Beyond black gold: Rethinking fiscal policy for a diversified future in Kuwait's oil-dependent economy

This paper investigates the implications of fiscal policy reform in an oil-dependent economy, using Kuwait as a case study. The research highlights the structural imbalances rooted in Kuwait's heavy reliance on oil revenues and aims to demonstrate how comprehensive fiscal reforms can mitigate this dependency while addressing other economic distortions. Utilizing a recursive dynamic computable general equilibrium (CGE) model calibrated to Kuwait's 2022 social account matrix, the study simulates various scenarios over an eighty-one-year horizon to evaluate the potential impacts of different fiscal policy changes. Key findings reveal that without significant reforms, the fiscal dependence on oil will persist, as indicated by only marginal decrease in the fiscal dependence on extractives (FDE) index under a business-as-usual scenario. However, targeted reforms, including increases in taxes and reductions in subsidies, can drastically lower the FDE index by the end of the simulation period, suggesting that non-oil revenues could fully finance government expenditures and yield budget surpluses. The results underscore the broader economic-wide benefits of fiscal policy reform, which not only reduce fiscal dependency on oil but also rectify other structural economic imbalances. This study provides significant insights into the potential for structured fiscal reforms to generate synergistic economy-wide effects, emphasizing the necessity for a resource dependent economy to pursue such reforms to ensure sustainable economic stability post-oil depletion.