$Unique_ID{COW02105} $Pretitle{385B} $Title{Kuwait Chapter 1B. The Economy} $Subtitle{} $Author{Darrel R. Eglin, Donald M. Seekins} $Affiliation{HQ, Department of the Army} $Subject{oil kuwait government production revenues percent gas officials crude kuwait's} $Date{1984} $Log{Kuwaiti Crafts*0210501.scf Figure 6.*0210503.scf } Country: Kuwait Book: Persian Gulf States, An Area Study: Kuwait Author: Darrel R. Eglin, Donald M. Seekins Affiliation: HQ, Department of the Army Date: 1984 Chapter 1B. The Economy [See Kuwaiti Crafts: Courtesy Embassy of Kuwait, Washington DC] After their migration to Kuwait Bay in the early 1700s, Kuwaitis were forced by the scant rainfall and limited water for irrigation of crops to look seaward for economic development. Boatbuilding flourished, and Kuwaiti craft became known throughout coastal Arabia for their quality. These craft with Kuwaiti sailors plied the waters of the Gulf, the Arabian Sea, and the Indian Ocean. Pearling was also a large-scale activity until the rise of the cultured pearl industry in Japan in the 1920s. The good harbor in Kuwait Bay and other maritime activity led to the development of a vigorous merchant class in Kuwait City. During the eighteenth and nineteenth centuries, the city rivaled Basrah in Iraq as an entrepot for the trade between India and parts of the Middle East. The legacy of seafaring and trade gave the Kuwaiti people an aptitude for commerce and a propensity to look abroad that continued into the 1980s. Although maritime activities provided employment in early Kuwait, incomes were low and life harsh except for a few merchant families who became wealthy. Even the ruling family had a very limited income. In the mid-1930s the entire budget for the palace and all of the royal family was the equivalent of about US $7,500 a year and was contributed directly or indirectly by the merchant families. In FY 1939 the average per capita income in the country was estimated at the equivalent of about US $35 a year, and total public revenue, two-thirds of which came from import duties, amounted to US $290,000. Some observers attributed the resourcefulness and independent spirit of the Kuwaiti people to their struggle for survival under adverse conditions. Conditions began to change after oil was found in 1938. Oil field activities created jobs at much higher pay than many traditional pursuits, attracting Kuwaitis from labor-intensive, low-income sectors of the economy and workers from other countries. World War II held up development of the fields. Commercial production of crude oil began in 1946, ushering in a construction boom. More workers were attracted from abroad, and by the 1950s foreigners outnumbered Kuwaitis in the work force. By 1948 oil revenues had reached about US $6 million, sufficient for the government to begin public projects to improve living conditions. In 1949 construction began on a public hospital, a government building, schools, and roads. The government was not prepared for the changes that occurred; there was little government when oil was discovered, and little was needed. Initial public projects were started with minimal basic planning and often from simple sketches. Public administration developed in response to the increasing flow of oil revenues. But one basic change occured with the first oil company payment: the oil revenues were paid to the amir, concentrating in his hands and, subsequently, those of other government officials, the distribution of funds. The position of the amir was enhanced relative to other segments of the society, and he was freed of dependence on financial support or taxes from the rest of the community. Oil revenues continued to mount. By the 1960s Kuwait had become the richest country in the world (wealth being measured in terms of national income per capita). The rapid escalation of crude oil prices and revenues per barrel greatly increased the government's income in the 1970s and early 1980s. Oil revenues jumped from US $1.8 billion in FY 1974 to US $8.3 billion in FY 1975. By FY 1980 government income from oil reached nearly US $21.7 billion, and in 1981 gross domestic product (GDP) amounted to US $24.3 billion. GDP on a per capita basis was about US $16,500, making the average Kuwaiti the world's wealthiest-except, perhaps, for the citizens of Qatar. The flow of oil revenues created a problem unusual to most governments in the world-what to do with all the money. By the early 1980s Kuwait had an extensive welfare program, exceeded perhaps by no other country. Citizens received free medical services from modern facilities, free education through the university level, and subsidized food, housing, utilities, and transportation, for example. Noncitizens, however, benefited much less, and many resented their disadvantaged position