Analysis - Kuwait faces reform stalemate after cabinet falls

KUWAIT Thu Apr 21, 2011 9:03am BST

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KUWAIT (Reuters) - Kuwait has mostly escaped the unrest sweeping the Arab world, but its dysfunctional politics once again risk blocking economic reform and foreign investment.

The Gulf oil producer has long lavished cradle-to-grave welfare benefits and public sector jobs on its one million nationals, who also have a parliament that is keen to protect such privileges and often quick to stymie legislation proposed by governments dominated by the ruling al-Sabah family.

The cabinet resigned this month to avoid the questioning of three ministers in parliament. Kuwait's ruler has asked outgoing Prime Minister Sheikh Nasser al-Mohammed al-Sabah to form a new cabinet -- his seventh since he was first appointed in 2006.

In this context, small protests by pro-democracy activists seem less worrying for the Sabahs than prospects of a return to stalemate between the legislative and executive arms after a two-year lull in a cycle of crises and short-lived cabinets.

"I think it will get worse. We'll have a weak government again and the problems with parliament won't go away," said Nasser al-Nafisi, General Manager at the al-Joman Centre of Economic Consultancy in Kuwait City.

Since a May 2009 parliamentary election the government had managed to avoid major clashes with MPs and enact some economic reforms such as creating a much-needed financial regulator for the Kuwaiti bourse, the Arab world's second-largest.

Despite its wealth, Kuwait needs to diversify for a post-oil economy and attract investment to find jobs for locals outside an overstaffed state sector. But deadlock looms again.

Lawmakers had wanted to question the three ministers over Shi'ite unrest in nearby Bahrain and other issues -- analysts said some were looking for any excuse to attack the cabinet.

"Parliament is dominated by mainly tribal deputies who oppose reforms and want benefits for their people. I don't think relations with the government will improve," political analyst Shamlan al-Eissa said.

The three ministers under attack are all members of the ruling family, who hold a grip on the prime ministry.

To buy time the next cabinet may be delayed until May, limiting any turbulence in parliament to a few sessions before a summer break that runs until October, parliamentary sources say.

Trouble was already brewing after several parliamentarians criticised the reappointment of Sheikh Nasser, a nephew of the ruler.

"We want a new prime minister and a new government," said Sunni Islamist MP Faisal al-Muslim.

But fears of a prolonged crisis have started hitting the bourse .KWSE, which is underperforming other regional markets.

"Active fund managers are taking a more negative view of the investment case," said Daniel Broby, chief investment officer at British asset manager Silk Invest.

"Investors such as ourselves get understandably concerned when they hear such things," he said, referring to parliamentary grilling of ministers over their performance.

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Such questioning may look like accountability, but in a fluid assembly dominated by loose blocs of Islamist and tribal deputies, the effect is often to prevent change, leaving Kuwait a lot less dynamic than ambitious Gulf neighbours such as Qatar, Dubai and Abu Dhabi, and less attractive to foreign investors.

Yet many Kuwaitis prefer their relative freedom to the more repressive systems elsewhere in the Gulf -- and it may act as a useful safety valve to avert sustained anti-government protests such as those shaking Syria, Yemen and other Arab countries.

Several hundred Kuwaitis demonstrated last month for more political reforms. Protests and strikes are not unusual in a country where MPs must approve major bills or big investments. Individuals and newspapers often criticise the government.

"Kuwaitis are frustrated with the government and parliament...(but) Kuwait is the best political system with freedom. You can speak freely," said Eissa.

Last week a shareholder meeting of the biggest local mobile operator Zain (ZAIN.KW) turned into public questioning over investments with investors taking executives to task for hours.

"We in Kuwait have different opinions but we respect that and in the end find a way to unity," said a shareholder who had been trying to build bridges at the meeting.

Nevertheless, the recurring confrontation between the government and parliament has hindered efforts to lower dependency on oil in the world's fourth largest exporter.

The energy sector still accounts for more than 40 percent of GDP, against 27 percent in Saudi Arabia and 3 percent in Dubai.

Majdi Amine Gharz Eddeene, Senior Vice President Investment Research at Kuwaiti fund manager KAMCO said cooperation to break the logjam was crucial. "There are many big projects that await government approval," he added.

(Additional reporting by Ahmed al-Hagagy, editing by Alistair Lyon)