The Kuwaiti economy stands at a defining juncture. In early February, the Cabinet endorsed the draft budget for fiscal year 2025–2026, projecting an 11% rise in the deficit, shaped by slightly diminished revenues compared with the preceding year. The idea, which is still pending Emir Mishal Al-Ahmad Al-Jaber Al-Sabah’s approval, comes as the Persian Gulf state struggles to diversify its economy because of its continued reliance on oil output.
After a 3.6% drop during the 2023 recession, Kuwait’s economy shrank by 1% in 2024. Since 90% of exports and government revenue come from hydrocarbons, OPEC+ production strategy, global demand, and rival output continue to have a significant impact on economic performance.
Kuwait is under pressure to accelerate its diversification efforts despite the World Bank’s prediction that GDP growth will exceed 2% this year, given recent proposals by US President Donald Trump to lower global oil prices.
Reforms have been postponed for years by a political impasse. Kuwait has held four legislative elections and experienced ten Cabinet resignations since 2020. However, change is underway. The Emir took a drastic step in May 2024 to expedite important structural reforms in cooperation with international organisations by dissolving Parliament and temporarily suspending the constitution for a maximum of four years.
“We were initially quite dubious because they had previously made promises, but we can see the actions and seriousness of certain reforms,” says Ahmad Al-Duwaisan, Al Ahli Bank of Kuwait’s (ABK) interim CEO and general manager of Corporate Banking.
There is ongoing discussion about game-changing measures such as reducing public-sector wages and subsidies, which make up 80% of total spending; enacting a value-added tax (VAT); modernising the Emirate’s mortgage law; and passing a new debt law that would enable Kuwait to borrow on foreign markets. However, several laws have been passed, indicating that reform is gaining traction.
Kuwait is implementing a 15% corporate tax on foreign companies that have generated more than $750 million in revenue in at least two of the previous four years, in accordance with the Organisation for Economic Cooperation and Development’s “Pillar Two” standards on minimum tax regulations. According to Finance Minister Noora Al-Fassam, the tax will target more than 300 businesses and generate up to $825 million a year.
Al-Fassam told local media, “This is part of a government strategy to build a more diversified economy, attract foreign investment, and create jobs for citizens. Kuwait is serious about moving ahead with fiscal and economic reforms, as seen with this as well.”
The main goal of the new measures is to establish Kuwait as a competitive business hub that complies with best global and regional practices, even though some multinational corporations may want to reduce compliance costs by expanding local partnerships or moving regional headquarters outside Kuwait.
Ali Khalil, CEO of Markaz, a Kuwaiti asset management and investment bank, said, “Kuwait’s alignment with international tax standards could improve credibility on a global stage and prevent the country from being seen as a tax haven for foreign investors, which could drive more sustainable and high-quality foreign direct investment (FDI) inflows.”
Furthermore, this reform lays the groundwork for future tax measures that could diversify the government’s sources of income. The extra money would likely be reinvested in the nonoil economy to help upgrade corporate infrastructure. Simultaneously, the administration wants to relax foreign ownership regulations and enhance investment frameworks and litigation processes.
According to Khaled Yousef Al-Shamlan, CEO of Kuwait Finance House (KFH), the second-largest bank in the emirate after the National Bank of Kuwait, “The country’s economic reforms are paving the way for significant opportunities for financial institutions. More investment inflows will be made possible by initiatives to improve the business environment, such as public-private partnerships and regulatory simplifications.”
Revamping the infrastructure
Another top priority is infrastructure improvement. With the signing of $1.3 billion in maintenance contracts with 18 businesses last October, Kuwait’s road system, once considered the worst in the Gulf Cooperation Council (GCC), will be renovated.
Sectors such as housing, health, water, waste management, power, and oil and gas have seen a sharp increase in project activity. The largest bank in the emirate, National Bank of Kuwait (NBK), reported that $8.7 billion worth of projects were awarded last year, a 44% rise from the previous year and the highest amount since 2017. The Cabinet has approved over $5.6 billion for 124 projects in addition to the 2025–2026 budget.
“With thriving economic activity, the government’s resolve to execute projects before deadlines, a supportive and strong banking sector, an expected fall in interest rates, stability in the regional geopolitical scenario, elevated oil prices, and supportive government policies for private-sector participation,” KAMCO Invest, one of Kuwait’s leading non-banking financial institutions, anticipates that markets will continue to be driven this year.