despite having worked many years in the country. In the 1970s the government invested heavily in a gas- gathering system and downstream (see Glossary) facilities for refining, petrochemicals, and petroleum marketing. Even with the various expenditures a substantial surplus of funds accumulated over the years, which the government invested in overseas assets. By the early 1980s Kuwait's economy was far different from that of 40 years earlier. In 1981 the oil industry (including refining) dominated the economy, contributing 63 percent of GDP (see table 5, Appendix A). The other major activity was public administration and social service, which accounted for about 10 percent of GDP. Trade contributed 7 percent of GDP and financial services a similar percentage. Industrial activity and construction each amounted to 4 percent of GDP. The remaining sectors made minor contributions to value added-particularly farming and fishing, which accounted for 0.3 percent of GDP. Apart from the oil industry but because of oil revenues, the economy was predominantly service oriented. The distribution of oil revenues among the population accounted for part of the services and also stimulated distribution and sale of imported goods and financial transactions, including real estate and stock market speculation (see Finance, this ch.). The traditional commercial orientation of the more prosperous Kuwaitis persisted in the 1980s, causing interest and investment in industry or agriculture to be the choice of relatively few. Once exports of oil began in the late 1940s, economic development became nearly continuous. Until 1972 much of the expansion resulted from increasing crude oil production, but oil production peaked in that year. For the rest of the 1970s, oil production was substantially lower, but higher revenues per barrel financed continued economic growth (see table 6, Appendix A). In late 1980 a surplus of oil relative to demand began to emerge on world markets, and this persisted in 1984. More important, oil revenues declined from US $21.7 billion in FY 1980 to US $9.7 billion in FY 1982. Although data were unavailable, economists expected that oil revenues remained low or declined a little in FY 1983. Economic activity slowed after 1980. GDP fell 9 percent in 1981 and probably further in 1982 and 1983. A crash of the unofficial stock market in mid-1982 contributed to the diminished economic activity (see Finance, this ch.). Although budget revenues dropped sharply during the recession of the early 1980s, officials largely sustained government spending by drawing on investment income from assets abroad (see Role of Government, this ch.). By maintaining government expenditures the economy was spared the worst effects of the recession. By 1984, however, some mild austerity measures had been introduced to limit the growth of expenditures. Although many economists considered the economy sound and stable because of the country's foreign assets, observers wondered about the population's reaction if further austerity measures were required by continuing low demand for Kuwait's oil in world markets for a few more years. The Oil Industry Kuwait is the classic example of an oil shaykhdom. A sleepy maritime settlement whose inhabitants eked out a bare existence by traditional pursuits in a harsh environment emerged in little more than a generation into one of the world's wealthiest countries on a per capita basis. The oil industry dominated the economy, contributing 63 percent of GDP (FY 1981), 97 percent of government revenues (FY 1982), and 93 percent of commodity exports (FY 1980). Kuwait was also blessed with large oil deposits, although official estimates of oil and gas reserves were not available in mid-1984. The authoritative Oil and Gas Journal estimated the country's recoverable crude oil reserves (including the Divided Zone) at nearly 66.8 billion barrels at the beginning of 1984, sufficient to last more than 160 years at the 1983 production level. Other publications frequently mentioned reserves of 70 billion barrels or more. For the beginning of 1984 the Oil and Gas Journal listed the country's gas reserves at nearly 1.1 trillion cubic meters, nearly all of which was associated with crude oil reserves. Discovery and Development of Oil For centuries oil seepages in the desert indicated oil below, but the amount and quality could be determined only by drilling. The natural seepages interested oilmen, and in 1911 a company, which in 1954 was to be renamed British Petroleum (BP) and which was developing oil fields in Iran, requested permission to negotiate a concession from Kuwait. The British government refused the request, saying that the area was too troubled. In 1913 the British government sent men to inspect the seepages and make a geological survey. The