Organization (WTO) requirements, primarily because it failed to provide national treatment for foreign works unless they are first published in Kuwait. A final version of the legislation has not been released, but is expected to be submitted to parliament in the current year.

Kuwait has continued its efforts to implement a patent and trademark office by means of the implementation of a GCC­wide patent and trademark office. Kuwait was "watch listed" in 1995 both for lack of progress in passing copyright legislation and for its lack of patent coverage for pharmaceuticals. It has not yet established a "mailbox" as required under the WTO TRIPS accord. Currently, Kuwait's Patent Office serves only as a registration center, with no means of enforcing patent protection.

Computer software piracy, in particular, continues to be a problem. Annual losses resulting from software piracy in Kuwait are estimated by industry sources at $45 to 50 million.

8. Worker Rights

a. The Right of Association: Both Kuwaiti and non­Kuwaiti workers have the right to establish and join unions; latest figures indicate 50,000 workers are union members. The government restricts the free establishment of trade unions: workers may establish only one union in any occupational trade, and unions may establish only one federation. New unions must have at least 100 members, 15 of whom must be Kuwaiti. Expatriate workers, about 80 percent of the labor force, may join unions after five years residence, but only as nonvoting members; in practice, they can join after one year.

b. The Right to Organize and Bargain Collectively: While unions are legally independent organizations, 90 percent of their budgets derive from government subsidies and the government oversees their financial records. This extends to prescription of internal rules and constitutions, including prohibition of involvement in domestic political, religious or sectarian issues; unions nevertheless engage in a wide range of activities. Unions can be dissolved by court ruling or Amiri decree, although this has never happened; were this to happen, union assets would revert to the ministry of social affairs and labor. Kuwaiti citizen, but not foreign, union members have the right within the union to vote and be elected. The law limits the right to strike; all labor disputes must be referred to compulsory arbitration if labor and management cannot reach a solution, and strikers are not guaranteed immunity from state legal or administrative action against them. Foreign workers, regardless of union status, may submit any grievance to the Kuwait Trade Union Federation, which is authorized to investigate their complaints and offer free legal advice.

c. Prohibition of Forced or Compulsory Labor: The Constitution prohibits forced labor "except in the cases specified by law for national emergencies and with just remuneration." Foreign nationals must obtain a Kuwaiti sponsor to obtain a residence permit, and cannot change employment without permission of the original sponsors. Domestic servants, not protected by Kuwait's labor law, are vulnerable to abuses of this rule. Sponsors frequently hesitate to grant permission to change employment because of the various expenses they covered to bring the servants into the country, often ranging from $700 to $1,000. "Run away" maids can be treated as criminals under law for violations of their work and residence permits, especially if they attempt to work for someone else without the required permits. Sponsors often hold their servants' passports, a practice which the government prohibits but enforcement is inconsistent. Credible reports continue that foreign nationals employed as domestic servants have been denied exit visas if they seek them without their employers' consent.

d. Minimum Age for Employment of Children: Minimum legal age is 18 years for all forms of work, both full­ and part­time. Employers may obtain permits from the ministry to employ juveniles between the ages of 14 and 18 in certain trades, for a maximum of six hours per day, on condition that they work no more than four consecutive hours followed by a rest period of at least one hour. Compulsory education laws exist for children between the ages of 6 and 15. These laws are not fully observed in the nonindustrial sector, and there have been unconfirmed reports of some South Asian domestic servants under 18 who falsified their age in order to enter Kuwait.

e. Acceptable Conditions of Work: In the public sector, the 1996 minimum monthly wage was approximately $74 for Kuwaiti citizens and $15 for non­Kuwaitis; there is no private sector minimum wage. Labor law sets general conditions of work for both public and private sectors, with the oil industry treated separately. Civil Service law, which also pertains to the public sector, limits the standard workweek to 48 hours with one full day of rest per week, and provides for a minimum of 14 workdays of leave per year and a compensation schedule for industrial accidents. The law also provides for employer­provided medical care, periodic medical exams to workers exposed to environmental hazards on the job, and compensation to workers disabled by injury of disease due to job­related causes. Legal protections exist for workers who file complaints about dangerous work situations. Laws establishing work conditions are not always applied uniformly to foreign workers and foreign laborers frequently face contractual disputes, poor working conditions and, in some cases, physical abuse.

f. Rights in Sectors With U.S. Investment: Two significant U.S. investments in Kuwait in the oil industry, one in the partitioned neutral zone shared by Kuwait and Saudi Arabia and the other in Kuwait proper, operate under and in full compliance with the Kuwaiti labor law.

Category		Amount
Petroleum		(1)
Total Manufacturing		0
Food & Kindred Products	0
Chemicals and Allied Products	0
Metals, Primary & Fabricated	0
Machinery, except Electrical	0
Electric & Electronic Equipment	0
Transportation Equipment	0
Other Manufacturing	0
Wholesale Trade		0
Banking		0
Finance/Insurance/Real Estate		­1
Services		(1)
Other Industries		4
TOTAL ALL INDUSTRIES		110

(1) Suppressed to avoid disclosing data of individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis

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