Public Debt to Reach 23% of GDP in 2026/2027

A report by National Bank of Kuwait stated that several key economic indicators have recovered from the low levels reached in earlier stages of the conflict, indicating that the economy has largely absorbed the initial shock, although conditions have not yet fully returned to normal.

According to the report’s details, the sharp decline in oil revenues, combined with spending on conflict-related costs, including subsidies and capital expenditures for reconstruction, will result in a fiscal deficit of approximately 20% of GDP (KD 9.6 billion) in the 2026/2027 fiscal year, wider than the 15% of GDP deficit recorded in the 2025/2026 fiscal year.

This deficit will be the eleventh over the past twelve years and the largest since the 32% of GDP deficit recorded during the COVID-19 pandemic.

However, the financial situation is expected to improve significantly in the 2027/2028 fiscal year, potentially approaching balance, assuming a recovery in oil production and exports alongside a reduction in conflict-related reconstruction spending.

The government is also expected to refocus on its fiscal consolidation agenda after a period of high spending pressures.

This includes continuing efforts to boost non-oil revenues, particularly through ongoing reviews of government service fees and the introduction of new tax measures, likely starting with a selective tax in 2027 before transitioning to a value-added tax.

General government debt has risen since March 2025 following the approval of the Financing and Liquidity Law, but the pace of borrowing should slow next year due to lower financing needs (assuming an improvement in the financial situation) and the new law allowing borrowing from the Future Generations Reserve Fund. Additionally, a new sukuk law will further diversify borrowing options.

We expect general government debt to reach around 23% of GDP in the 2026/2027 fiscal year, with a likely slowdown in issuance given the possibility of accessing financing from the Future Generations Reserve Fund.

Credit rating agency Fitch considers this type of borrowing as government borrowing from another government entity, and thus it will not be included in the general government debt figure.

Overall, fiscal space remains comfortable, with a low debt burden by global standards and ample room for additional borrowing exceeding KD 30 billion from the Future Generations Reserve Fund, effectively raising the cumulative government debt ceiling (general government debt plus loans from the Future Generations Reserve Fund) to over KD 60 billion, compared to approximately KD 11 billion in current issuances.

Non-oil activity has improved despite headwinds from trade disruptions, project delays, and general uncertainty related to the conflict, supported by government measures, stable household incomes, and easing inflationary pressures. Meanwhile, oil production has risen to three-quarters of its pre-conflict level, and as more shipments pass through the Strait of Hormuz, Kuwait is better positioned to benefit from higher oil prices than in the early stages of the conflict. The improvement in economic data reinforces our previous view that the non-oil economy will avoid a sharp slowdown.