Oil Prices and Public Expenditures Allocation in Kuwait: Understanding the Dynamics

Purpose: This study quantifies the dynamics of Kuwait’s government resource allocation to real capital and current expenditures in response to global real oil price shocks.Study design/methodology/approach: A Bayesian Structural Vector Autoregressive model is employed to identify structural real oil price shocks and analyze their effects through impulse response functions and historical decompositions.Sample and data: The analysis uses quarterly time series data from 1993Q3 to 2015Q4, including real oil prices, Kuwait’s real oil revenues, and real public capital and current expenditures.Results: Evidence indicates that real oil price shocks significantly affect Kuwait's real public expenditures, with a 10% shock resulting in a 5.2% increase in real capital expenditures and a 3.8% increase in real current expenditures over a 2.5-year period. Therefore, real public capital expenditures are about 37 percent more sensitive to real oil price shocks compared to real public current expenditures. From 1993 to 2015, real oil price shocks played a crucial role in driving fluctuations in real public expenditures; however, non-oil-related shocks were also significant, especially after 2006.Originality/value: This study examines the underexplored connections between public expenditures and the oil market at a disaggregated level, providing valuable insights for policymakers aiming to enhance fiscal management and sustainability.Research limitations/implications: The study is silent on the welfare consequences of alternative allocations and on the transmission mechanisms of shocks. DSGE models can help address these gaps. Future research should also explore non-oil-related shocks influencing public expenditure fluctuations.