Prior to 1990 Kuwait was a rich country with large oil reserves and, owing to the prudent financial policies of the 1970s and 1980s, considerable foreign assets. The economy had low inflation, a stable currency, and a liberal external trade and payments system. In 1989, the year preceding the Iraqi invasion, Kuwait’s budget surplus was close to 30% of GDP, while the overall balance of payments surplus was $1.3 billion. Inflation was contained at 3%. The oil sector had been diversified, with an extensive range of downstream activities in Kuwait and other countries. The sensitivity of the economy to fluctuations in international oil prices had been reduced by investment income, which amounted to 86% of oil export receipts in 1989, reflecting Kuwait's large stock of foreign assets.

The Iraqi invasion of 1990 inflicted widespread physical damage and resulted in large budgetary and balance of payments deficits, disrupted the domestic financial market, halted foreign trade, and paralyzed the labor market. Over 60% of the oil wells, the lifeline of the economy, were set on fire. While estimates of the total damage to oil facilities vary, the cost may well have been in excess of $10 billion. The physical disruption spread well beyond the oil sector. Communication systems were dismantled and damaged. Private and public buildings were looted, and records and statistical systems lost. All electricity-generating plants were damaged. Production of goods and services came to a virtual standstill during the occupation and GDP is estimated to have amounted to 10-20 percent of its pre-invasion level.

Kuwait emerged from the crisis with a considerably weakened fiscal structure. Large payments associated with Desert Shield and Desert Storm operations and the cost of restoring the country’s infrastructure led to the drawdown of foreign assets and the consequent erosion of investment income, which had previously acted as a revenue stabilizer--thus rendering the economy vulnerable to unfavorable developments in the oil market. The financial system also was dealt a severe blow as result of the invasion. Financial contracts were disrupted and assets serving as collateral destroyed. The value of real estate and financial assets plummeted. It is estimated that the population shrank to about one-fifth of its preinvasion level as a result of a large-scale exodus of both Kuwaitis and expatriates, which had a major impact on labor markets and domestic supply and demand factors.

The authorities' response to the disruption caused by the invasion may be divided into three phases:

• Immediate emergency operations to restore basic economic and social services for the population;
• Reconstruction and rehabilitation, with emphasis on the oil sector and infrastructure; and
• Addressing the remaining financial imbalances and structural weaknesses in the economy to reestablish sustained foreign asset accumulation, strengthening the financial system, and enhancing the ability of the private sector to provide employment opportunities.

Kuwait has made an impressive recovery from the damage and disruption caused by the August 1990 invasion. The authorities were successful in quickly restoring basic economic and social services and oil production and capacity have returned to pre-invasion levels, as has infrastructure. The reconstruction and rehabilitation effort has contributed to strong GDP growth, while inflation has been contained. The fiscal deficit has been reduced in a gradual and steady fashion, the current account has resumed its traditional surplus position, and foreign assets, albeit at a reduced level compared to preinvasion levels, are comfortable and rising.

These positive economic developments have been reflected in the performance of the Kuwait Stock Exchange (KSE). Strong corporate earnings, excess liquidity and the Kuwait Investment Authority's (KIA's) sale oof state holdings helped the KSE reach new highs in 1996. The index rose by more than 40 percent and weekly turnover regularly topped $1,000 million. There is also the prospect of the first direct foreign portfolio investment in the KSE in 1997, with a number of international banks holding talks with Kuwaity partners.

The KIA privatization programme is continuing apace. The government's investment arm has sold KD 653 million worth of shares since mid-1994. The National Assembly is due to debate a privatization law this year. If passed, and approved by the amir, the sell-off of government utilities and state compaies such as Kuwait Airways Corporation will theoretically be permissible.

The authorities' success in addressing the economic and financial consequences of the invasion places Kuwait in a favorable position to address remaining challenges. Chief among these are re-establishing the country’s tradition of saving for future generations; providing employment for the growing number of nationals entering the labor force; and restoring the integrity of the financial sector.

IFC strategy in GCC countries focuses on institution-building in the financial sector to promote financial deepening, efficient resource mobilization and financial intermediations, and financial integration between GCC and other Arab countries. In Kuwait, in particular, IFC can provide technical assistance, and opportunities may exist for advisory services in capital markets.

Poverty, Social, and Key Economic Indicators

Source: World Development Indicators, World Bank, February 1997