Kuwait is working on projects totalling $121 billion, some of which will be granted this year. Al-Shamlan stated that significant prospects for financial institutions are being created by economic reforms.
One of the most recent was the 110-kilometre railway tender that Turkey’s Proyapi Consulting won in January to link Kuwait and Saudi Arabia by 2030. By 2045, the new line is anticipated to carry eight million people and 95 million tons of cargo annually as part of a larger 2,100-kilometre network that spans the GCC. The Cabinet also signed an agreement with China State Construction Engineering Corporation last month to build, oversee, and run the new Mubarak Al Kabeer port.
All of this is good news for banks. Capital expenditures and reforms could accelerate economic growth and recovery, increasing lending activity. Al-Duwaisan states that ABK has been given a fair share of the new projects and that “as a bank, we have to take advantage of the contracts that are rolling out as we speak. We have excellent coverage across several industries, including energy, power, civil, and infrastructure.”
“I see growth potential in sectors that are essential to the infrastructure and energy needs of the global economy, particularly in the areas of construction, services, and oil and gas,” Al-Shamlan said.
Changing environment of banks
The foundation of Kuwait’s non-oil economy is the financial industry. Kuwaiti lenders are demonstrating resilience in the face of volatile global energy prices and a tense regional geopolitical environment.
In January, Standard & Poor’s (S&P) gave Kuwaiti banks a stable outlook, stating that they “usually retain 50% or more of their bottom line, which supports their capitalisation, and operate with strong capital buffers.” With a small percentage of hybrid instruments, the quality of capital remains high.
Despite this, the financial landscape is changing dramatically. The administration proposed laws in July intended to increase transparency and reduce fraud by imposing stricter screening requirements on those wishing to register bank accounts. At the same time, as consolidation initiatives pick up momentum, the banking industry is beginning to reflect regional trends.
A $190 million deal to buy Bahrain’s United Gulf Bank was announced by Burgan Bank in December, and it is expected to be finalised in the coming months. In a release, Burgan Group CEO Tony Daher stated that the transaction “aligns with the bank’s new asset reallocation strategy and efforts to build new and diversified revenue streams.”
Burgan may use the acquisition to further expand in the MENA region, as it already has subsidiaries in Algeria, Tunisia, and Turkey in addition to a corporate headquarters in the United Arab Emirates.
There are other deals in progress. One of Kuwait’s biggest family companies, Alghanim Trading, sold a 32.75% stake in Gulf Bank to Warba Bank in January. Boubyan Bank suggested last summer that it would buy Gulf Bank, which would have made it Kuwait’s third-biggest bank with more than $50 billion in assets. Later on, the deal was cancelled.
Due largely to mergers and acquisitions that produced regional giants, the number of banks in the GCC has decreased from 77 to 60 since 2018. However, Kuwait mostly remained out of the spotlight until 2022, when KFH successfully acquired Bahrain’s Ahli United Bank (AUB), completing the first significant cross-border consolidation in the MENA region and establishing the second-largest Islamic bank in the world with combined assets of $120 billion.
However, Kuwait, like many GCC nations, is still seen as overbanked, with 21 regulated banks serving a population of just over four million. Furthermore, there is fierce competition among the other participants in the banking sector due to the dominance of NBK and KFH, which together account for around two-thirds of total assets.
Al-Duwaisan said, “We’re all fighting over good clients, and that creates compression in margins and returns.”
However, there is little chance that the planned mergers will result in major disruption. Usually, only asset restructuring occurs during GCC bank consolidations, leaving the major shareholders, strong families or state-owned companies, unchanged.
The royal family-backed Kuwait Projects Company (KIPCO), one of the biggest holding companies in the MENA region, is the parent company of both Burgan and United Gulf Bank. As a subsidiary of NBK, Boubyan Bank would have strengthened NBK’s already dominant position in the market if it had purchased Gulf Bank or any other retail bank.
Building up its capital markets to support the expansion of the private sector is another objective of Kuwait’s recent financial sector development activities. Results are beginning to emerge from measures to simplify the regulations governing foreign ownership and the growth of the Kuwait Stock Exchange (KSE).
