President Bush and Kuwaiti Prime Minister Sabah have built a lasting friendship and alliance

he State of Kuwait is a small but crucial U.S. ally
in one of the most important
regions of the world. It is a country slightly smaller in size than New Jersey, located between desert, marsh, and sea at the northern end of the Persian Gulf.

One hundred years ago, the Kuwaitis were a seafaring nation, renowned for their pearl-diving skills and the trade which they plied across the oceans in dhows to India, Africa, and all round the Arabian peninsula. Then, in 1938, oil was discovered and commercial priorities changed.

Today, Kuwait is one of the most open economies in the Middle East. It is also the gateway to Iraq and is playing a crucial role in its reconstruction.

The proven oil reserves which lie under Kuwaiti sand amount to approximately 98 billion barrels or 10% of world reserves. Kuwait is the most oil dependent country in the region. Approximately 46% of its GDP is earned by the hydrocarbon sector, with oil products accounting for over 95% of total exports and 90% of government revenue. Much of the remainder comes from investments in foreign assets worth approximately $100 billion, about three-fourths of which are owned by two governmental institutions, the Kuwait Investment Authority and Kuwait Petroleum Corporation.

The majority of its citizens earn salaries paid for by government revenues. This means the budget is vulnerable at times of falling oil prices. However, a program of economic diversification and reform launched after two years of economic contraction at the beginning of the decade has made the economy more resilient. In 2003, it grew by 3.8% and is expected to repeat that performance this year and grow by 4.1% in 2005 and 4.7% in 2006. Long-term forecasts predict that inflation will creep up to 2.46% in 2005 and thereafter will remain under 2% as far ahead as 2008.

The 2003 parliamentary election tipped the balance in favor of pro-government candidates, lending impetus to a program of reforms. These include the abolition of most restrictions on foreign ownership and investment.

The Kuwait Stock Exchange is being opened to foreigners and the banking sector is gradually welcoming international participants. There are even plans to open the upstream oil sector to foreign companies. Private investment is also being encouraged in IT, telecommunications, and light industry. The Kuwait Free Trade Zone will be the first in the region to be run privately.

Since the toppling of Saddam Hussein’s regime in Iraq last year, Kuwait has played a crucial role in supporting the reconstruction of its large northern neighbor. The disruption to trade caused by the conflict may have inflicted some short-term economic damage but the longer-term effects of the war are looking positive. Many foreign investors have decided to use Kuwait as a base for their Iraqi operations and Kuwaiti firms are resuming age-old economic ties across the border.