ruling shaykh also reaffirmed a previous stipulation that he would grant a concession only to a group recommended by the British government. World War I interrupted another effort by BP to negotiate a concession. By this time the British government had purchased 51 percent ownership in BP as part of an effort to ensure oil supplies for its Royal Navy. In the 1920s the Gulf Oil Corporation of the United States began to seek concessions in the Gulf to overcome its lack of crude oil sources. British treaties with most rulers in the Gulf, including Kuwait, made it difficult for non-British companies to gain access, however, even though the United States government pressured the British to provide equal treatment to American oil firms. During the 1920s BP continued attempts to obtain a Kuwait concession. In 1932 Gulf Oil and BP formed a joint company to negotiate a concession in Kuwait, and this received British approval. The amir finally signed the concession on December 23, 1934. The concessionaire was the Kuwait Oil Company (KOC), owned equally by Gulf Oil and BP. KOC began operations with surveys in 1935. Drilling started in 1936 on the north shore of Kuwait Bay, but no oil was found. The second attempt, in the desert, struck a real gusher in 1938 that subsequently was called the Burgan (Al Burqan) field, one of the largest and most productive in the world (see fig. 6). World War II halted development, and finished wells were plugged. At the end of the war, pipelines and other facilities were completed to handle 30,000 barrels per day (bpd) of crude. Commercial export of crude oil began in June 1946. Production amounted to 5.,9 million barrels in 1946 and 16.2 million barrels in 1947. KOC subsequently discovered seven additional oil fields, and production continued to increase until 1972. Subsequent concessions contained progressively better terms for Kuwait, partly because of the entrance of small oil companies anxious to acquire crude oil sources and partly because of the activities and exchange of information among oil-producing states (see Appendix B). Payments were substantially higher, the length of the concessions was shorter, schedules for relinquishing underdeveloped areas were established, and opportunities for Kuwait participation in the companies were increased. [See Figure 6.: Kuwait. Oil Fields, 1984] The American Independent Oil Company (Aminoil) was the successful bidder for Kuwait's rights in the Kuwait-Saudi Arabia Neutral Zone, receiving on June 28, 1948, a 60-year concession for exploration and production. Aminoil, which was owned by a number of small American oil companies, had a joint operation with the Getty Oil Company, which held the Saudi rights in the Neutral Zone. The Arabian American Oil Company (Aramco, the main developer of Saudi Arabia's oil fields) reportedly viewed the terms given Kuwait by Aminoil as excessive and relinquished its concession in the Neutral Zone, which Getty won. Aminoil started exploratory drilling in 1949 but did not strike oil until March 1953. Production started in 1954. Production from the Neutral Zone was shared between the two countries, and Aminoil paid royalties and taxes to Kuwait and Getty to Saudi Arabia. The zone was partitioned in 1969 and does not appear on most contemporary maps, but the partitioning did not affect the concession arrangements. A group of Japanese companies formed the Arabian Oil Company (AOC), which obtained concessions from both Saudi Arabia (1957) and Kuwait (1958) for exploration and production in the offshore area of the zone. AOC started drilling in 1959, and production of crude oil began in 1961. Production was shared between Kuwait and Saudi Arabia. Some of AOC production is from the northern tip of Saudi Arabia's Saffaniyah field, the world's largest offshore field. Saudi Arabia and Kuwait each purchased 10 percent ownership of AOC soon after its formation. From the beginning of the oil industry, Kuwait's leaders had wanted to participate and have some part in policy and management. BP and Gulf Oil turned aside the amir's demand for a Kuwaiti on the board of directors of KOC. The Kuwaitis obtained some participation in the AOC concession agreement, but its importance was more symbolic than real. Frozen out of oil operations by the major oil companies, Kuwait started on its own to develop proficiency in the petroleum industry. The Kuwait National Petroleum Company (KNPC) was formed in October 1960 with the expressed intent that it should become an integrated oil company. Its founding charter allowed it to engage in almost any activity touching on petroleum at home or abroad. It began with 60 percent government ownership, the remaining shares being held by private Kuwaiti investors. The government bought out the private investors in 1975. KNPC started