The Economic Policies that Promote Business in Kuwait - Coursework Example

Formal Report/Problem-Solution Table of Contents Table of Contents 2 Executive Summary 3 Introduction 3 Background 4 Analysis 5 Conclusions and Recommendations 9 References 11 Executive Summary Kuwait has geographically small land mass but enjoys enormous wealth, open economy with oil reserves of billions of barrels. Oil accounts for almost half of its Gross Domestic Product, a huge chunk of the export revenues and a large percentage of government income. Oil being the driving force behind the economy, the officials has made a commitment of increasing the production of oil to four million barrels a day by 2020. Budgetary surpluses have always stood out at around 30 percent of Gross Domestic Product, which in the overall effect has led to increase in budgetary expenditures, more so wage hikes for civil servants as well as increased funding of Kuwaiti’s Future Generations Fund. The general view of Kuwait’s economy is of concern due to the laxity to diversify its economy, partly due to its positive financial status, secondly, due to absence of proper business climate and poor relationship between the national assembly and the ruling branch, which has staggered economic reforms. Recently flexibility in the emerging market, high lighting the problems faced in unwinding Kuwait’s economic spectrum has remained a tedious work with the involvement of the International Monetary Fund to try and easy the Federal Reserve’s quantitative policy. Furthermore, geopolital uncertainties are also high exclusively to the region. Introduction Kuwait has been struggling with standing strong economically in regard to its central location within the Middle East region. It has significant difficulty in dealing with foreign investors and local firms. However, World Bank has taken significant step to give advisory and ranking to boost this phenomenon. The main objective of this report is to show that despite its location at the epicenter of a volatile region, Kuwait is still an economic hub that is open to foreign investors while at the same time safe guarding local investments. The paper will address the economic policies that promote business in Kuwait, tax mechanisms for foreign investors, means of protection of the local firms, global ranking in ease of doing business in Kuwait and the remedial measures towards the listed challenges. This report is organized as follows. The first section is the background where the definition of the terms of reference as well as the historical context of the problem will be discussed. The next section is the analysis section where the numerical data findings will be presented and their relationship with the topic of the day explained. The last section will be the conclusion where a summary of the findings and its interpretation as well as the recommendations will be provided. Background The state of Kuwait is located at the Arabian Gulf between the Gulf Cooperation Council countries. Kuwait’s economy greatly depends on petroleum, which accounts 90% of its exports and 80% of its budget revenues since the discovery of oil in 1938. Therefore, oil refining and petrochemical processing dominates Kuwait manufacturing sector. Quadrupling of the oil prices in 1973 lead to a boom in the real estate sector thus providing foreign investors with investment opportunities although its development was hampered by the Iraqi invasion in 1990. The government’s preference to give business to the locals caused the economy to be dominated by companies owned by locals. However, promulgation of the Foreign Capital Investment Law in 1999 encouraged foreign investors to engage in profitable operations in Kuwait while at the same time assisting the government to meet its objectives. World Bank is the central global institution that addresses the socio-economic and political trend across the world (Evenett, 2009). Moreover, it offers resources in terms of loans and advisory services for economic reconstruction and stimulus to various member countries. Kuwait falls within the widely unstable Middle East. Ease of doing business is a key criterion that World Bank has used to gauge economic performance of Kuwait on the global platform (McDonough,et al. 2010). The ease of doing business is indexes created by the World Bank .The countries that are highly ranked have a better simpler business regulations and stringent property rights protection (Ṣabrī, 2008). A country’s ease of doing business index is usually an average of ten sub-indices, which includes starting a business, dealing with construction permits, getting electricity, registering property, getting credit, paying taxes, protecting investors, cross boarders trading, resolving insolvency and enforcing contracts. Analysis A formal report on its economic overview indicates that Kuwait offers a better investment destination despite its geopolitical position within the politically volatile region. Considering its relative socio-economic and political stability, it is rated as having high income with an estimated population of 3,368,572 (Ṣabrī, 2008). Economic policies that promote business in Kuwait Kuwait has open market policies that have enabled facilitation of the international trade and corresponding investment flows. The underlying country’s scores regarding the trade freedom and venture freedom is above the global averages (Haddad & Shepherd, 2011). Nevertheless, there is overdue privatization and massive organizational reforms that can enable expansion of the economy and correspondingly emergence of vibrant private sector due to the lofty oil revenues. The Kuwait dinar is mainly connected to an unidentified basket of the main global currencies. Moreover, there exist neither constraints on the present nor capital account transactions within Kuwait past the underlying obligation that entire foreign exchange purchases made via bank and corresponding accredited foreign exchange merchant (Ṣabrī, 2008). Economic policies pertaining to the equity, finance capital, revenues, royalties, dividends coupled with the individual savings have been transferred within or outside of the Kuwait devoid of any interference. Moreover, under the prevailing Direct Foreign Capital Investment Law of the Kuwait, investors are allowed to transfer entirely or