Budget Deficit Remedies and Their Impact on the Non‐oil Sectors of an Oil‐exporting Country: the Case of Kuwait

Abstract

A model for the non‐oil production side of the Kuwaiti economy was developed and estimated. The model, then, was simulated according to various scenarios designed to eliminate the budget deficit by the year 2000, in order to examine the effect on the non‐oil sector of the economy. The results indicate that, in terms of its impact on non‐oil GDP, the extreme case scenario is harsh, bringing down the level of non‐oil GDP by more than 20% by the year 2000 from its level in 1993. The impact on the budget deficit may be very positive, but non‐oil production and consumption will decline very rapidly, creating widespread hardship across all economic sectors. The results suggest a better option lies in adopting either of two intermediate case scenarios. While each of these will also cause a decline in non‐oil GDP, it will not be to the extent caused by the extreme case scenario.