Kuwait’s pandemic-related financial struggles may force its leader, Emir Sheikh Sabah Al Ahmad Al Sabah, to bypass the country’s legislative process in order to push through a crucial debt law that remains locked in parliament. The need to enact other overdue reforms may also tempt Al Sabah to extend a potential parliamentary suspension — a politically risky move that would also require suspending Kuwait's constitution. On Sept. 23, Moody’s Investors Service downgraded Kuwait's sovereign credit rating for the first time to “A1,” citing the country's liquidity crisis that has been brought on by low oil prices due to the COVID-19 pandemic. In its announcement, Moody’s also specifically referenced the Kuwaiti government’s failure to pass a debt law that would help mitigate the country’s current financial woes by enabling its finance ministry to issue sovereign bonds.

• At the end of March, Fitch Ratings estimated that the Kuwait Investment Authority (KIA) had $527 billion in foreign holdings, but $489 billion was held in the KIA’s Future Generations Fund (FGF), which the finance ministry cannot draw from under current law. As a result, the Kuwaiti government has been withdrawing from the remaining $38 billion in its smaller General Reserve Fund (GRF) to cover its budget deficit. 
• When lobbying for the debt law’s passage last month, Kuwait’s finance minister told parliament that the government had just $6.6 billion in remaining liquidity, and had been drawing $5.55 billion from the GRF each month to cover salaries and other expenses. 
• But on Aug. 16, the parliament rejected the proposed law that would enable the government to withdraw reserves from its larger FGF for the second time over concerns about transparency, corruption and long-term debt sustainability.

If a debt law isn’t passed by the end of October, Sheikh Sabah will likely dissolve parliament and issue the law through a decree, which would alleviate much of the country’s short-term financial challenges. Under Kuwait’s constitution, the emir has the ability to dissolve the assembly largely at will, which has become a common practice since Kuwait became an independent state. The parliament’s current term is set to end in December and elections need to be held before then. 

• To avoid a liquidity crunch, the Kuwaiti government has been asking for the ability to raise up to $65 billion in debt in the law, including $13 to $16 billion for the fiscal year ending March 2021.
• As the most financially stable monarchy in the Arab Gulf under normal circumstances, Kuwait would likely find a large appetite among international financial institutions and investors for its debt once the government is able to go forward with its debt plan. Saudi Arabia, Qatar and Abu Dhabi’s bonds, for example, were all oversubscribed several times earlier this year, despite the pandemic-induced drop in oil prices, as well as longer-term concerns about challenges in diversification away from oil-based economies. 

Sheikh Sabah may also keep the parliament dissolved for an extended period in order to pass more significant economic and social reforms, as well as avoid holding an election amid the COVID-19 pandemic. But such a move would require suspending the constitution, which would prove unpopular. Under the constitution, elections must be held within two months of the emir dissolving the parliament. Both the constitution and parliament have previously been suspended for years at a time, including from 1976 to 1981 and from 1986 to 1991. It is thus entirely possible that Sheikh Sabah suspends parliament for longer than just a few months in order to move quickly on reforms that the parliament has been blocking related to the country’s longer-term Vision 2035 economic diversification program, as well as unpopular reforms around social spending. Doing so, however, would be risky as it could trigger public backlash against the government. 

• Kuwait’s democratically elected parliament has enabled the monarchy to channel some of its citizens’ discontent through voting instead of on the streets. 
• Kuwait also allows an active opposition that won roughly 20 of the parliament’s 50 elected seats in 2016 — a relatively high number compared with other Middle Eastern legislatures. These opposition legislators have largely campaigned against the government’s economic reform initiatives that looked to implement an austerity budget and curb social spending programs.