partially section of their underlying investments to another foreign and domestic investor without any restrictions of the cash transfers. These policies aids in the promotion of the business within Kuwait Macro-economic variables such as GNI Per Capita and population indicate ease of doing business and succeeding in Kuwait (Evenett, 2009). The World Bank has ranked Kuwait from 2014 and 2015 forecasts which indicates 86 and 79 respectively as shown in the Figure below. Figure 1: Comparisons of Ease of doing business indices of Kuwait between 2006 and 2015. The indices depicts an increasing ease of doing business in Kuwait over the years from number 37 in 2006 to 79 in 2015 (Doing Business 2014, 2013). Increase in ranking is mainly due to the implementation of the different business reforms. For example, implementation of reforms in the trade across borders emanated due to advanced administrative procedures and staff training. Moreover, advancement of administrative procedures and staff training in Kuwait led to reduction of time required for custom clearance (Ṣabrī, 2008). Resolving Insolvency reforms where the insolvency process was enhanced by introduction of new legal procedures that enabled financially distressed companies on the verge of insolvency to restructure in 2010 improved the DB rankings from 61 in 2010 to 74 in 2011. Labor Market Regulation in 2011 enabled number of payable annual leave days as well as increase in the notice period in case of redundancy dismissals (Ṣabrī, 2008). The Protection of Minority Investors in 2014 has enables minority shareholder to request the appointment of an auditor to review the company’s activities Tax mechanisms for foreign investors Kuwait has unattractive tax mechanism, limited access to credit facilities and protection of local industries. Kuwait constitution prohibits foreign ownership of the underlying Kuwait’s mineral resources. Foreign investments are subjected to the heavy taxation thereby resulting to the expropriation. Expropriation of tax occurs due to lack of the rebates to curb tax evasion. Rebates aids in balancing of the interest of the foreign investors (Haddad & Shepherd, 2011). Numerous investment treaties deal pertaining to tax exclusively demands that allegations of the unfair taxation Kuwait protects local firms by imposing interior taxation and regulations, Import boundaries and import licenses, export grants and TRIMs, Anti-dumping, countervailing and protection measures (Ṣabrī, 2008). Kuwait does not impose taxes to the locally manufactured goods. Moreover, Kuwait possesses a common trade remedy that conform to the anti-Dumping, Subsidizations and corresponding Countervailing and Safeguard Measures The aggregate rankings shown above are an aggregate of the performance of the ten sub-indices earlier mentioned. An example of all the sub-indices is shown in the chart comparing their performance in 2014 and 2015 in Figure 2 below. Figure 2: Comparison of the rankings of different sub-indices in Kuwait in 2014 and 2015. From the figure above, it is clear that the reforms implemented in 2014 that increased the minimum capital requirements led to a decline in the rankings of Starting A Business from 146 in 2014 to 150 in 2015. The ranking is done out of 189 countries and hence a clear indication that Kuwait is not worse of although more still need to be done (Ṣabrī, 2008). According to the World group, (2014), the ranking is based on general business regulations that have significant influence on the outcome of any foreign business adventure in Kuwait. Expropriation of tax remedial measures is tackled by enacting rebates to curb tax evasion thus resulting to balance of interest of the foreign investors. Moreover, it will ensure non-discrimination and fairness. Numerous investment treaties deal pertaining to tax exclusively demands that allegations of the unfair taxation be tackled via consultation amidst the two prevailing treaty partners thus removing scope of undertaking endowment within the treaty. Conclusions and Recommendations Foreign Capital Investment Law has encouraged foreign investors to engage in profitable operations in Kuwait as well as assisting the government to meet its objectives. Kuwait has open market policies that have improved business within the country. Presently, Kuwait needs an economic stimulus in support of economic activities in the country. Recently announced development plan is the masterpiece of Kuwait’s economy in case it is well implemented. Importantly, the government mega projects stand a better chance of reviving the economy by the virtue that private sectors will also be involved. As a result, banks will have the desire to provide credit lines as long as government supports them. This will have a direct positive effect with expansions in monetary policy to raise liquidity. Kuwait needs to adopt competitive economic tool that reconciles foreign companies and local firms concerning mutual existence and sustainable growth. The projected ease of doing business in Kuwait should be used as strong indicator of continued economic prosperity assuming other factors are held constant and particularly political stability. References Doing Business 2014(2013): Understanding Regulations for Small and Medium-Size Enterprises. ,. Internet resource. Retrieved on 15th November 15, 2014 from: http://books.google.co.ke/books?id=pwg4AgAAQBAJ&pg=PA203&dq=ease+of+doing+business+in+kuwait&hl=en&sa=X&ei=ZlpoVL-mJef-ywPlnoHwAQ&redir_esc=y#v=onepage&q=ease%20of%20doing%20business%20in%20kuwait&f=false The World Group (2014). Doing Business; Ease of doing business in Kuwait. Retrieved on 15th November 15, 2014 from http://www.doingbusiness.org/data/exploreeconomies/kuwait/ McDonough, Terrence, Michael Reich, & David M. Kotz (2010). Contemporary Capitalism and Its Crises: Social Structure of Accumulation Theory for the 21st Century. Cambridge: Cambridge University Press. Print. Ṣabrī, N. R. (2008). Financial markets and institutions in the Arab economy. New York: Nova Science Publishers. Haddad, M., Shepherd, B., & World Bank. (2011). Managing openness: Trade and outward- oriented growth after the crisis. Washington, D.C: World Bank. Evenett, S. J. (2009). Effective crisis response and openness: Implications for the trading system. Washington, DC [u.a.: World Bank [u.a.. Read More