Kuwait postpones VAT on recovering oil revenues

Kuwait's decision to delay the introduction of VAT on food and other items comes as the economy benefits from higher oil revenues. (AFP)
Updated 15 May 2018
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Kuwait postpones VAT on recovering oil revenues

  • All six GCC states agreed last year to introduce VAT by 2018
  • Only UAE and Saudi Arabia have introduce the 5 percent levy

LONDON: Kuwait has postponed plans to introduce value-added tax (VAT) to 2021, as rising oil revenues ease pressure on the country’s economy.

However the country’s parliamentary budget committee said it would push ahead with plans to tax certain products such as tobacco, energy drinks and soft drinks, according to a government statement on Tuesday.

“The committee noted that the value-added tax will be delayed in Kuwait until 2021, and that the Ministry of Finance considered the need to speed up excise tax on selected commodities such as tobacco, soft drinks and soft drinks,” according to the budget committee statement, published on 15 May, said.

The new excise tax is expected to boost treasury revenues by 200 million dinars ($662.6 million), as well as aiming to improve the health of Kuwaitis by reducing the consumption of cigarettes and sugary drinks, the committee’s statement said, without providing a timeline for the implementation of the new levy.

The UAE and Saudi Arabia have both already introduced the five percent VAT at the start of this year in an effort to boost government revenues that have been under pressure from low oil prices.

While all six GCC states originally agreed to bring in the tax in 2018, commitment to the tax has flagged.

Oman, Qatar and Bahrain are expected to introduce VAT by next year, although no specific date has been given yet.

The delay in Kuwait’s VAT plans was widely expected, according to analysts, given domestic political resistance to the tax, and the relative strength of the country’s finances compared with neighboring states.

The price of oil is now on the rise thanks to increasing global demand and the Opec-led deal that came into force last year. Oil prices briefly rose above $79 a barrel on Tuesday, making the prospect of introducing a new levy in a country unused to taxation is even less appealing.

“The combination of Kuwait having among the lowest fiscal and external breakevens in the region, and the vast sovereign assets of the Kuwait Investment Authority have always reduced the urgency for the government to introduce new revenue-raising measures compared to other sovereigns in the region such as Saudi Arabia and Oman,” said Thaddeus Best, analyst at Moody’s Investors Service.

“The recent rise in oil prices has also likely further sapped reform momentum,” he told Arab News.

Kuwait’s state budget for the fiscal year ending March 31, 2019 forecasts 15 billion dinars in revenue, based on an average price of oil at just $50 per barrel. Oil has traded above the $50 a barrel mark since July 2017.

The delay in introducing VAT will not have an immediate impact on government revenues, or any material impact on their sovereign rating for the country, according to Zahabia Gupta, associate, sovereign and international public finance ratings, at rating agency S&P Global.

“As the government relies on hydrocarbon receipts for around 90 percent of its revenue, we expect higher oil prices will likely offset the potential loss in revenue from delaying the implementation of VAT,” she said.

Concerns about the oil price persist, with Kuwait’s fiscal and external positions remaining vulnerable to swings in oil prices, she said.

But such risks are “balanced by Kuwait’s sizable fiscal and external buffers, which remain key rating strengths,” she said.

The IMF has urged Kuwait to keep progressing with plans to introduce both excise and VAT charges, as well as reduce government spending, in its Article 4 briefing published in January,.

However, Best said that even if implemented, VAT alone may not be enough to balance any long-term decline in oil prices.

“The relatively modest fiscal gains from the proposed revenue measures also need to be taken into account,” he said.

“For example, we estimate the additional revenue from VAT would be equivalent to around 1.6 percent of GDP assuming full compliance, which although higher than some of our estimates for other GCC sovereigns, is still ultimately less than the additional government revenues arising from a $5 increase in the price of a barrel of oil.”


