(Bloomberg) — From an unpredictable monetary policy to its noisy domestic politics, Kuwait is often the odd one out in the Gulf.

It boasts the region’s first female finance minister and, uniquely for a Gulf monarchy, has an elected legislature. But acrimony between lawmakers and the appointed government has resulted in eight administrations in as many years, and the fallout on fiscal policy is becoming harder to contain.

Debt Is Outside the Law for Gulf’s Laggard Draining Reserves

Unlike most of its neighbors, OPEC’s fourth-largest producer has failed to introduce taxes after taking a hit from lower oil prices since 2014, earning the moniker of the “slowest reformer” among Gulf Arab economies from Fitch Ratings. For the year starting April 1, AA-rated Kuwait expects to run its biggest-ever budget deficit on anticipation of a decline in oil income and output.

The government’s financing needs “are projected to grow rapidly,” the International Monetary Fund warned last week.

The collateral damage also includes the government’s ability to borrow, which it lost after issuing debut Eurobonds in 2017 because the country’s public-debt law lapsed the same year. The main option for covering the budget deficit is to draw down the holdings of the smaller of the country’s two wealth funds that could be fully depleted next fiscal year.

Finance Minister Mariam Al-Aqeel has said the government “will fight for getting this law approved.”

Lawmakers have resisted efforts by the government to reclaim access to debt, accusing it of mismanaging public finances and demanding a fix before it can borrow again.

“Unless it’s under real pressure, there will be no reform to fiscal policy,” said Jassim Al-Saadoun, head of Kuwait-based Al-Shall Economic Consultants. “They have to convince people they will use it wisely, and they have failed to do so.”

On track for its sixth straight fiscal shortfall and lacking a new debt law, the government has relied on the General Reserve Fund, managed by the Kuwait Investment Authority, the world’s oldest sovereign wealth fund. Tapping the KIA’s much larger Future Generations Fund, designed as a buffer for the time when Kuwait’s oil runs out, would require a legislative change.

Kuwait doesn’t publicly disclose the size of its wealth fund holdings.

Debt Is Outside the Law for Gulf’s Laggard Draining Reserves

“The urgency to update the debt law is growing,” said Maya Senussi, senior economist at Oxford Economics. “The problem with the outdated debt law is that in the current dynamics of low-trending oil prices, Kuwait will continue to run deficits, maintaining pressure on GRF resources, which are of course finite.”

Parliamentary elections later this year will likely sideline discussions of reform and put off approval of the law, which Fitch now expects to be delayed until the 2020-2021 fiscal year.

Talk of an economic revamp, by means of taxing people or cutting subsidies, is currently the most contentious issue in parliament. Lawmakers have vowed to grill Al-Aqeel over any reference to such measures, insisting Kuwaitis must never bear the brunt of any fiscal reform.

Meanwhile, GRF’s readily available assets might dry up by the end of next March, according to Moody’s Investors Service.

While there have been no reforms on the revenue side, the government has tried to cut wasteful spending. By continuing to keep expenditure in check, Kuwait may be able to avoid withdrawing money from the Treasury next year, according to Al-Aqeel. Still, the legislation is a priority since “the cost of borrowing is less than the cost of withdrawing from the reserves,” the finance minister said at a briefing this month in response to a question from Bloomberg.

Wealth, Oil

The paradox is that despite the strain on Kuwait’s finances, its wealth still sets it apart. Boosted annually by mandatory transfers of 10% of total revenue, assets in the KIA amount to over $400 billion, according to the IMF, while Kuwait’s proven oil reserves could last around a century at the current rate of production.

Kuwait has two Eurobonds outstanding. Its $4.5 billion of notes maturing in March 2027 have rallied in the past year, sending the yield down 1.3 percentage points in that period to 2.2%, below Saudi bonds of similar maturity.

S&P Global Ratings estimates that at 420% of gross domestic product, the government’s net general asset position was the highest of all rated sovereigns at the end of 2019. Kuwait is ranked at the third-highest investment grade level by the three major credit assessors.

But in a borrowing outlook the IMF calls “unprecedented,” debt would have to grow to over 70% of GDP in 2025, from just 15% last year, should the government face no legal roadblock to finance its needs by raising capital in the market.

“It would be cheaper to issue debt than draw on reserves or sell assets,” said Abdul Kadir Hussain, head of fixed-income asset management at Arqaam Capital in Dubai. “It would be good practice to start putting in place some fiscal consolidation measures like reduction in subsidies and some tax reforms.”