operations on a small scale, partly because of Kuwait's acute shortage of skilled manpower. It bought out KOC's local petroleum distribution facilities and became the sole supplier of petroleum products in Kuwait. It participated in foreign refinery operations and established subsidiaries and facilities abroad for marketing petroleum products. Departments for exploration and other aspects of field operations were established within KNPC to work with foreign companies in the concession area that KNPC had received from the government. KNPC also built, with foreign expertise and equipment, a modern refinery to use gas in the Burgan field-which would otherwise have been flared-in a hydrogenation process to convert crude into products and to produce sulfur as a useful by-product. Kuwait's crude is heavy and contains considerable sulfur, so the design of the refinery was excellently fitted to the local circumstances to turn out a more superior product than a normal refinery. The refinery at Ash Shuaybah was completed in 1968, but technical problems caused an unprofitable mix of products for a while. Between cost overruns during construction and a poor range of products, KNPC lost money until the problems were corrected. Nonetheless, KNPC provided important training for Kuwaitis in upper levels of management for oil company operations. Kuwait's goal of real participation in and control over its oil industry was achieved in 1974 and 1975. In 1974 the government bought 60 percent of KOC, including the refinery and other installations, reportedly for US $112 million-presumably the net book value of the assets involved. In December 1975-backdated to March 5, 1975-the government bought the remaining 40 percent of KOC, reportedly for US $50.5 million. BP and Gulf continued to provide technical services and personnel in return for access to oil supplies and service fees. By 1980 about half of KOC's work force were Kuwaitis, many of whom held high administrative and technical positions. In 1976 negotiations were concluded for Kuwait's purchase of 60 percent of its half-share of AOC's offshore operations. Negotiations for 60 percent of Aminoil floundered over the value of assets. In 1977 Kuwait nationalized the firm, paying compensation on the basis of an official estimate of the value of assets. Aminoil became the Kuwait Wafrah Oil Company, until 1978, when operations in the Wafra field passed to KOC, and KNPC took over the former Aminoil refinery and shipping terminal at Mina Abdallah. In January 1980 the government created the Kuwait Petroleum Corporation (KPC) to rationalize the organizational structure of its oil industry. KPC was established as a commercial company outside of the government's budget and expenditure control system. KPC became the country's national (government-owned) integrated oil company with KOC, KNPC, the Kuwait Oil Tanker Company (KOTC), the Petrochemicals Industries Company (PIC), and the Kuwait Foreign Petroleum Exploration Company (KFPEC) as some of its more important wholly owned subsidiaries. KOC was primarily responsible for domestic exploration and production of oil and gas, and KNPC was mainly the refining subsidiary. KPC also entered joint ventures with and purchased shares in foreign companies involved in aspects of the oil business. In 1981, for example, KPC bought Santa Fe International Corporation, an American drilling and energy engineering firm, for a reported US $2.5 billion. Other KPC activities abroad included part ownership in refineries and petrochemical plants, exploration and drilling in foreign concession areas, such as Egypt, Indonesia, and China, and purchase of retail outlets for petroleum products in Western Europe. Government Oil Policy Since assuming control of its oil industry in the mid-1970s, Kuwaiti officials followed moderate policies between conflicting objectives. Most Gulf oil governments, including Kuwait, believed that oil in the ground was worth more to future generations than holding such paper claims as securities and corporate shares, which were subject to price inflation, exchange rate risks, and sequestration. Kuwait officials could have limited oil production to that required for financing priority programs. Officials also actively supported the Organization of Petroleum Exporting Countries (OPEC), which at times required oil production levels below that necessary to cover government expenditures. Kuwait, for example, reduced oil production and exports during the Arab oil embargo associated with the October 1973 War launched by Egypt and Syria against Israel. An oil production limit of 3 million bpd was set in 1973 after members of Kuwait's National Assembly questioned the accuracy of KOC estimates of recoverable reserves. The government hired foreign experts who confirmed KOC