Kuwait

Regional conflict and oil shock drive economic contraction

In the event of a prolonged conflict in Iran, Kuwait’s macroeconomic outlook would deteriorate significantly due to its high dependence on the hydrocarbon sector (nearly 45% of GDP), its complete reliance on the Strait of Hormuz for oil exports, and limited economic diversification. Disruptions to oil production and exports are primarily driving the economic downturn, which directly affects overall activity and spills over into the non-oil economy through weaker confidence, delayed investment, tighter financial conditions and lower public revenues. Kuwait is one of the Gulf countries most dependent on the Strait of Hormuz for its hydrocarbon exports, with 100% of exports passing through this strait. Disruptions to shipping in the Strait of Hormuz forced Kuwait to cut oil production to around 500,000 barrels per day (bpd), down from nearly three million bpd before the war began. Deteriorating security conditions will also affect travel, supply chains, and non-oil exports and imports. Additionally, LNG imports from Qatar, which are crucial for domestic power generation, could face logistical and security-related challenges. This would put pressure on the domestic energy supply and electricity generation capacity.

At the same time, inflationary pressures are expected to rise, primarily due to external factors. Higher import costs resulting from supply chain disruptions and rising global shipping prices are likely to contribute to domestic inflation, particularly through food prices. This highlights Kuwait’s vulnerability to imported inflation, despite relatively moderate domestic demand conditions. In this environment, monetary policy is expected to remain under pressure. Kuwait’s dinar is anchored to a currency basket with a significant dollar component which limits the central bank’s ability to diverge from US monetary policy. In response, the central bank has shifted toward macroprudential support measures rather than adjusting interest rates, including easing liquidity and capital requirements, releasing capital buffers, and increasing lending capacity for banks. These measures aim to sustain credit flows and cushion the economic impact of the conflict. However, these measures primarily support financial conditions rather than directly stimulating credit demand. Hence, monetary policy is only partially effective as a stabilisation tool.

Hydrocarbon revenue decline causes deterioration in fiscal and external accounts

The fiscal position is expected to deteriorate sharply mainly due to Kuwait’s high reliance on hydrocarbon revenues which account for 90% of total fiscal revenues. A decline in oil production and exports would directly weaken government income. At the same time, spending pressures would increase as the government seeks to mitigate the impact of the crisis on the domestic economy. Kuwait has substantial financial reserves, including an estimated USD 1 trillion in assets in the Kuwait Investment Authority (KIA), its sovereign wealth fund (around 650% of GDP). These assets would allow fiscal policy to maintain flexibility and alleviate the impacts of the conflict on the economy.

The current account balance will weaken due to the country’s dependence on hydrocarbon exports. Disruptions to oil export flows will impact export revenues (around 90% of the total) while elevated shipping costs and supply chain constraints will increase the cost of imports, further reducing the external surplus. Additionally, Kuwait’s exports are heavily dependent on the energy sector. Without alternative sources of exports, a drop in oil revenues would directly affect the country's external position. Last, because food and equipment imports are rigid necessities, Kuwait cannot easily reduce import spending to stabilise its trade balance.

Despite these pressures which are compounded by structural services deficit and remittance payments, the central bank’s international reserves (covering around 10 months of imports) and substantial buffers in its sovereign wealth fund provide an important cushion against external shocks. However, a prolonged disruption would lead to a more pronounced erosion of the current account surplus, thereby reinforcing the economy’s structural exposure to hydrocarbon market volatility.

Regional geopolitics are key risks

Political risks in Kuwait stem from a combination of domestic institutional friction and heightened regional tension, which together increase economic uncertainty. Domestically, recurring friction between the government and parliament (suspended in 2024) often result in delays to key economic and fiscal reforms. This institutional rigidity limits the government's ability to swiftly and decisively respond to economic shocks, especially regarding fiscal consolidation, subsidy reform and economic diversification.

In the region, geopolitical risks have increased considerably due to the war in Iran and the closure of the Strait of Hormuz. Owing to its proximity to the conflict zone and the heavy reliance on maritime export routes, Kuwait is experiencing direct spillovers, including disruptions to oil exports, trade flows, and investor sentiment. Although Kuwait has strong defence partnerships - for example with the US - these partnerships mainly serve as a stabilising factor rather than affording full protection against regional spillovers. Consequently, Kuwait is likely to remain heavily exposed to heightened geopolitical risks.

Last updated: May 2026