Saudi energy minister recommends driving down oil inventories, says supply plentiful

Updated 19 May 2019
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Saudi energy minister recommends driving down oil inventories, says supply plentiful

  • Oil supplies were sufficient and stockpiles were still rising despite massive output drops from Iran and Venezuela
  • Producer nations discussed how to stabilise a volatile oil market amid rising US-Iran tensions in the Gulf, which threaten to disrupt global supply

JEDDAH: Saudi Arabia’s Energy Minister Khalid Al-Falih said on Sunday he recommended “gently” driving oil inventories down at a time of plentiful global supplies and that OPEC would not make hasty decisions about output ahead of a June meeting.
“Overall, the market is in a delicate situation,” Falih told reporters before a ministerial panel meeting of top OPEC and non-OPEC oil producers, including Saudi Arabia and Russia.
While there is concern about supply disruptions, inventories are rising and the market should see a “comfortable supply situation in the weeks and months to come,” he said.
The Organization of the Petroleum Exporting Countries, of which Saudi Arabia is de facto leader, would have more data at its next meeting in late June to help it reach the best decision on output, Falih said.
“It is critical that we don’t make hasty decisions – given the conflicting data, the complexity involved, and the evolving situation,” he said, describing the outlook as “quite foggy” due in part to a trade dispute between the United States and China.
“But I want to assure you that our group has always done the right thing in the interests of both consumers and producers; and we will continue to do so,” he added.
OPEC, Russia and other non-OPEC producers, an alliance known as OPEC+, agreed to reduce output by 1.2 million barrels per day (bpd) from Jan. 1 for six months, a deal designed to stop inventories building up and weakening prices.
Russian Energy Minister Alexander Novak told reporters that different options were available for the output deal, including a rise in production in the second half of the year.
The energy minister of the United Arab Emirates, Suhail Al-Mazrouei, said oil producers were capable of filling any gap in the oil market and that relaxing supply cuts was not “the right decision.”
Mazrouei said the UAE did not want to see a rise in inventories that could lead to a price collapse and that OPEC would act wisely to maintain sustainable market balance.
“As UAE we see that the job is not done yet, there is still a period of time to look at the supply and demand and we don’t see any need to alter the agreement in the meantime,” he said.
US crude inventories rose unexpectedly last week to their highest since September 2017, while gasoline stockpiles decreased more than forecast, data from the government’s Energy Information Administration showed on Wednesday.
DELICATE BALANCE
Saudi Arabia sees no need to boost production quickly now, with oil at around $70 a barrel, as it fears a price crash and a build-up in inventories, OPEC sources said, adding that Russia wants to increase supply after June.
The United States, not a member of OPEC+ but a close ally of Riyadh, wants the group to boost output to bring oil prices down.
Falih has to find a delicate balance between keeping the oil market well supplied and prices high enough for Riyadh’s budget needs, while pleasing Moscow to ensure Russia remains in the OPEC+ pact, and being responsive to the concerns of the United States and the rest of OPEC+, the sources said earlier.
Sunday’s meeting of the ministerial panel, known as the JMMC, comes amid concerns of a tight market. Iran’s oil exports are likely to drop further in May and shipments from Venezuela could fall again in coming weeks due to US sanctions.
Oil contamination also forced Russia to halt flows along the Druzhba pipeline — a key conduit for crude into Eastern Europe and Germany — in April. The suspension, as yet of unclear duration, left refiners scrambling to find supplies.
Russia’s Novak told reporters that oil supplies to Poland via the pipeline would start on Monday.
OPEC’s agreed share of the cuts is 800,000 bpd, but its actual reduction is far larger due to the production losses in Iran and Venezuela. Both are under US sanctions and exempt from the voluntary reductions under the OPEC-led deal.
REGIONAL TENSIONS
Oil prices edged lower on Friday due to demand fears amid a standoff in Sino-US trade talks, but both benchmarks ended the week higher on rising concerns over disruptions in Middle East shipments due to US-Iran political tensions.
Tensions between Saudi Arabia and Iran are running high after last week’s attacks on two Saudi oil tankers off the UAE coast and another on Saudi oil facilities inside the Kingdom.
Riyadh accused Tehran of ordering the drone strikes on oil pumping stations, for which Yemen’s Iran-aligned Houthi militia claimed responsibility. 
Saudi Arabia’s minister of state for foreign affairs said on Sunday that the Kingdom wants to avert war in the region but stands ready to respond with “all strength” following the attacks.
“Although it has not affected our supplies, such acts of terrorism are deplorable,” Falih said. “They threaten uninterrupted supplies of energy to the world and put a global economy that is already facing headwinds at further risk.”
The attacks come as the United States and Iran spar over Washington’s tightening of sanctions aimed at cutting Iranian oil exports to zero, and an increased US military presence in the Gulf over perceived Iranian threats to US interests.