The State of Kuwait covers an area of about 17,818 square kilo-meters of mostly flat desert in the North-western corner of the Arabian Gulf (Persian Gulf). To the south and southwest Kuwait is bordered by Saudi Arabia and to the north and northwest by Iraq. Iran lies to the east, across the Arabian Gulf.
Kuwait has the fourth largest proven reserves of crude oil in the world and is among the world’s largest oil producers. As such, Kuwait’s economy is heavily dependent on the oil sector which accounts for over half of gross domestic output.
Kuwait’s crude oil production averaged about 2.5 million barrels per day (mbd) in 2006, near the maximum production capacity. Though, as a member of OPEC, Kuwait must limit its output to the assigned ceiling, production tends to be slightly above the OPEC target especially when oil prices are high.
Oil production is poised for a substantial expansion in coming years with investment in the sector up substantially. The plan is to expand crude production capacity to 3.5 mbd from the present 2.5 mbd by 2010 and to 4 mbd by 2020. In attaining this goal, authorities have been implementing an ambitious investment program in recent years.
Revenues in fiscal year 2006/07, that ended in March 2007, amounted to KD 15.5 billion ($55billion), up 12% from the previous year. Oil revenues accounted for over 94% of the total. Kuwait’s gross domestic product (GDP) stood at KD 29.6 billion ($103 billion) in 2005. Nominal GDP rose 21% in 2006 boosted largely by a rapid increase in the price of oil. GDP growth has averaged 23% over the last five years. Real growth in GDP during 2005 topped 10%, and averaged 7.9% over the last five years.
The currency of Kuwait is the Kuwaiti dinar (KD), which is divided into 1000 fils (KD 1 = 1000 fils). Denominations of the currency notes are one-quarter, one-half, one, five, ten and twenty dinars, while the coins are in denominations of five, ten, twenty, fifty, and one hundred fils. For nearly four and a half years from the start of 2003, the exchange value of the Kuwaiti dinar was officially pegged to the US dollar using a flexible peg. Under this regime, the central bank would set the KD/USD rate within a 7% band around the KD 0.29963 = USD initial parity rate set at the start of 2003. Though the CBK was free to set the rate on a daily basis within the band, the central bank generally maintained a fixed KD/USD rate for extended periods of time since late 2003. The 2003 change in policy came as a preparatory step towards the adoption of a single GCC currency by 2010, as Kuwait was the only country of the six member states not to have a formal peg to the US dollar.
However, in May 2007, the CBK decided to end its US dollar peg and move to peg the dinar to a basket of major currencies, a regime similar to that in place prior to 2003. Though the constituents of the basket under the new regime are not disclosed, the US dollar is thought to have the largest weight with the euro, yen, and British pound having significantly smaller weights. As of the end of July 2007, the rate stood at 0.282 KD/USD. Commercial banks fix their rate for commercial and financial transactions by reference to the central bank rate. Although published retail rates show about a 1% buying and selling spread, it is normal to obtain more competitive quotes from the banks for large transactions.
Kuwait has eleven commercial banks including six branches of foreign banks. There are three Islamic banking institutions and one specialized bank. In addition, there are few investment & currency trading companies that are regulated under the Commercial Code (68/1980) & its amendment and under the ministerial decree number (113/1992) in which Arab Financial Brokers was the first to register under number one (1) to that effect in records. Total assets at local banks reached KD 27 billion ($93 billion) at the end of 2006, growing by 25% from the year before. Private deposits totalled KD 15.3 billion ($53 billion), up 22%.
The spot foreign exchange market in Kuwait is large and it has always been possible to deal in substantial amounts on a regular two-day settlement basis. There are no exchange controls and residents and non-residents may freely purchase and sell foreign currencies in Kuwait. There are also no restrictions on transfers to and from Kuwait by residents or non-residents in any currency.
There are also no controls on the movement of foreign exchange or restrictions on trade with other countries, with the exception of Israel. While the bulk of demand in the market is for necessities and low to medium priced consumer goods and durables, the very high per capita income of a certain segment of the market also creates significant demand for high quality goods.
In a bid to achieve greater integration with the global economy, Kuwait became a member of the World Trade Organization (WTO) in 1995. Kuwait has also made efforts to strengthen trade relations with partners in the region. In January 2005, Kuwait began enforcing a zero-tariff regime on exports originating from members of the Greater Arab Free Trade Area (GAFTA). Kuwait is also part of a GCC customs union which has eliminated all tariffs and trade barriers between GCC member states.
Kuwait has been eager to establish strong trade ties with the US. In February 2004, Kuwait signed a Trade and Investment Framework Agreement (TIFA) with the United States. The agreement is considered the first step in developing economic reform and trade liberalization criteria to strengthen economic relations with the US and to work toward an eventual Free Trade Agreement (FTA).
Kuwait has three important laws governing business activity; which are the Commercial Companies Law (15/1960) and its amendments, the Civil Code (67/1980), and the Commercial Code (68/1980), all strongly influenced by France’s Napoleonic code. These three codes form the backbone of the law governing such areas as civil relations, general contract law, banking operations and commercial instruments (including bills of exchange, checks, promissory notes), commercial and other agencies, carriage and storage of goods, bankruptcy, construction and contracting. In addition, there are a number of laws dealing with specific topics such as taxation, foreign direct investment, lease contracts, and civil and commercial procedures. There is also a maritime code, which covers such matters as maritime claims, ship registration, charter parties, marine insurance and bills of lading.