Al-Watani: Highest deficit level since the pandemic amid decline in oil revenues

The final account for the fiscal year 2025/2026 revealed an unexpectedly wide deficit

National Bank of Kuwait’s economic analysis indicated that the State’s final account for the fiscal year ending 2025/2026 showed the general government deficit widening to KD 7.1 billion, compared to approximately KD 1.1 billion in the previous fiscal year. This represents a significant and unforeseen level (estimated at around 15% of GDP), marking the widest deficit since the 2020/2021 fiscal year, which was affected by the coronavirus pandemic.

Furthermore, this deficit exceeded the government’s own estimates in the budget by approximately KD 800 million. This is primarily attributed to a noticeable decline in oil revenues, resulting from a slower-than-expected phase-out of production cuts agreed upon by OPEC+, as well as disruptions in oil exports caused by tensions between the United States and Iran.

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Conversely, the rise in government spending was not a major factor, as actual spending remained close to the levels set in the general budget.

Non-oil revenues continued to grow, albeit remaining at relatively low levels. In terms of expenditure, the marginal increase of approximately 2% year-on-year reflects a disciplined government approach, alongside the positive impact of reduced subsidy expenditures due to lower oil prices during 2025. While the rise in capital expenditure was a positive development for economic growth, it remained at historically low levels. Overall, the financial results confirm the continued vulnerability of the State’s public finances to volatile oil revenues, highlighting the need to accelerate fiscal consolidation plans and economic reforms, particularly amid a regional geopolitical environment characterized by increasing uncertainty.

Significant Increase in Deficit

A key feature of these data, alongside the substantial increase in the deficit, is the sharp decline in total revenues, which fell by 25% year-on-year—the largest drop since the 2020/2021 fiscal year impacted by the pandemic. This decline is almost entirely due to lower oil revenues, which plummeted by a sharp 30% compared to the previous year, recording KD 13.6 billion, which is more than 11% below the estimates outlined in the budget. This is unusual given that budgets are typically based on conservative assumptions regarding oil prices and production levels. Although the actual average oil price during the 2025/2026 fiscal year largely aligned with the budget assumption of $69 per barrel, oil production estimates were significantly higher than reality. This discrepancy is attributed to OPEC+’s decision to delay production increases during the first quarter of the year to mitigate the risk of oversupply amid weak prices, followed by Iran’s closure of the Strait of Hormuz in March, which negatively impacted Kuwait’s oil export revenues.

Improvement in Non-Oil Revenues

In contrast, non-oil revenues continued to improve, rising by 6% year-on-year, marking the third consecutive annual increase. This performance is due to ongoing efforts to enhance non-oil resources through measures such as raising service fees and increasing revenues from state property rentals. This follows the implementation of the white land tax and a 15% corporate income tax on multinational companies, the effects of which are expected to appear in the accounts of the 2026/2027 fiscal year. Additional steps in this regard are likely to be taken in the near to medium term, including the potential implementation of selective taxation in 2027.

On the expenditure side, financial results were largely in line with expectations, as spending rose by 2.1% year-on-year to reach 23.6 billion dinars, remaining below the ceiling set in the general budget, consistent with the usual historical trend. Expenditure on employee compensation increased by 5% compared to the previous year, outpacing the decline in subsidy expenses (down 8%) and other expenditures (down 4%). Controlling expenditure has been a key feature of fiscal policy in recent years, and this approach is expected to continue as the government seeks to rationalize discretionary spending, including salaries, bonuses, goods, and services, alongside efforts to achieve operational efficiency gains. Notably, capital expenditure improved, rising by 17% year-on-year to 1.8 billion dinars, accompanied by an increase in the capital expenditure execution rate to 79% of the allocations approved in the budget. This should be viewed as an indicator of the recovery in project activity and the government’s renewed focus on domestic investment prior to regional tensions.

Financing the Deficit

Following the approval of the Financing and Liquidity Law in March 2025, the government returned to debt markets for the first time since 2017, issuing bonds with a total value of 7.8 billion dinars, including 6 billion dinars during the 2025/2026 fiscal year, through local and international offerings that saw demand exceed supply. This included the issuance of Eurobonds totaling $11.3 billion in October 2025. Outstanding public debt is estimated to have risen to approximately 14% of GDP by the end of the 2025/2026 fiscal year. The current fiscal year (2026/2027) may see the deficit widen to over 20% of GDP, due to the impact of the regional conflict on public finances, particularly through losses in export revenues from oil caused by Iran’s closure of the Strait of Hormuz since March, as well as increased crisis-related spending, including government subsidies, alternative logistical solutions, and the import of necessary materials. This comes in addition to increases in spending on non-recurring items previously identified by the Ministry of Finance in the 2026/2027 budget, which was published before the outbreak of the conflict and estimated the deficit at that time at approximately 9.8 billion dinars. Consequently, the government is likely to resort to additional debt instrument issuances this year, especially since the Financing and Liquidity Law allows for cumulative borrowing of up to 30 billion dinars over 50 years, in addition to the possibility of drawing from the General Reserve Fund, the levels of which remain undisclosed. Despite increasing financial pressures, particularly due to the conflict in the Gulf region, debt levels remain within manageable limits. Both Standard & Poor’s (S&P) and Moody’s have affirmed Kuwait’s sovereign credit ratings at AA- and A1, respectively, citing the strength of the country’s foreign reserves.

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