The KSE is one of the most active and successful stock markets in the GCC, with 69 million shares traded there last year. Although most investors are still domestic, foreigners accounted for 7.8% of all deals in 2024, up from 5.8% in 2021.
Markaz’s Khalil, who recently introduced the “GCC Momentum Fund,” Kuwait’s first passive investment fund, said, “Reforms undertaken to deepen the capital markets and improve liquidity have helped increase the visibility of Kuwait markets among foreign investors and allowed asset managers to launch new products like ETFs and REITs, which was previously not possible.”
Additionally, by focusing on theme funds and products based on alternative asset classes such as private equity and private credit, Markaz wants to expand its product line.
Global index providers MSCI, FTSE Russell, and S&P elevated the stock exchange to “emerging market” status when Boursa Kuwait, which runs the KSE, was privatised in 2016. Attracting local family businesses to list is one of the major challenges ahead under this ambitious “Market Development Plan,” which is currently in its third phase.
“The IPO wave that is sweeping through some other GCC countries has not yet taken off in Kuwaiti markets,” Khalil said.
Similarly, there is limited deal activity in Kuwait. Market development would be aided by policies that encourage the listing of family firms, the privatisation of public assets, the creation of parallel markets, and the use of products like exchange-traded funds (ETFs).
Kuwait advances economic reform
Kuwait is actively pursuing economic diversification through significant infrastructure projects and a growing focus on renewable energy. A cornerstone of these efforts is the development of Madinat al-Hareer, or Silk City, envisioned as a major urban hub to bolster trade and investment.
Integral to this project is the Sheikh Jaber Al-Ahmad Al-Sabah Causeway, inaugurated in May 2019, which connects northern Kuwait to Kuwait City, improving accessibility and laying the groundwork for further development in the Subiya region.
Additionally, the Mubarak Al Kabeer Port, part of the Belt and Road Initiative (BRI), is under construction on Bubiyan Island. The first phase, completed in April 2021 with four operational berths, positions the port to serve as a pivotal maritime centre, potentially creating numerous job opportunities and strengthening Kuwait’s role in regional trade networks.
In tandem with infrastructure advancements, Kuwait is embracing renewable energy to reduce its reliance on oil and promote sustainable development. The Middle East has emerged as the fastest-growing renewables market outside China, with countries such as the United Arab Emirates announcing a $6 billion, five-gigawatt solar project.
While Kuwait’s specific renewable energy projects are not detailed in the provided sources, the regional momentum toward renewables indicates a broader shift that Kuwait is likely to be part of. This transition aligns with global trends and supports Kuwait’s “Vision 2035” goals, which aim to diversify the economy and ensure long-term sustainability.
Through these strategic initiatives in infrastructure and renewable energy, Kuwait is taking concrete steps toward reducing its economic dependence on oil, fostering a more diversified and resilient economy.
Kuwait’s efforts at economic diversification are gaining momentum, but traditionally, the nation lags in adopting significant reforms compared with its neighbours in the GCC. While Kuwait is now striving to catch up, Saudi Arabia, the UAE, and Qatar have aggressively pursued economic diversification via large investments in non-oil industries.
Projects such as the $500 billion smart city NEOM and major foreign direct investment (FDI) incentives driven by Saudi Arabia’s “Vision 2030,” along with liberalising foreign ownership rules, creating free zones, and heavily investing in renewable energy—such as the largest solar park in Dubai—have made the UAE a global business centre. Particularly after successfully hosting the FIFA World Cup 2022, Qatar has used its wealth from liquefied natural gas (LNG) exports to develop its finance and tourism sectors.
Kuwait’s reforms have been delayed due to political deadlock, although the current suspension of Parliament has accelerated important projects. The nation is now focusing on major infrastructure projects such as “Silk City” and “Mubarak Al Kabeer Port,” as well as new tax laws intended to attract foreign capital. Furthermore, Kuwait’s early-stage efforts in renewable energy align with the regional shift toward sustainability.
Kuwait aims to establish itself as a competitive participant in the evolving economic landscape of the GCC as it increases the pace of reforms. To match the success of its regional peers in diversification, however, consistent political stability and effective policy implementation will be essential.
Ongoing reform momentum, in turn, contributes to rising investor confidence. However, given the government’s aspirations to significantly boost oil output, much work remains to promote and support private-sector expansion that reduces the state’s reliance on hydrocarbon revenue.