estimates, although reserve figures were not released. Nonetheless, the production limit was established, but it applied only to KOC operations because limits on production from other oil fields-those in the Divided Zone-would have required Saudi Arabia's cooperation. Former KOC fields, however, accounted for nearly all of the country's oil production. In late 1976 Kuwait's production from all fields briefly exceeded 3 million bpd. In 1976 the production ceiling was reduced to 2 million bpd, which was exceeded in early 1979, when Gulf producers increased production to compensate for the disruption of supplies from Iran (see Appendix B). Kuwaiti officials showed a responsibility to oil-consuming nations. As surplus oil supplies appeared in world markets in the early 1980s, Kuwait's production ceiling was reduced to 1.5 million bpd, although actual production was appreciably lower, amounting to only 821,00 bpd in 1982 and about 1.06 million bpd in 1983. Installed capacity for crude oil production by 1984 was rated at about 3.2 million bpd, although sustainable maximum production over several months was about 2.8 million bpd. As oil revenues began to mount in the early 1970s, officials decided to invest part of the funds in downstream petroleum operations. A key ingredient was a gas-gathering system to use the gases produced in association with crude oil. Until the late 1970s a considerable part of the gases had been flared. A major portion of the gas-gathering system was completed in 1979. Extension to onshore fields in the Divided Zone was finished in 1983, and construction of the system for offshore fields was scheduled to begin in 1984 or 1985. Processing facilities removed corrosive sulfur compounds, yielding sulfur as a by-product. The KNPC liquefaction plant separated the gases (consisting of methane and ethane), which provided fuel and feedstock for industrial uses from the natural gas liquids (NGL) that were further separated into propane, butane, and natural gasoline. Propane and butane were stored and shipped under refrigeration as liquefied petroleum gas (LPG). By 1984 the bulk of the gases associated with crude oil production was captured and used. When the gas-gathering system was completed to offshore fields, little gas would be flared. In addition to the gas-gathering system, the government expanded its investment in oil refining capacity and petrochemical facilities. In 1984 an expansion was under way, costing about US $4.8 billion at two of the country's three refineries, which would raise total refining capacity to about 664,000 bpd of crude oil input by the end of 1986 as well as providing a better product mix and cleaner products. In 1982 about 10 percent of refined products and about 20 percent of LPG products were consumed locally; the remainder was exported. The major markets were East Asia, 32 percent; the rest of Asia, 20 percent; Western Europe, 16 percent; Oceania, 10 percent; and the Middle East, 9 percent. In 1983 and early 1984 KPC purchased some of Gulf Oil Company's West European marketing system, which included at least 2,800 gas stations that would in future years provide outlets for larger exports of refined products. Petrochemical plants were constructed to use the products resulting from the gas-gathering system (see Industry, this. ch.). Gas products, used for fuel and feedstock in industrial plants, were priced substantially below international prices. The glut of oil on the world markets after 1980 created particular problems for Kuwait. By early 1984 the country's only source of natural gas was that associated with crude oil production. At the beginning of 1984 the Oil and Gas Journal estimated Kuwait's gas reserves at 1.1 trillion cubic meters. As crude oil production dropped from an average of about 2.5 million bpd in 1979 to 823,000 bpd in 1982, supplies of associated gases fell from 37.3 million cubic meters per day in 1979 to less than 12 million cubic meters per day in 1983. In the early 1980s industry became increasingly short of gas supplies. Kuwait's electric power plants were able to switch to the use of fuel oil and crude oil to fire boilers. KNPC's liquefaction plant and PIC's petrochemical plants were greatly underutilized by 1983, and some operations were shut down. In 1982 and 1983 KPC had to reduce progressively export sales of LPG products. Since 1976 Kuwait has been drilling to find reservoirs of natural gas. Many oil experts believed that the country had substantial natural gas deposits, but by 1984 drilling onshore had failed to find them. Only more oil fields were discovered. In 1984 drilling for gas included offshore areas. Officials indicated that imports of liquefied natural gas would by mid-1984 begin to relieve the gas shortage. A specialized gas tanker had been purchased to transport the gas. Observers wondered how officials would price the natural gas, because its international price was substantially above that charged for domestic gas. By 1984 Kuwait controlled its hydrocarbon resources and had created an international oil company that rivaled other major oil companies. KPC was among the world's largest corporations and was sometimes called the "seventh sister," a reference to its having become one of the seven major international oil companies. Through its subsidiaries it was involved in all aspects of the oil industry and in many countries of the world. This was a remarkable achievement in less than a quarter of a century since the first Kuwaiti effort to enter the oil industry. Role of Government Under the first oil concession, payments were made to the amir. Government in the usual sense did not exist. The amir and his advisers decided how much of the oil revenues would be spent and in what way. In time ministries, budgets, financial controls, and other aspects of modern public administration were instituted, but decisionmaking remained centralized in a small group at the pinnacle of government (see The Constitutional Monarchy, this ch.). The objectives of government policies, however, remained largely unchanged between the first exports of oil and 1984. Government officials have been keenly aware that oil is a depleting asset, that the country had few other resources, and that preparations had to be made for the day when there would be no more oil. Almost from the beginning of oil revenues, officials spent less than the treasury received, leaving a surplus in the state's General Reserve for investment; because of the limited domestic investment opportunities, most investments were made abroad. World Bank (see Glossary) economists estimated that about a quarter of revenues were placed in foreign assets during the 1950s, although officially published data have always been vague about reserves and some other economic variables. In 1952 an office was established in London, staffed with experienced British investment counselors who guided the government's placement of funds. In the same year investment relations were established with a large New York bank. The best known of Kuwait's investment organizations, which was copied by other oil exporters, was the Kuwait Fund for Arab Economic Development (KFAED), formed in 1961. This fund functioned as both an investment and an aid agency, providing loans for specific projects and often on concessionary terms. KFAED's charter was changed in 1974, when capitalization was increased to KD1 billion so that it could provide funds to developing countries anywhere in the world. Loans were made to governments or to recipients for which a government guaranteed repayment. The total loans provided by KFAED between January 1963 and November 1983 amounted to KD1.2 billion and included 62 countries (see Foreign Relations, this ch.). In 1976 the Reserve Fund for Future Generations was established to invest 10 percent of annual oil revenues, although there were suggestions that in some years more than 10 percent was set aside. These funds were not to be used until many years in the future. Kuwaiti officials had established other investment relationships and were in a good position to invest profitably the surplus funds that emerged after the great increase in oil revenues in the 1970s. Official government statements in 1984 indicated government reserves of at least US $74 billion as of June 30, 1983, with perhaps more than US $30 billion invested abroad. Maybe half was invested in the United States, and much of the remainder was placed in West European countries. Kuwaiti officials reportedly favored equity investments, holding relatively small amounts of bonds and other securities. Some government investments have gone into real estate, particularly in Britain. By the 1980s earnings from foreign investments had become substantial, amounting to an estimated US $5.5 billion in 1983. These earnings were not shown as government revenues in the budget, but many observers believed they were drawn on, beginning in 1981, to balance expenditures. From the first oil concession the amir wanted Kuwaitis to be employed and to participate in management of companies exploiting the country's oil deposits, but officials never attempted to establish certain activities exclusively for the public sector. In fact, the private sector, including domestic and foreign investors, was encouraged in various ways to expand the economy. It was recognized that only through technological transfers and on-the-job training of Kuwaitis would the economy modernize. The government attitude remained essentially the same in 1984. Nonetheless, in the mid-1970s a substantial public sector that was concentrated in the production and processing of crude oil and gas-including basic petrochemical products-began to emerge. Private shareholders, both foreign and domestic, were bought out in nearly all of these activities, and in one case an oil firm was nationalized. Several factors contributed to the growth of Kuwait's public sector. Developments in the international oil industry, the need to establish control over hydrocarbon resources and to gain the maximum value added as the power of international oil companies waned, the size of investments, that were needed, and the demonstrated reluctance of Kuwaiti investors to undertake large-scale industrial projects combined to push the government to take leadership in hydrocarbon-related fields. Many other oil-exporting countries followed a similar pattern. In 1984 Kuwait still did not have any activities exclusively for the public sector and continued to encourage private investment, but major oil-related industries appeared likely to remain almost completely in government ownership for several years. From the beginning of oil revenues, officials relied on them as the main source of financing expenditures. In FY 1982 oil revenues accounted for 97 percent of budget revenues, although the budget did not include income from investments. Income tax receipts, apart from those paid by foreign oil companies, were minuscule. The only important tax consisted of duties on imports, which provided KD57 million in FY 1982, 1 percent of total revenues. Import tariffs were mostly modest. Charges for services-such as utilities, housing, and transportation-provided KD104 million, 2 percent of total revenues in FY 1982. Most of these services were substantially underpriced. As oil revenues declined in the early 1980s, pressure increased to expand sources of government revenues, but Kuwait's businessmen strongly opposed taxes. By 1984 a few prices had been raised, but no effective measures to increase revenues appreciably had been implemented. Kuwaiti officials decided early to provide a variety of services to the population as a means of distributing the country's oil income. An elaborate welfare program evolved, providing free education and health services and large subsidies for electricity, water, fuel, housing, transportation, communications, loans, and numerous foods. By the early 1980s a serious shortage of housing had developed, however. In 1982 and 1983 officials instituted mild measures to restrain the expenditure side of the budget, such as increasing the number of students per teacher. The price of gasoline was doubled, but it still was less than half that in the United States. There was discussion of raising charges for electricity, which the population used in large quantities, to reduce the subsidy and excessive consumption. Other measures were advocated, but as of mid-1984 few appeared to have been implemented. Nonetheless, officials recognized that greater austerity and more selective subsidies might become necessary if oil revenues remained low. Development expenditures were also restrained by stretching some construction schedules and by postponing or canceling less essential projects. Data were unavailable to determine the effects on defense expenditures, which customarily were an important budget item (see Kuwait, ch. 7). Officials traditionally used part of oil revenues to assist other countries, primarily Arab nations. Kuwait's foreign aid increased substantially as oil revenues rose in the 1970s. The aid took many forms, such as loans, joint financing, equity participation, and direct grants-particularly in support of Arab causes. KFAED was a major vehicle for extending aid but not the only one. In 1982 Kuwait's foreign aid amounted to nearly US $1.2 billion, about the same level as in 1980 and 1981. Kuwait reportedly had provided about US $6 billion to Iraq in its war with Iran, but at least part of that would have been outside of balance of payments data. Kuwait's officials have traditionally followed a conservative fiscal policy. Development expenditures were financed from current revenue, and total expenditures were usually kept below income. This conservatism greatly lessened the damage inflicted by the downturn in the country's economic fortunes. Oil revenues fell by more than half between 1980 and 1982. Many governments would have had trouble surviving such a rapid and catastrophic fall in their main source of income. Officials talked about budget deficits in the early 1980s, but when figures were placed in the usual budget format, Kuwait retained a budget surplus between FY 1980 and FY 1983 (see table 7, Appendix A). Nonetheless, the surplus was small after FY 1981. By 1984 officials were trying to cut waste in government spending and to target subsidies and services more selectively toward those in need.